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The risk of food contamination runs through the entire food supply chain, from farm to fork. While the Australian food supply chain is well regulated, regulations can't completely eliminate the risk of contamination from foreign materials, chemicals such as cleaning products, pathogens that cause food-borne illness and allergens that aren't in the ingredient list, such as milk and nuts. When detected, contamination can trigger a food recall.
How can insurance protect you from a food safety incident?
It's a common misconception that general liability and property insurance cover more than they do. For example, many companies assume incorrectly that their general liability policy will protect them from liability for selling contaminated ingredients which cause a business customer consequential damages, such as business interruption.
Your general liability policy generally covers bodily injury or property damage that results from consuming or using your product.
Here's an overview of the differences between general or product liability coverage and product recall and product contamination insurance cover.
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General or product liability |
Recall or product contamination |
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Trigger |
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Covered loss |
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Major exclusions |
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What insurance coverage supports food product recall risk?
What fills the large potential gap in other liability coverage are product contamination and recall insurance programs that address the stages of a recall, including:
- initial testing and analysis
- crisis consulting (including PR, testing, regulatory guidance and more)
- logistics, employee OT, disposal costs and additional warehousing space
- replacement (or refund/repair) costs
- first-party business interruption
- brand/sales rehabilitation costs
- third-party consequential damages
- forensic accounting support.
Different elements of a product recall or contamination policy may be more important, based on your specific risk. If you're making a finished product, terms that cover replacing the product are much higher priority.
If you're manufacturing an ingredient however, the focus is more on the third-party consequential damages, which is the financial loss your customers sustain from using your contaminated ingredient.
Other factors like shelf life, customer exposure, scope or distribution and diversification of risk are important considerations.
Why business interruption is essential to product recall or contamination insurance cover
A product recall or contamination policy typically includes business interruption. Business interruption costs — for you or your customers — can include the following:
- loss of gross profit from downtime in the plant and inability to produce product
- suspension of registration of the facility while you clean it and get Food Standards Australia and New Zealand (FSANZ) approval to restart
- decreased demand
- loss of a corporate contract — there are many examples of companies publicly firing their suppliers or contract manufacturers following a contamination related loss.
It's important that you and your broker carefully review your policy terms and conditions. This is where an experienced product recall broker will ask the right questions and recommend the right cover.
Having access to experienced claims advocates can help you navigate the claim and develop a recovery strategy.
Mitigating your risk for product contamination through contract and supply terms
In addition to optimal insurance coverage you can also look to transfer risk for product contamination with contracted suppliers — depending on your role in the food supply chain. Terms to consider include limits of liability clauses, indemnity obligations, reps and warranties, subrogation risks, access to records, insurance requirements, control over the messaging of the recall, etc. All regions/ countries have different conditions and regulations on terms so need to be factored in also.
Be prepared and conduct a recall simulation exercise
It's advisable to conduct recall simulation exercises to identify potential issues — not just traceability concerns, but also financial risks. This simulation could include testing protocols and decision-trees, and examining loss limitation or recovery options, including via your contracts and insurance.
Research the recall risk in your portfolio, including suppliers and scope of distribution.
- What type of companies are involved? Do the companies involved have the financial resources or insurance to cover a large loss that you and potentially your customers incur?
- Are you the only buyer or one of many who might share a contaminated batch?
- Do your suppliers use one source or multiple sources? Do they monitor the financials of their suppliers?
- Do your suppliers require contamination/recall liability coverage?
- Where are your products going — do you know all destinations and implications?
How can Gallagher help protect you from the aftermath of a food product recall?
It's critical to consider obtaining the right coverage and terms to make sure your business has the protection it needs, which might be beyond what's covered in your standard policy. It's important to find cover that can be customised to fit your operations.
Gallagher has local Australian specialty brokers for the food production sector as well as global experts with over 75 years in servicing food production businesses, to provide knowledge, advice and access to insurance and risk solutions.
