Risks in the Food Production Business
Due to the growing interest in Specialty Foods along with the FDA concern over food borne illnesses which is resulting in new laws under the Food Safety and Modernization Act (FSMA), food producers are becoming more aware of the risks of the food production business. This increased awareness has created a greater need for understanding the insurance products which can help protect your business.
Insurance agents are always telling their food clients that they need Spoilage Coverage. It sounds simple enough but a good policy should provide Spoilage under a variety of circumstances. When purchasing this coverage, be sure to ask if it will cover if your freezer or refrigerator fails due to mechanical failure, or if it is caused by an off-premises power outage. These common causes of loss can often be included but are overlooked.
Product Recall insurance is a growing area of interest for food manufacturers today. This insurance is available to manufacturers, bottlers, ingredient suppliers, processors, co-packers, packagers, wholesalers and distributors. Many principals in the food manufacturing business feel that FSMA is going to increase the number of government triggered food recalls. This has sparked an increase in the number of products available to purchase that will cover a variety of recall situations.
There are insurance companies that cater to the small business owner that have developed forms that can be added to the policy of a small food manufacturer. Generally these forms have lower amounts of coverage and more restrictive wording than purchasing a “stand-alone” policy.
Product Recall policies are not standardized and have a variety of choices for additional coverages. The primary policy usually provides coverage for Accidental Contamination and Malicious Tampering. The definition of Accidental Contamination may include impairment or mislabeling of the insured product to the extent that it would cause bodily injury or property damage. Note that mislabeling an incorrect expiration date may or may not be covered depending on whether or not an expired product would cause bodily injury or illness. However, mislabeling a product that contained gluten as “gluten-free” would most likely be considered a covered event as the potential for serious injury exists.
Most Product Recall policies also contain coverage for Consultant Costs for the advisory services of a Crisis Consultant provided to assist you in the recall process. There is also payment of defense costs, if applicable. Product that has received malicious tampering may have extortion costs involved and the recovery of cash or other monetary instruments may also be covered.
Actual Recall Costs can include the cost of media announcements as well as the costs of corresponding with various agencies regarding the recall. The cost of shipping the product to another location and additional storage is covered. There may be costs over overtime to employees to deal with the additional work that a recall requires. The costs for disposing of the product or redistributing the recalled product is covered. Retail slotting fees and cancellation fees for promotion programs which were unable to be executed due to the recall may also be part of the covered costs.
There are some notable things that are often not covered on the primary policy that can be added by endorsement. These include:
Adverse Publicity: The reporting of actual or alleged Accidental Contamination during local, regional or national media and specifically mentions your company or product.
Replacement Costs: Covers the costs of refunds the insured gives to purchasers of the affected products as well as the cost to repair unsold stock and the labor costs related thereto. If unsold stock cannot be repaired, this endorsement will pay the cost of unsold finished stock that must be destroyed.
Government Recall: If this is not covered under the primary policy as an insured event, then it can be added by this endorsement.
Rehabilitation Expenses: These are costs incurred in order to re-establish the product to reasonably projected level of sales anticipated prior to the recall.
Extra Expense: Provides expense reimbursement for expenses in excess of the normally incurred for the sole purpose of reducing the Loss. These expenses may include the cleanup of machinery or location or the temporary use of another’s property while restoring the insured facilities.
Extortion Costs: While the actual extortion monies may be covered as a primary cost, this endorsement adds payment for rewards to an informant, loss due to the destruction or disappearance of the extortion monies, interest costs for procuring a loan for purpose of extortion payment, costs of travel while attempting to negotiate a demand and cost of security guards and security consultants.
Customer Loss of Gross Profit: Loss of Gross Profit incurred by a direct customer of the insured for which the insured would be legally obligated to pay or reimburse which is caused solely by the recall event.
Long Term Agreement: Allows the primary policy to be renewed for the same premium, terms and conditions as long as the business has not substantially grown or changed.
Food manufacturers have a wealth of concerns on a daily basis. They need to optimize their production, reduce waste, maximize the shelf life of their products and consider the delivery options of getting them to market. Add to that the compliance with a variety of government regulations including FDA, NOFA (Northeast Organic Farming Association) and labeling requirements and there appear to be long list of possible risks and missteps that require attention.
Avoiding or mitigating food related risks by having Good Manufacturing Practices, HACCP (Hazard Analysis Critical Control Points) plans, and other Risk Based preventative controls is also an absolute necessity. Even the smallest of food producers are often being required to have a HACCP in order to do business with certain vendors.
Insurance is known as a risk transfer vehicle which allows you to transfer your chance of risk to the insurance company in return for a paid premium. Not all risks are insurable but the number of choices in the food manufacturing industry is clearly quite broad and should be made in conjunction with an agent who understands your business.
If you have any questions, please call us today at 1-877-352-2121, or e-mail us at beready@clark-mortenson.com.
**As published in Valley Business Journal – May 2014
