Product Recall Exposures for Agribusinesses

Transcription

1 Product Recall Exposures for Agribusinesses #IRMI2017 Agribusinesses can be particularly vulnerable to product recall, and the past few years have seen more frequent recalls. Unfortunately, the recalls are often breaking news items that can be costly and potentially damaging to the business and brand. This session will discuss the limitations on coverage within standard insurance policies and the extent to which product recall insurance provides the insured indemnification for its financial losses resulting from the recall of a product. Copyright 2017 International Risk Management Institute, Inc. 1

2 Notes This file is set up for duplexed printing. Therefore, there are pages that are intentionally left blank. If you print this file, we suggest that you set your printer to duplex. 2

3 Product Recall Exposures for Agribusinesses #IRMI2017 Today s Objectives Why foodborne illness concerns are greater now than before What the Food Safety Modernization Act (FSMA) means to the Farm/Ag account What ISO & AAIS contracts have to say about this What (at least) one insurer is doing 2 3

4 Food Safety Modernization Act (FSMA) Passed by Congress in December 2010 largest expansion of food safety in U.S. since 1930 s Enforced by the Food & Drug Administration (FDA) Multiple delays to FSMA because of court challenges New timelines for enforcement regulations with implementation expected for late 2015 to mid 2016 have been met 3 FSMA FDA Authority Includes Mandatory recall of contaminated food products Preventive controls & food safety plans at some processing plants Enhanced surveillance to investigate foodborne illness outbreaks Enhanced traceability within food distribution channels Increased inspections of high risk food facilities Expanded authority over foreign food imports 4 4

5 FDA 5 Key Elements of FSMA 1. Preventive Controls 2. Inspection and Compliance 3. Response 4. Imported Food Safety 5. Enhanced Partnerships 5 Preventive Controls FSMA provides the FDA with legislative mandate to REQUIRE comprehensive, prevention-based controls on the food supply. Mandatory preventive controls for food facilities Mandatory produce safety standards Authority to FDA to prevent intentional contamination 6 5

6 Inspection & Compliance Oversight to ensure compliance with regulations Ability to respond when new problems emerge e.g., establishing a mandated inspection frequency (based on risk), FDA access to industry records and food safety plans, and requiring testing to be done by accredited laboratories 7 Response Respond when NEW problems emerge: Mandatory recall authority for ALL food products Expanded authority to administratively detain certain products that are in violation of the law Authority to suspend a facility s registration Prohibiting a company from selling in the U.S. Establishing pilot projects to enhance product tracing Requiring additional recordkeeping by those facilities that manufacture, process, pack, or hold foods designated as high risk 8 6

7 Imported Food Safety Do food imports meet U.S. Food Safety Standards? Require importers to verify that suppliers have adequate controls in place Establish a third-party verification process Certification by credible third party for high risk foods entry into U.S. Establish a voluntary qualified importer program Right to refuse entry into U.S. of foods from a foreign supplier where the FDA has been denied access to their facilities or country 9 Enhanced Partnerships Authority to improve training of state, local, territorial and tribal food safety officials Multi-year grants to state/local agencies to develop and implement strategies to enhance their food safety Similar strategies to enhance foreign governments and industries Authorizes FDA to rely on inspections by other federal, state, and local agencies in order to meet its increased inspection mandate for domestic facilities 10 7

8 Court Ordered Timelines 8/30/15 preventive controls for both human and animal food 10/31/15 imported food and foreign suppliers, including Foreign Supplier Verification Program and Accreditation of Third Party Auditors 10/31/15 produce safety 3/31/16 sanitary transportation practices for food and feed 5/31/16 intentional adulteration of food 11 Key Considerations For Recalls 1. It happens more than you probably think it does 2. Governmental oversight is only going to get stronger 3. The costs are prohibitive 4. The mistaken belief that it won t happen to our operation 5. Product Recall insurance is probably the first line of defense What did we learn in basic risk management? Insure that which occurs infrequently but when it does produces catastrophic results. 12 8

