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A highly publicized product withdrawal can have adrastic effect on a company and potentially even make a company close its doors for good.

 

 

 

 

 

 

 

 

 

 

 

 

ISO Products Perspective

Do you recall that product withdrawal?

Coverage is available to protect against potentially huge losses

By Ron Beiderman


If you were watching a game show and the final question was, "What do cantaloupes, eggs, and peanut butter have in common?" what would your answer be? While one answer could be that they are the ingredients of an eccentric breakfast omelet, a better answer might be that they have each been the subject of highly publicized food-related product recalls/withdrawals over the past several years. (While product recalls and product withdrawals can have certain different characteristics, the exposures addressed in this article arising out of both are similar. Reference to product withdrawal in this article is intended to include both withdrawals and recalls.) Consider this:

• In 2009, contamination at a peanut manufacturing plant led to a salmonella outbreak that infected more than 700 people. That resulted in a large-scale withdrawal of various peanut butter–related products from the marketplace. Shortly after the product withdrawal, the operator of the peanut manufacturing plant filed for bankruptcy.

• In 2010, more than 500 million eggs were withdrawn from the market after a salmonella outbreak was traced back to a particular egg farm. Hundreds of people around the country were sickened.

• In 2011, an entire crop of cantaloupes was withdrawn after a listeria outbreak. Ten deaths and hundreds of illnesses were alleged to be attributed to the outbreak. The affected farm operator filed for bankruptcy as a result of the withdrawal.

• In 2013, certain "beef" products in Europe were reportedly found to be made from horse meat rather than from cattle. That led to widespread withdrawals from large multinational retailers down to small local distributors.

As you can see, a highly publicized product withdrawal can have a drastic effect on a company and potentially even make a company close its doors for good. While such highly publicized product withdrawals may not be an everyday occurrence, similar small-scale withdrawals happen regularly across many industries, and some can also have a drastic effect on a company's business.

First-party expenses

Product withdrawals are typically initiated in three ways:

• A company may voluntarily initiate a product withdrawal.

• A third party, such as a supply-chain partner, may request that a company conduct a product withdrawal.

• A governmental authority may order a product withdrawal.

Regardless of how a product withdrawal is initiated, a company that participates in a product withdrawal will likely incur various direct expenses associated with the withdrawal. Some of the more significant expenses may relate to the cost to repair the defect in the withdrawn product, to replace the withdrawn product, or to recoup lost profit. Other direct expenses may include the cost to notify others of the product withdrawal; costs related to government-required testing and inspection of the product, if necessary; and transportation, shipping, or packaging costs. Another expense that could become costly for a company, especially if the product contains hazardous materials, is the cost to dispose of the withdrawn product properly.

Beyond the direct expenses, a company also may incur several indirect expenses. One of the more significant types of indirect expenses relates to the potential effect on a company's reputation because of the product withdrawal. Depending on the product involved, the reason for the withdrawal, and its scope, a company's reputation may, at best, suffer only temporarily or, at worst, could suffer irreparable harm.

To rehabilitate its image after a product withdrawal, a company may also incur public relations expenses. Local companies that have initiated a product withdrawal may run advertisements in local media. Larger national companies may hire a public relations or crisis management firm to put together a comprehensive national advertising campaign to reach out to the public. Even with a public relations campaign, a company still can suffer a loss of goodwill, which is an indirect expense much harder to quantify.

Third-party expenses

When a product withdrawal occurs, a company needs to be concerned about more than just the first-party expenses it will incur. It also must consider that injured parties or other companies that have experienced product withdrawal expenses may file related liability lawsuits. Those other companies may have incurred costs resulting from the removal of the withdrawn products in their own distribution channels or from having incorporated the withdrawn product into their own products.

For example, various companies in the food industry used as a component in numerous products peanut butter and peanut paste from the peanut manufacturing plant referenced earlier. Many of those companies incurred first-party expenses from the withdrawal of their products that contained the contaminated peanut butter or peanut paste. One company reportedly lost $70 million after having to withdraw millions of packages of peanut butter crackers. It's likely that when such situations occur, companies will seek to recoup their costs directly from the party responsible for the product withdrawal.

Getting covered

While many standard general liability policies—for example, ISO's CG 00 01—generally provide liability coverage for bodily injury with respect to those who suffered an illness or death due to a product that is withdrawn, such policies typically specifically exclude product withdrawal expenses incurred by the insured or others. However, in recent years, coverage for product withdrawal expenses has become available in the marketplace either as an endorsement to a general liability policy or as a stand-alone coverage.

For example, in 2001, ISO introduced Limited Product Withdrawal Expense Endorsement (CG 04 36) to provide reimbursement coverage for various first-party expenses that the named insured incurs as a result of a product withdrawal. In 2004, ISO introduced a stand-alone Product Withdrawal Coverage Form (CG 00 66) that not only provides coverage with respect to various first-party expenses, but also provides third-party coverage with respect to product withdrawal expenses incurred by others. Restoration expense options are also available (for example, ISO Endorsement CG 31 72) to provide certain coverage for expenses related to regaining a company's goodwill, market share, or profit or the redesign of the named insured's product after a product withdrawal.

In just about any manufacturing, retail, food-related, or product-driven sector, the reality is that product withdrawals can happen. Alerting your clients to these types of exposures and the availability of product withdrawal coverages in the marketplace may help them sleep a little better in the unfortunate event their product becomes the subject of a future game show question concerning a product withdrawal.

The author

Ron Beiderman is assistant vice president, Commercial Casualty at ISO, a member of the Verisk Insurance Solutions group at Verisk Analytics.

   

 

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