Digging In: Navigating Product Recall and Contamination Insurance

Intro (00:00):
You're listening to Digging In, where we dig into the insurance topics, trends and news surrounding all things agribusiness.

Peter Johnson (00:14):
Welcome back to another Alliant podcast. Today we're going to focus on product recall, and we'd like to talk about an often hot topic in the food and agribusiness space: product recall insurance. Now I know that's a broad topic and can cover many parts of the business. Let's focus on the food and ag realm of the product contamination insurance. I'd like to introduce today Brian King, he's the first vice president in our food and ag business practice and our national lead for Alliant's product recall coverage specialty. Brian has been in the industry for nearly 15 years as both an underwriter, wholesaler and retail broker at a multinational corporation, advising his clients on diverse and complex areas of risk and insurance with a focus in the areas of all things food and ag. In addition, Brian has been advising clients on the complexities of product recall insurance for over a decade and placing coverage directly into the market on their behalf. So, Brian, what are some of the notable regulatory updates in 2023?

Brian King (01:36):
It's a great question. 2023 had some pretty big changes in the regulatory realm relative to other years. Earlier this year, the FDA announced a significant change to the Food Safety Modernization Act, adding what's called the final rule requirements for additional traceability records for certain foods. Now, this final rule is a key component of the FDA's new era of Smarter Food Safety Blueprint, and it implemented what's known as Section 204D, but it requires additional traceability record keeping requirements for entities that manufacture, process, pack or even hold foods in this food traceability list. Now, the intent behind this will allow for faster identification and rapid removal of contaminated food from the market. Now, there's a full list of these things out there, but you know, some notable ones include cheeses, which are mainly soft cheeses, leafy greens, melons, fresh-cut fruits and vegetables, and ready to eat salads.

Many of the items on this list are those that have caused massive recalls in the past. We're going to publish a full list on our website, but it's also out there on the FDA's website as well. The compliance date for record keeping is Tuesday, January 20, 2026. Another one of the regulatory changes that happened this year is that the FDA appears to be taking a closer look at both dietary supplements, which there were 16 FDA recalls in Q2 of 2023, and online grocers. The latter is being due to the growth of how these online grocers need to approach labeling requirements online. There is currently a request for information occurring by the FDA to address nutrition guidance and other labeling issues presented by the pure growth of the online grocery industry. Finally, another hot topic this year was around the addition of sesame to the list of the now big nine major food allergens that companies have to declare on food packaging as of January 1, 2023.

What was interesting about this was some of the fallout from this new guidance that they put in play. The FDA released a draft compliance policy guide, called a CPG, in May of 2023, regarding major food allergen labeling and cross contamination or cross contact. However, given how stringent this requirement was, some food manufacturers were then adding small amounts of sesame or sesame flour to products that previously didn't contain it, and they were putting “contains sesame” on their label rather than taking precautionary measures to minimize or prevent cross-contamination. Now, while this put them in compliance with the law, it adversely affected the population by further limiting non-allergenic food in the marketplace, which the FDA denounced that practice and engaged several stakeholders to try and prevent this action so that consumers can look for safe food. Food manufacturers contended that they can't sufficiently clean their equipment to guarantee its free of sesame as the fast track requires, which is understandable in a lot of cases, but under these federal labeling rules, they can't state that their product or they couldn't state that their product contains sesame unless it actually contained it.

