Digging In: How Product Recall Coverage Has Evolved After the Pandemic

Introduction (00:00):
You're listening to Digging In, where we dig into the insurance topics, trends and news surrounding all things agribusiness. Here's your host, Bruce Droz.

Bruce Droz (00:17):
Hello, and welcome to another episode of Alliant Agribusiness podcast. This is Bruce Droz of Alliant Agribusiness. And with me is my associate Trey Busch, Executive Vice-President of Alliant Agribusiness. And we're going to be talking about product contamination and recall coverage. We've got a very special guest with us today, Lori Hunter of AmWINS. Lori, I hate to say this, we're all kind of in this timeframe here, has about a 40-year insurance career behind her. She's a leader in the surplus lines industry. She began her career graduating with distinction from the College of Insurance, with a degree in risk and insurance. And she's currently an Executive Vice President with AmWINS, and she's a creative force who continues to find unique solutions for hard-to-place casualty and professional risks. Lori is passionate about mentoring and education, and she's created continuing education classes for the industry on topics including product contamination, recall umbrella and construction. She serves on various committees and management and has also served on a number of carrier advisory boards. When she's not focused on the insurance industry, Lori volunteers her time at local nonprofit organizations in her hometown of Pasadena, California. Lori, welcome to our podcast today.

Lori Hunter (01:44):
Thanks, Bruce. It's good to be here. I'm always happy to talk about product contamination, insurance, and what's going on in the world of food safety.

Bruce Droz (01:52):
We want to cover a number of topics today. So, our brief agenda really is just some initial comments as it's hard not to have some aspect of the pandemic in any conversation. Now we have gone through a rough stretch as a society. We've gone through a rough stretch in the industry, and we can touch on how that's impacted product contamination recall. But from that, we'll talk about the current market conditions in the product contamination recall space in the context over the overall insurance industry. And then I know we want to spend some time talking specifically about the coverages, the policies, and how they've evolved and the types of coverages that are recommended and available today. So, Lori, how are things for you coming out of the pandemic, which I say coming out, hopefully, we are.

Lori Hunter (02:46):
Yeah, hopefully we are. You know, the pandemic, one of the things that it did was it brought to light a number of important things that apply to our world in general. But specifically, food safety, as we all know, because we hear from the FDA about various things relating to COVID all the time, the FDA has found that one of the most important things that we were missing, frankly, prior to the pandemic, was being able to trace things. So being able to trace viruses and being able to trace things like product contamination. So, if you back up to 2011, when the Food Safety Modernization Act was passed by Congress and the president at that time, the Food Safety Modernization Act has taken a full 10 years to roll out and become fully implemented. Right before the pandemic, we really were in a place where the Food Safety Modernization Act was implemented.

And so, the FDA in 2019 decided why not keep going? We don't want to stop with this modernization act. So, they created something called the new era of smarter food safety. It still is a working document, but when they created it, they worked for a year to outline what they wanted that to look like. So, in the midst of the pandemic in 2020, they came up with a blueprint of the things that they felt were really important for our society and the FDA in general, to focus on in terms of the future of food safety. And that blueprint contains four different items. But in my mind, the most important thing that the FDA identified was the importance of traceability. So, you know, here we were in this midst of the pandemic, we were trying to trace where the virus originated from, trying to figure out if the virus was transmissible via food products. And, you know, it was thankfully determined that the virus is an airborne virus, not transmissible through food products, but it did highlight the need for traceability. So here we sit today and in September of last year just six or seven months ago, the FDA published the mandated proposed Food Traceability Rule. Hopefully that rule will get adopted in the next 12 months. And it will change a lot of things for your growers, packers, shippers.

