By: Phil Gusman
Read the original article on propertycasualty360.com
In June, Kansas City, Missouri-based Hostess Brands LLC announced a recall of more than 700,000 cases of Ding Dongs, Chocodiles and various bakery products in the United States and Mexico.
The reason? Certain lots of its flour contained undeclared peanut residue. It's estimated that more than 3 million people in the United States alone report being allergic to peanuts, tree nuts or both.
Talk about a Zinger.
The snack-cake maker, however, is hardly alone: From the auto industry to food manufacturers, product recalls have been appearing in the news with increased frequency. A quick Google News search of headlines over the past month turns up pages of results on recall announcements, the vast majority occurring in the food industry.
“The number of FDA [Food and Drug Administration] Class 1 recalls is clearly on the rise,” says David Bresnahan, client executive at the Horton Group in Orland Park, Illinois. The FDA defines a Class 1 recall as “a situation in which there is a reasonable probability that the use of or exposure to a violative product will cause serious adverse health consequences or death.”
Simon Oddy, a New York City-based partner with RGL Forensics, maintains that the 2011 passing of the Food Safety Modernization Act has accelerated the pace of recalls by giving the FDA added authority to trigger them. “Essentially, the FDA has increased authority over control and monitoring of the food industry — and if you’re not in compliance with some new regulations, that increased authority allows the FDA to interrupt the supply chain” with either a suggestion of a recall or a mandatory recall, he says.
On the client side, compliance with Food Safety Modernization Act standards has been mixed, says Paul Primavera, executive vice president and practice leader with the national risk control group at Lockton Cos. While there's a large percentage of his clients for which the act has had minimal impact in terms of procedures and reporting requirements, “for other corporations that did not have those protocols in place — and we’ve seen some of those — it's been a little bit tougher.”
According to William Harrison, managing director at Marsh & McLennan Cos., the improved ability to trace causes of contamination has likewise helped drive the number of recalls. “The level of quality control in the food business — and non-food manufacturing business — is far better than ever before,” he says. Harrison offers a hypothetical example of a dozen people across the country getting sick and being diagnosed with E. coli. Today, government agencies have the technological ability to track the cause of those incidents to a company, restaurant or even supplier level, down to the manufacturer of a single ingredient.
“What might have been viewed as a 24-hour bug 10 years ago, today more often they can find out the root cause and where it was shipped,” says Harrison. “It may trigger six, eight or 10 recalls, where 10 to 20 years ago it might not have caused any.”
What's more, “with social media, everyone finds out about it in an instant,” he adds. “It's a different world.”
Oddy says the combination of the Food Safety Modernization Act, increased recalls and the potential for criminal charges brought against executives — if it's found they knew their companies were disseminating contaminated products — has created a surge in demand for product recall coverage. The insurance market has made tremendous progress developing products to fill gaps in coverage, he adds, in order to keep pace with this evolving risk set.
Half a decade ago, insurers’ limited product expense coverages would typically be limited to paying for the removal and disposal of the recalled product, and only if it was determined that the product would cause bodily injury or property damage. But over the past five years, Bresnahan explains, as supply chain risks increased the current product recall market emerged.
Today, policies cover government recalls: Even if a product is not 100% certain to cause bodily injury or property damage, Bresnahan says the policy will respond should the FDA trigger a recall. They also cover “loss of gross profits, first-party, third-party; they pay for crisis consultants, rehabilitation expense — the full gamut, compared to what it was,” he adds.