So, they were adding small amounts of sesame and then labeling it as containing it. Now, the FDA finalized this guidance here in November. It includes the addition of what's called Chapter 11, Food Allergen Program, discussing what options companies can consider when, despite adhering to appropriate good manufacturing programs, cross contact can't be avoided. Which that guidance included discussing the use of using allergen advisory statements. Interestingly enough, though, a couple things in this is that they use two food allergen program examples of a frozen dessert manufacturer and a bakery, which likely highlights what the FDA will expect from manufacturer allergens good manufacturing programs. And I'd recommend insureds review those recommendations and expectations to weigh against their own program. The FDA also clarified in some Q&A that advisory statements cannot be used in lieu of GMPs and preventative controls. Now, according to some legal experts out there, this guide gives the FDA a fair amount of discretion on determining whether a company can avoid allergens and cross-contamination through their GMPs. And it gives the FDA support to determine that a food containing some of these precautionary statements are actually considered adulterated when manufacturers lack the sufficient allergen controls in their food safety program, which according to these legal experts may increase exposure to food manufacturers. So, I'd say a big recommendation is double checking with a knowledgeable food regulatory attorney, as well as reviewing limits and coverage of insurance with a knowledgeable broker.

Peter Johnson (07:22):
As you review the various data sources out there, what are the most common causes of food recalls?

Brian King (07:30):
Certainly it's important to note that the U.S. recall activity has returned to the pre-pandemic levels based off of the 2023 product recall data that's out there. Which is not surprising now that we've effectively come back out of the woods of decreased oversight, and we're still dealing with supply chain issues, which can exasperate or cause substitution of ingredient exposures, which can lead to recalls. As far as causes go, the rankings tend to vary by quarter, especially by product type, but in general, the leading top three culprits in terms of causes for FDA related recalls tend to be undeclared allergens. This is number one, it's continued to be number one and has been for the last six years. Foreign materials is number two, and think of this as wood chips, plastic, metal, stems and thorns or golf balls, etc. in that category. And then bacterial contamination is number three.

That's FDA. When it comes to the USDA, which regulates the meat and poultry industry, their leading causes tend to lean more toward no inspection was incurred and misbranding and undeclared allergens, those are their top threes. Bacterial contamination tends to be the next most common category for the most impacted unit counts, meaning how many units were actually impacted; foreign materials and packaging defects tend to be the leader for that. No inspection was the second most impactful for unit counts based on the data that's out there. Now, as technology, communication, traceability has increased, this has led to more recalls over the last data, and this is why we're constantly seeing this in the news and it's not about whether or not an insured has a recall that's important, but how they respond to that recall drives the success of the outcome after the fact.

Peter Johnson (09:29):
Brian, I agree, it's how to respond to these events that are the key to whether or not the insureds survive the impact, not whether or not they had a recall. And to that end, let's talk about the tool insureds can use to help and guide the response as well as financially protect them from those issues - product contamination insurance. Can you talk a little bit about that? Tell us what product contamination insurance is and how it responds.

Brian King (10:03):
Product contamination insurance is the formal name for product recall in the food realm and consumable product realm. And at its core, product contamination insurance is a standalone insurance product that is largely a first party or balance sheet protection coverage against accidental or unintentional contamination of an insured product and that includes the mislabeling of it. But the key is that contamination must have or would have caused bodily injury or property damage to a third party. So again, that's the key for these triggers of coverage. Now, whether that's an undeclared allergen or a cross contamination, a foreign material, or even a bacterial contamination, those are all areas that could respond for coverage and trigger coverage as long as it's harmful. Product contamination insurance is generally not designed to address non-dangerous product quality issues that would be more appropriate in a product warranty type of cover.

There are some areas of insurance where you can carve that back to a degree for certain defined events, but it's generally sub-limited. So again, it's primarily addressing those extra costs associated where the product needs to either be destroyed or removed from the marketplace, whether that's voluntarily by the insured or mandated by the government. And it covers those, associated loss of income, the decontamination of the facility, public relations costs, and even the economic injury that they could be legally liable to a third party, assuming that they've written the policy correctly. It's part of what I call a four-legged chair between product liability, your equipment breakdown, your stock throughput and even your directors and officers liability. Each of those are going to trigger because if you have a true product recall event, chances are these other areas of coverage are going to somehow be involved at some point.