9 It Happens More Than You Think National Institute of Health Foodborne Illnesses, April 14, 2016 Each year an estimated 48,000,000 people in the U.S. experience a foodborne illness A foodborne illness is an infection or irritation of the gastrointestinal tract caused by food or beverages that contain harmful bacteria, parasites, viruses, or chemicals 13 Types of Harmful Bacteria Salmonella Shigella Campylobacter jejuni Escherichia coli Listeria Monocytogenes Vibrio Clostridium Botulinum 14 9

10 Three Types of Recalls Class 3 least severe class situations where the use of the product will not cause adverse health consequences Class 2 situations where there is a remote probability of adverse health consequences from the use of the product Class 1 situations where there is a reasonable probability that the use of the product will cause serious, adverse health consequences or death Source: Utah State University, Finance & Economics Newsletter, February Some Product Recall Expenses Amounts spent to carry out the actual recall Publishing expenses related to the recall Retrieval of the recall products Warehousing and subsequent disposal of the recalled products Replacement of the recalled products Lost sales and then recapture efforts for market share If publicly traded stock fluctuations 16 10

11 ISO CGL/FL Coverages CGL 2. Exclusions This insurance does not apply to: n. Recall of Products, Work or Impaired Property FL 2. Exclusions This insurance does not apply to: v. Recall of Products, Work or Impaired Property 17 ISO Language This insurance does not apply to: Damages claimed for any loss, cost or expense incurred by you or others for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal Your of: text here (1) Your product ; (2) Your work ; or (3) Impaired property ; If such product, work, or property is withdrawn or recalled from the market or from use by any person or organization because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it. CG Insurance Services Office., Inc

12 AAIS Coverages GL-610 Additional Exclusions That Apply Only To PD 9. We do not pay for loss or expense incurred by you or anyone else arising out of the loss of use, disposal, withdrawal, recall, inspection, repair, replacement, adjustment, or removal (including any expenses involved in the withdrawal or recall) of your work, products or impaired property. This applies when the loss of use, disposal, withdrawal, recall, inspection, repair, replacement, adjustment, or removal was because of a known or suspected defect, deficiency or unsafe condition. 19 One Insurer s Response ACE Recall Plus Targeted industries are food and beverage companies, cosmetics, and pharmaceuticals (yes, this includes farm/ag ops) Insured event(s) is adulterated product that results in or would result in BI or PD 20 12

13 Coverage Analysis Approach Check the Declarations Pages Review the insuring agreement Review the defined terms used in the contract Review the Exclusions Review the Conditions Review the Application 21 One Insurer s Response Base Coverage includes Recall Costs & Consultant Costs Available Endorsements Include Replacement Costs Loss of Gross Profit Extra Expenses Rehabilitation Expenses Consequential Damages Defense Costs Adverse Publicity 22 13

14 Insuring Agreement We will reimburse you for: 1. Loss to which this insurance applies, in excess of the applicable self-insured retention and any applicable coinsurance, up to the Limits of Insurance stated in the Declarations, that is caused by an insured event that is first discovered by you during the policy period and reported to us in compliance with the provisions of Condition R., (Notice of Loss); and 2. Consultant Costs to which this insurance applies. ACE Recall Plus Insurance For Consumable Products Policy Form, REC (12/15) 23 Definitions Loss means pre-incident costs and recall costs, that you have incurred directly and solely in connection with a covered insured event. Pre-incident costs means the costs incurred by you for chemical analysis and/or physical examination necessary to determine whether the insured product(s) has been adulterated or to determine what, if any, potential effect might result from the adulterated insured product(s). ACE Recall Plus 24 14

15 Definitions Adulterated means: a) accidentally or unintentionally contaminated or impaired by a microbiological, chemical, allergen or physical hazard; or b) mislabeled; or c) deliberately, maliciously, illegally or allegedly tampered or threatened to be tampered. ACE Recall Plus Insurance For Consumable Products Policy Form, REC (12/15) 25 Definitions Insured product(s) means: Any topical and ingestible product(s) for human use or consumption, including any of their ingredients, components or packaging, provided such product(s): a. are in production by the insured ; b. have been processed, manufactured, mixed, blended, compounded, packaged, handled or distributed by the insured(s) or by any contract manufacturer for the insured(s) ; or c. are available for sale by the insured(s) or are sold on behalf of the insured by any distributor, wholesaler or retailer. ACE Recall Plus Insurance For Consumable Products Policy Form, REC (12/15) 26 15

