Chocolate-maker Mars recently ordered a recall of products in 55 countries after a customer in Germany found pieces of plastic in a Snickers bar. The company traced the issue back to its factory in the Netherlands and recalled all five of the products manufactured in that facility.
The recall will no doubt present Mars with a logistical nightmare, one that will likely cost the company millions of dollars. But it has also taken its toll on consumers’ trust. The announcement made headlines across the globe and the sheer volume of panicked customers was so high that it even crashed the company’s website.
For many it’s a worst case scenario, but the Mars case is a timely reminder that when things go wrong, it can challenge even the strongest companies and brands.
Counting the Cost of Recalls
Product recalls can be a costly exercise. According to research conducted in 2015 by the Grocery Manufacturers Association, 77% of companies that had faced a food recall between 2005 and 2010 reported that the estimated financial impact on their business was up to $30 million, and a startling 23% reported even higher costs.
The majority of the costs involved with these cases include those directly related to the recall itself such as discarded goods, sales losses, and the expenses involved in investigation, sanitization, and interruption to business. What’s harder to quantify, however, is the impact any recall will have on loss of future sales and the damage to brand reputation and consumer confidence – something that can take years to repair as companies attempt to win back customers who switched brands in the aftermath of a recall, or avoided a type of product altogether.
Two Types of Insurance for Outbreaks & Recalls
As recall incidents have increased over the last few years, so have the number of insurers offering specialist coverage to help companies mitigate the risks associated with this type of incident. Although every policy is tailored, insurance for food companies generally falls into two categories.
First, Commercial General Liability (CGL) or General Liability (GL)/Product Liability coverage covers losses arising out of bodily injury and/or property damage. This means the company is covered for costs associated with illness or death resulting from the consumption of a particular product. However, this type of coverage will not typically compensate the company for the costs involved with product recalls, whether they are mandatory or voluntary.
On the other hand, Product Recall insurance fully covers a company against the loss arising out of a product recall incident and any associated costs. These policies also cover things like lost revenue and crisis management services, such as PR campaigns or increased advertising spending, which many need to be employed in the wake of a recall. Often, product recall insurance is separate from liability insurance, which falls under a company’s commercial general liability.
Building a Proactive Risk Mitigation Strategy
“Every business knows that insurance is essential, but it’s important to note that buying the proper policy is just one piece of the overall risk management strategy of any organization,” says Natalie Chan from Axis Insurance.
Insurance policies offer a last resort for companies, a means to cover you in the event of unforeseen or catastrophic circumstances. No one ever believes that a recall is going to happen to them, but you can’t bury your head in the sand. There are 330 million people living on the continent, that means that roughly a billion meals are consumed every day in North America. The volume is so large that statistically speaking, companies are going to have problems. So instead of hoping the worst never happens, it’s vital that businesses take steps to actively manage their risks.
Proactive risk mitigation measures such as a robust food safety system that meets the latest regulatory requirements laid out in the Food Safety Modernization Act (FSMA), alongside proactive adoption of GFSI food safety standards, can help. It’s also vital that companies maintain continuous education regarding industry news and standards, as well as investing in the latest advancements in food safety technology to enforce stronger food safety cultures and work to eliminate the risk of human error.
Manual food safety programs have become inadequate in the face of an increasingly complex global supply chain and the regulations that go with it. Most food safety management applications do little beyond document management, but technology can do much more than put your filing system in the cloud. Comprehensive, advanced software can do anything from easily tracking and logging records to provide a complete, automated audit trail to enhancing traceability process so that deviations can be pinpointed with unrivaled precision. Integration with advances in testing solutions, as well as communication between staff and across facilities, further reduces risk and makes food safety all the more efficient.
Reducing Liability & Insurance Costs with Food Safety Technology
The bottom line is that technology helps achieve greater compliance, not only minimizing the impact of potential recalls (including the expense and hassle of costly insurance claims and the untold damage to your company’s reputation), but helps prevent them from ever happening in the first place. And insurance companies are beginning to recognize this.
Just as door locks and smoke alarms help lower the cost of your building’s insurance policy by mitigating risk exposure, other measures can do so as well.
“Having robust risk management measures, like automated food safety programs, in place will put businesses in a better position to be presented as “better risk to insure” to insurance companies,” continued Chan. “This gives insurance companies incentive to offer coverage and reduce the cost of policies.”
About Axis Insurance Managers Inc.
Axis Insurance Managers Inc. was established as a single location family business over 70 years ago and has grown exponentially from strength to strength, ranking in the top 10 commercial insurance specialty brokers in Western Canada. Operating in five main locations in British Columbia and one in the Yukon Territory, the Axis team consists of dedicated professionals specializing in mining and energy, forestry, food processing and hospitality, and more. Visit their website.