And if you think about it from a case example standpoint or just examples of recalls out there, Peter, product contamination insurance doesn't have to be where the product is actually out into the marketplace. A perfect example of this is a chocolatier that has metal fibers in their bulk chocolate from their equipment use. Even if their quality control catches that, but they have to destroy some product and spend the time reworking it, shutting down the plant, trying to figure out where it came from, etc., those are all things that can be picked up in a contamination, because the key is, it was the metal shards would be harmful to consume and the product has been contaminated with it. And so a properly placed and designed program will respond to that. Now another really good example that people don't often think about is what about people we're getting ingredients from?

There was a cumin supplier that provided some contaminated product to an insured. The issue was though, that they didn't do it in malicious intent. So, cumin gets paid based off of the weight of their product, and during a down year, one of the employees of that cumin supplier used crushed up peanut shells to just increase the weight. And they weren't trying to cause bodily injury to somebody. They weren't trying to maliciously tamper the product to somebody else. It was just they put that in there to make more money for the entity that they work with. Now, of course, the insured who incorporated that product had to recall all of that because they were foreign. They didn't have a viable recourse against the supplier. So if you properly write a product contamination policy, you could have that type of exposure addressed.

Peter Johnson (13:53):
So it seems as though there's a lot of complex angles to this. What does product contamination insurance coverage provide?

Brian King (14:03):
Product contamination insurance is largely a first-party balance sheet protection. So it's addressing those costs where the product becomes dangerous and adulterated or dangerously mislabeled, and it can't be sold or it needs to be removed from the marketplace. So, if you think about it from a another standpoint, it's largely a business interruption and extra expense type of cover just from these defined triggering events, just like when we've got in a property policy or a cyber policy. Now, these policy triggers tend to include unintentional contamination, which would result in injury if the product was consumed in the manner in which it was intended. It includes malicious product tampering as a trigger, including product extortion and government recall, along with the adverse publicity alleging of these events. Now, over the years, these triggers have evolved, such as realizing the need to cover a government shutdown, and there are also additional triggers that can be added, usually at a sub limit for things like product refusal, false positive, even non-dangerous mold or regulatory advisor.

From there, you get into the coverage specifics. So those were all the triggers, like what could cause the policy to respond. And this includes costs, like we need an incident response team. We've got to get public relations in here. We've got expenses for brand rehabilitation, we've got to send notifications out to folks, establish call centers. It's the logistical and financial costs associated with the actual recall and destruction and replacement of that product, even refunds. And it's the business income loss that the insured incurs, or even the amounts that the insured becomes legally liable to a third-party customer for their economic damages. And the associated defense costs with it, the coverages that you can get for it can be expanded upon to help meet the needs of the insureds or even narrowed if that's what they so choose.

Peter Johnson (16:07):
So with as broad as this coverage is, what's currently going on in the product recall insurance marketplace. How are the insurance companies responding to the demand for this product?

Brian King (16:17):
It has got a lot of increased interest out there. It's one of the few areas of insurance that right now is soft. How long that will continue is another question, but there's a lot of capacity out there in the marketplace. We even had some new market entrants over the last 12 months and an increased push by Lloyd's of London wanting to write more domestic U.S. business. So again, the pricing continues to be competitive, and keep in mind, compared to general liability and excess liability, this is still a relatively new and small market in terms of how much premium is written, especially when you compare it to more established coverages like general liability and excess. So it's a growing area, as this product has become more established over the years and more proven, a lot of the big box stores are starting to require this more.

But I would submit to you that there are a lot of MGAs and a lot of underwriters and carriers out there that are becoming more interested in this particular industry segment. One key thing to remember is that as far as coverage goes, there is no standard, no two carrier policies are the same. So paying attention to the language is key to what the insured wants to accomplish for their operations and needs to be amended to address their specific exposures. If you try and commoditize this and just look at it from a pricing perspective, you're just gonna end up getting yourself in trouble. So it's really looking at the coverage.

Peter Johnson (17:54):
Brian, there's a lot of moving parts here. What are the common mistakes that you see people make with respect to product contamination insurance?