16 Definitions Recall costs means the following costs and expenses listed below incurred by you or your retailers or other third parties arising out of an insured event : 1. The cost of newspaper, magazine or any printed advertising (whether electronic or otherwise), radio and television announcements or commercials, as well as the cost of correspondence regarding or concerning the recall. 2. The cost of shipping the insured product(s) from any purchaser, distributor or user to the place or places that you designate. 3. The cost to rent additional warehouse or storage space. ACE Recall Plus 27 Definitions Recall Costs continued: 4. The cost of hiring additional persons other than regular employees to assist with the recall of the insured product(s). 5. Overtime paid to non-salaried employees and additional compensation pair to other than non-salaried employees for work devoted exclusively to the recall of the insured product(s). 6. Employees travel, transportation, and lodging expenses directly attributable to the recall of the insured product(s). ACE Recall Plus Insurance For Consumable Products Policy Form, REC (12/15) 28 16

17 Definitions Recall Costs continued: 7. The cost of disposal of the insured product(s), to the extent that specific methods of disposal other than those usually employed for trash discarding or disposal, are required to avoid BI or PD as a result of such disposal. 8. Expenses incurred for the proper disposal of the unused packaging and point-of-purchase marketing material of a recalled insured product(s) if such packaging or material cannot reasonably be reused. 9. Retail slotting fees and cancellation fees for any advertising or promotional program which were scheduled but which were unable to be executed because of an insured event. 10. Retail fees as required by contract not otherwise listed. ACE Recall Plus Insurance For Consumable Products Policy Form, REC (12/15) 29 Definitions Consultant Costs means the fees and expenses incurred by you for the advisory services of the Crisis Consultants referred to in First Steps In A Crisis attached to this policy to assist you (1) in responding to events or incidents that have the potential to lead to an insured event or (2) in response to an actual insured event. Consultant Costs do not include any of the costs defined in Definition N. o Note: Definition N is recall costs as previously defined ACE Recall Plus Insurance For Consumable Products Policy Form, REC (12/15) 30 17

18 Endorsements Rehabilitation Expenses can be included by endorsement Rehabilitation Expenses means expenses incurred by you as a direct result of an insured event to re-establish the insured product(s) to a reasonably projected level of sales or market share anticipated prior to the insured event. ACE Recall Plus Insurance For Consumable Products Endorsements 31 Endorsements Adverse Publicity Coverage can be endorsed Insured event includes adverse publicity and the use of this endorsement DELETES the exclusion for adverse publicity in the policy Adverse publicity means the naming of both the insured(s) and the insured product(s) in any local, regional or national media, including, but not limited to, radio, television, newspapers, magazines, the Internet or any governmental publication, during the policy period, with the implication that the insured product(s) is adulterated and that the consumption, exposure to, or use of such insured product(s) has resulted in or would result in BI or PD. ACE Recall Plus Insurance For Consumable Products Endorsements 32 18

19 Endorsements Consequential Damages can be added by endorsement Means the amounts, costs, expenses or economic loss a customer has incurred or suffered over a period of 12 months caused solely and directly in connection with a covered insured event and for which you are legally obligated to reimburse or pay that customer. Customer means parties with whom the insured has directly contracted or indirectly supplied their insured product(s). Does NOT include any fines, fees, penalties, punitive, or exemplary damages. Does not include any loss or expense recoverable in other parts of the policy. ACE Recall Plus Insurance For Consumable Products Endorsements 33 Endorsements Extortion Costs can be added by endorsement Extortion monies means any monies paid by the insured(s) or lost in transit subsequent to a product extortion demand. For the purpose of this insurance policy, the term monies includes cash, monetary instruments, bullion or fair market value of any securities, tangible property or services. 1. Extortion monies paid by the insured in direct response to an product extortion demand. 2. Extortion monies lost due to the destruction, disappearance, confiscation or wrongful appropriation of extortion monies while being handled or conveyed for delivery by anyone who is authorized by you to have custody thereof; provided that the product extortion demand which gave rise to the delivery is covered by this insurance. ACE Recall Plus Insurance For Consumable Products Endorsements 34 19