Bruce Droz (05:22):
And I think that the gist of this is that this act as it comes to fruition will presumably and potentially increase the number of recalls. And that will put more pressure on the food industry, but also provide an opportunity to expand those that have the insurance. And one thing I wanted to just segue on this point is it will be of utmost importance for most in the food industry to respond to these recalls using insurance. These policies pay a lot of the costs involved in a recall, but they also provide some value added services. I just want to make sure we're getting that point in that when you have a product contamination recall policy, you're covered for a number of things, but there are services that come with that in terms of helping the policy holder through a recall. And I know we're slightly off script here, but could you just touch on that?

Lori Hunter (06:21):
Yeah, that's a really important point, Bruce. So, when an insured purchases a product contamination or a product recall policy, each of those policies comes with access to crisis consultants. And what those crisis consultants do is they help set up phone lines. So, they help an insured navigate through a lot of the different aspects of a recall. And that can include how an insured might respond to the FDA or any other governmental agency that might be mandating the recall or monitoring how the insured responds. So that's a really important part of the coverage is to have access to those kinds of people that can help insureds.

Bruce Droz (07:03):
Yeah, definitely. Okay. Well, thank you for that. Let's segue into this next section about the marketplace, because while this pandemic has been going on, we in insurance and business and many of our clients have suffered as well through increasing rates and prices and shrinking capacity. So, it's been a difficult marketplace in a number of areas. How has the product contamination recall marketplace fared through this rough patch as well?

Lori Hunter (07:30):
So, the product recall contamination marketplace is a little bit different than what we've seen. You know, certainly your insurance has seen increases in their property insurance, their auto insurance, their liability, and their excess insurance, but product recall has remained pretty stable in terms of pricing. And that's because there's a lot of capacity in the market. So, what we have seen in the product recall market is a lot of change in the carriers that are providing the coverage. So, there have been some major insurance carriers that have exited the product recall space or changed their risk appetite. But when those carriers have exited the market, they've been replaced by new market capacity. So, we have a number of new companies that have come on the scene in the last 12 to 18 months. So, capacity remains strong. One of the things that has happened though is that a lot of the recall carriers don't want to provide the kinds of limits they were providing before.

So, you may have seen one company providing a $10 million limit, and now you might use two companies that'll each give you $5 million instead of just one giving you 10. And that's because, you know, especially with the leafy green recalls of 2019, there was some massive losses. And the carriers realized that they didn't want to be on the hook for the full 10 million in a scenario like that in the future. And so, they're just offering a little bit less capacity, but the amount of capacity has made that market stable from a pricing standpoint. So that's good news for your insurance.

Bruce Droz (09:11):
Definitely. You know, that's been our experience as well. A lot of us that focus in the agriculture and food space tend to forget sometimes how big the marketplace is for product contamination and recall for classes of business, other than AG and food. But since that's where we specialize, and that's what we're talking about today, are there any specific classes of business that maybe are getting more scrutiny today or any changes in underwriting practices for any segments of the AG food industry?

Lori Hunter (09:42):
Yes. For the AG food industry, the sectors that seem to get the most attention are the meat and poultry, the leafy greens, and then anything that becomes an ingredient to something else. So nuts is an example of that, anything that goes into dry baked goods. So, if you think about the ultimate supply chain, if you're growing corn and that corn can then become a product in different types of flowers or cake mixes, and think about whatever you could put corn into. Well, if your product is an ingredient in many other things and your product has a contamination, then it could have far-reaching implications in terms of a recall. So those types of things have more scrutiny from an underwriting standpoint and underwriters then ask for a lot more information with those meat and poultry leafy greens, and then ingredient risks. Underwriters need to try to figure out how easily a contamination can be traced and how far-reaching a contamination could go in the event of a recall.

Bruce Droz (10:58):
Mm. Yeah, that's very interesting. And I guess the last point in terms of the marketplace is one thing we've noticed over the years. I know that you keep in very close touch with the various underwriters, but there has been a lot of movement of underwriting teams between carriers. And it seems that it's the consistency. You mentioned consolidation and companies getting in and out, but the consistency is more with the teams than necessarily it is with the name on the door.