Brian King (18:03):
I'd say that some of the common mistakes made by both brokers and insureds are that, again, brokers and insureds both are commoditizing this coverage line. You can't do that; this is not general liability insurance. There is no standard ISO policy. So each policy with the carriers are uniquely worded with their own exclusions, their own triggers, their own definitions and conditions that all need to be evaluated for each insured. And having somebody pay attention to what those are is critical when evaluating coverage relative to the insured's objectives and goals. As far as insureds’ mistakes go, there are many court cases out there that were adverse to the insureds, where the insured did not realize that as they're filling out the applications, they're signing a warranty statement and it extends beyond just the person that's signing the application itself, especially as it relates to knowledge of prior losses or circumstances that could give rise to a loss within that organization.

Again, there's a lot of court cases around this, so I tell insureds I understand it's very easy to get wrapped into going through your renewal process, filling out a bunch of things on autopilot, but insureds need to be careful about asking around, getting written documentation from their plant managers, etc. before signing and attesting that nobody in the organization knows that we have a circumstance that may give rise to a loss. I would say another mistake that's made is that insurers and brokers both are not asking the right questions to help the insurers determine what they need to and what they are hoping to accomplish with these policies.

Peter Johnson (19:55):
Brian, it seems like you can make a lot of mistakes and there's a lot of ways that this coverage can get confusing. What are some of the best practices out there for risk management related to this coverage, to product contamination?

Brian King (20:08):
Great question. So best practices really boil down to what the insured's product is. They'll differ between if you're a raw agricultural good to an ingredient food manufacturer. However, there are some basics that I would recommend to every insurer that's out there. I'll give you my top five general recommendations. Number one is get comfortable and established with a strong food regulatory attorney. They can help you with compliance around proper labeling and marketing, food safety compliance and a slew of other issues that could get insureds into hot water in this dynamic world we live in. I think we've all seen websites where folks claim that they're doing something that they in fact aren't. So just get very comfortable with a food regulatory attorney. Number two is understand what these common pitfalls are that have avoided coverage for insureds in the past, even in that procurement process that I highlighted earlier.

And especially, do not delay in reporting claims or circumstances to your insurance carrier even if you don't intend to pursue the claim. If you're aware of an issue, you need to report that to the carrier as soon as possible and they're not going to care about you turning in claims that are below the retention and you're putting them on notice and not really pursuing, you're just letting them know. But there are notification requirements within the policy itself that have to be met, and I think a lot of people just don't. They either get bad advice or they are too afraid to notify the carriers of this. The third recommendation is obtain and maintain proper documentation. Now, there's a list we provide our clients, but it includes keeping affected sample products and positive pathogenic tests if you are just relying on general testing. So making sure you have proper documentation and discussing with your broker and the signed carrier's crisis consultant on how to handle these situations is key.

If you don't have proper documentation, it can become an argumentative area at claim time and create an issue for you. I'd say an area that is often underutilized, many of these policies provide pre-incident funds to utilize these crisis consultants to help improve their food safety program. And it's already baked into the policy, there's an amount there. So I would recommend to insureds, if you have an amount in there, use it right. Improve your food safety program, conduct a mock recall, do whatever it is that you need to do because both you and the carrier want to constantly improve. And then number five, when it comes to your suppliers, whether they're domestic or foreign, I recommend people audit and visit their suppliers with food safety in mind and not just for bacterial risk. We see a lot of claims for Hep A and norovirus out there that doesn't get picked up by the ATP or APC testing. Viruses don't really get picked up by those. So auditing with that in mind is a key thing in there. And having a good risk transfer contract with your suppliers will also be key. And then, Peter, I would say finally, my shameless plug is for any insured to speak to a specialist broker in this product contamination coverage area. It is not something everybody knows how to do.

Peter Johnson (23:53):
Well Brian, thanks for coming by today. Thanks for being on the podcast. It's a pleasure to work with you, and we look forward to having you back again sometime soon.