20 Endorsements Extortion expenses (cont d) 3. Expenses or fees which are incurred and paid by you solely as a direct result of a product extortion demand, including the following: a. The amount paid by you as a reward to an informant for information relevant to a specific product extortion demand. Will not be paid to officers, members, partners, employees, etc. b. Interest due on any loan made to you by a financial institution for the purpose of paying extortion monies. c. Reasonable costs for travel & accommodations incurred while negotiating these demands d. Reasonable increased security costs due to these demands for a period of up to 90 days. Must be recommended by Security Consultant hired by insurer. ACE Recall Plus Insurance For Consumable Products Endorsements 35 Endorsements Product Extortion means any threat or related series of threats to cause an insured product(s) to become adulterated communicated to the insured(s) for the purpose of demanding extortion. ACE Recall Plus Insurance For Consumable Products Endorsements 36 20

21 Endorsements Ingredient Coverage endorsement The following is added to the definition of insured product(s) Any property of which such good(s) or product(s) form a part, after physical possession of such goods or product(s) have been released by the insured to others. However, coverage will apply only if the insured would be legally obligated to reimburse the customer for loss arising out of an insured event. ACE Recall Plus Insurance For Consumable Products Endorsements 37 Endorsements Extra Expense added by endorsement means the reasonable and necessary expenses you incur during the period of restoration that you would have not incurred if there had been no loss resulting fro man insured event to: Maintain employment of your workforce Minimize the suspension of business if you cannot continue operations. Avoid or minimize the suspension of business to continue at the described premises or at a replacement or temporary locations, including relocation expenses and costs to equip and operate the replacement location or temporary location. Does NOT include loss of gross profit, any costs to repair, restore or replace the insured product(s) or any expenses recoverable elsewhere in the policy. Suspension and period of restoration are quite similarly defined to what we would find in a Business Income coverage form. Coverage is provided for a maximum of 12 months. ACE Recall Plus Insurance For Consumable Products Endorsements 38 21

22 Endorsements Loss Of Gross Profits can be endorsed and means your sales revenue projected prior to the happening of an insured event. But which has been lost during a period of 12 months beginning after the decrease in sales attributable to and caused directly by an insured event, less: 1. the variable costs that would have been incurred during the same period, but which have been saved as a result of not making those sales (including the cost of raw materials and all other saved costs); and 2. the increased sales of another insured product(s) within the same product line as the affected product(s) claimed in the loss as a result of an insured event. ACE Recall Plus Insurance For Consumable Products Endorsements 39 Endorsements Replacement Costs can be added by endorsement Means: 1. The total amount of refunds you give to purchasers for the affected insured product(s), not to exceed the initial purchasing price of the goods sold. 2. The direct costs to repair the affected insured product(s), including the cost to repair unsold stock. 3. The direct cost to produce or acquire a like replacement product if the affected insured product(s) cannot be repaired. 4. The direct cost of unsold finished stock if the affected insured product(s) cannot be repaired, reconditioned, decontaminated or otherwise treated so as to render it marketable. 5. The direct cost related to removal and installation of the repaired or replaced insured product(s). The actual cost to redistribute any restored, repaired or replaced insured product(s). ACE Recall Plus Insurance For Consumable Products Endorsements 40 22

23 What We ve Addressed Why foodborne illness concerns are greater now than before What the Food Safety Modernization Act (FSMA) means to the Farm/Ag account What ISO and AAIS contracts have to say about this What (at least) one insurer is doing 41 Resources and Sources ACE Recall Plus Insurance For Consumable Products Policy Form, REC (12/15) and related endorsements National Institute of Health Centers for Disease Control and Prevention Food & Drug Administration - and

24 Notes This file is set up for duplexed printing. Therefore, there are pages that are intentionally left blank. If you print this file, we suggest that you set your printer to duplex. 24