Lori Hunter (11:26):
That's right. Yes. It's very unique to this space and insurance, where you have entire teams of underwriters who are recall underwriters that pack their bags and go to a new carrier. And it creates a lot of challenging situations for brokers because not only do you have to keep track of where everybody's gone, but when a team of underwriters goes to a new company, they'll have a new form. So, then you have to scrutinize what the new policy language says and make sure that if, for example, you have an insured that was with Alliant last year and they're not doing recall anymore, and now that risk may follow the underwriters that were at Alliant who are now at Scottsdale, that the Scottsdale form is just as good as what they were offering as the Alliant form. So, it creates a lot more work for us having to do the analysis and make sure that we're not leaving any holes for insurance in terms of their coverage.

Bruce Droz (12:26):
Very interesting. Well, and I think that's a good segue into the next piece. You talked about the coverage forms. We have been working together, Lori, you and our team for many years, going back to the beginning of product contamination and recall insurance and we've really seen an evolution in coverage since those days. And I think it continues to evolve, but let's talk about the coverage. Let's talk about what has become standard in these policies today. And then we can talk about some of the newer areas that are available if the brokers are aware of them and know what to ask for.

Lori Hunter (13:05):
Sure. So, you know, if you go back to 2008, and that's when there was a turning point for this coverage line. Prior to that, there were only two or three insurance companies they've even offered product contamination coverage. And then in 2008, what happened was there was a group of underwriters that left. It was actually AIG and they all branched out and they went to different insurance companies. And the insurance company saw the need for this product and so at that point, you had several markets that were in the product recall space, and each of them had their own form. But as time has gone on this coverage has evolved. So, there are a few things that are very standard in every policy and those things are that every recall policy, you will always get coverage for accidental contamination. You'll always get coverage for malicious product tampering and always for product extortion.

Those are sort of the three coverages. The fourth one is coverage for adverse publicity, and that is now included in almost every form. So, you're always going to see those elements in a product recall policy. And from there though, what carriers offer really varies. And so, if you have an insured who has a third-party exposure, for example, somebody who's selling to Costco or Walmart, and they might be liable to reimburse that third party for expenses. If their product causes a recall, you need to have third-party coverage, and that's not automatically included in every product recall policy. It's something that is offered for those insureds that actually have an exposure. And then when the FDA passed the Food Safety Modernization Act, it actually gave the FDA the right to mandate a recall. And when that happened, when that got implemented, the next coverage that was offered was governmental recall so that if a governmental agency came in and mandated that an insured recall their product, now your product recall policy will respond as long as you have that governmental recall coverage in your policy. Many forms today include that automatically, but many forms include that coverage at a very basic level. And a lot of insurance companies will offer broadened coverage where that's concerned and that's super important, and it can get very technical. For example, there is one or two companies that will give coverage for suspension of registration. So, if you don't actually have a recall of your product, but the government comes in and suspends your facility for 24 or 48 hours, because they detect some sort of contamination that might be present. Well, if you have that coverage, it can pay for your loss of income for those days that your plant is shut down, but not all carriers will offer that. There's coverages such as intentionally impaired ingredients, where if an ingredient to your product was somehow amended or modified and when you modified that ingredient, you didn't know that it could cause harm. Well, that's an intentionally impaired ingredient and that's a coverage that a few carriers include in their forms, but most don't. So, you'd have to ask for it. Product refusal coverage is one that is super important and affects a lot of the leafy green growers. Because as we've have seen over the years with the spinach recall, and the romaine recalls, if you can't sell your product, because all romaine lettuce is being recalled and the contamination source hasn't been identified, then you might want to carry product refusal coverage, because it could help cover some costs if you can't sell the product that you were already contractually going to sell to a third party.

Bruce Droz (17:04):
So, Lori, on that point, we always stress that one of the keys to triggering a coverage under a product contamination recall policy is having some sort of positive test for a pathogen that would cause injury to a consumer that's in your product, not your neighbor's product or the grower shipper down the street, but your product. And that's where this product refusal coverage seems to be so different because it's triggered by refusal from your customer because of an event and a contamination in a similar product of yours, but not yours. Am I right on that?

Lori Hunter (17:47):
Yes, that's right. And that is why it's very different than any other type of coverage that you get in a recall policy. So, the wordings for product refusal really vary between carriers. So there, again, we have to be careful about reading the language and understanding what you're getting when you buy that coverage. Because with refusal, an insured’s big loss is going to be their loss of income. It's not going to be the cost for them to recall their product. And so, you want your refusal coverage to include loss of income. And then I think of finally, there's some good sub-limited coverages that are being offered on a fairly regular basis. You have to ask for them and you have to ask for the right limits. And those can be a sub-limit for forensic accounting costs because it's costly to actually hire forensic accountants after recall to determine what your dollar loss was. Another sub-limited coverage that we're seeing is unsubstantiated retailer costs where your retail customer may have costs that are not enumerated in a recall policy. And so, this just gives a limit. So, sort of a general limit that can be accessed if you are liable to reimburse your retailer for recall.

Bruce Droz (19:04):
Along that line, we've seen during some of these claims where the retailers, the grocery store specifically, do incur some expenses. They pass that back to the grower-shipper, but they don't always like you said, enumerate what those exact charges are for. They get an invoice for a lump sum. Would that in your mind potentially fall under this unsubstantiated cost issue?

Lori Hunter (19:30):
Yes. Yeah. And it's there to help make the claims-handling process go a little bit more easily. It's if you think about it and sort of like general liability, it's sort of a med pay coverage where you're just going to cover that bill.

Trey Busch (19:47):
So, Lori, I just have a question for you. Talking a little bit about so many carriers offer different forms and different coverages, and some are better at it than others, but let's talk a little bit about off-the-shelf products and how brokers really need to understand their grower/packer/shipper clients, and the process they go through. And the coverages that need to be tinkered to a specific industry set, like leafy greens is going to be different than tomatoes, most likely, and the coverages that can apply once it's modified. And you've been great at this over the years, listening to our challenges with our various clients and their exposures, and you got the carriers to change and the manuscript forms that really apply to our clients. You want to talk about any of the off-the-shelf products that can be modified.

Lori Hunter (20:46):
So, a lot of the carriers can be very flexible and creative when they're pushed to be and provide products that really take the off-the-shelf product and amend it to fit an insured’s specific needs. And as you've said, Trey, I mean, we've worked with your team in Salinas and Bruce's team in Fresno on such a variety of different kinds of customers. And you think of it in terms of taking into account how long a growing season is, for example, would be one thing, because there are one or two carriers that are actually willing to give you coverage if you have a recall in your plant for the destruction of your crops in the ground. And if you have an insured that has a longer growing season, that's a consideration you might want to make in terms of offering coverage. Another area that we've seen is, I touched on the intentionally impaired ingredients, but pet food manufacturing is a big one where companies manufacturing pet food are importing products from foreign countries. So, when you're importing ingredients that might create a different set of circumstances that could create a higher exposure to an intentionally impaired ingredient. So regardless if it's meat or veggies or fruits, these coverages, it's really important that the insurance brokers like you guys understand what a client's actual needs are so that you can help craft these endorsements. I mean, another one that comes to mind, Trey, that I credit you for almost inventing is the waiver of segregation. If you're somebody who's getting their supplies from a number of different farms and you want to waive the subrogation rights, not all carriers will go along with those types of coverages that you guys continue to ask for and push for, for your clients.

Bruce Droz (22:52):
Well, Lori, on behalf of Trey Busch and myself, we'd like to say thank you very much for spending some time with us today and walking through these important aspects of product contamination, recall insurance, and for those listeners out there, we'd like to thank you for your time. And for more information, please go to www.alliant.com.