CAUTION!

A U.S. government agency has alerted consumers that consumptionor use of this product may pose an unsafe, hazardous or potentiallyharmful threat to users.

This type of announcement has become more commonplace in recentyears.

In the United States, the numbers of voluntary and involuntaryrecalls continue to hit higher levels than in the past--or at leastthey have played out more dramatically in the media.

In 2007, at a Capitol Hill news conference, the year was dubbed"The Year of the Recall." This label was supported by statisticsthat there were 472 consumer product recalls during thisrecord-setting year.

In mid-2008, a spokesperson forthe U.S. Consumer Product Safety Commission in Washington said thenumber of recalls continued to rise.

From peanuts to pistachios, much attention has been paid toproduct recalls in 2009 as well--particularly consumable productrecalls. The January 13th recall of peanut products, notorious forbeing one of the largest recalls in U.S. history, was just thestart of 2009's recall issues.

The peanut is unsurpassed in the number of businessesaffected--more than 2,100. In this case, microbial contaminationhad an impact on a wide variety of products in the supply chainincluding cereals, health bars, crackers and ice cream. Given thatthis chain reaction affected a large number of other businesses,the peanut outbreak in total was also responsible for eight deathsand 575 illnesses throughout the United States, according to pressreports. (See, for example, Associated Press report,"Peanut Product Recall Tops List of Bad Foods," Feb. 5, 2009).

It's More Than A Few Peanuts.

Everyone is no doubt aware of the well-publicized recalls of petfood due to melamine poisoning, not to mention the contamination ofbeef, spinach, tomatoes, jalapeno peppers, pistachios and cookiedough in the past 24 months.

The 2007 recall of pet food, which turned out to be the largestrecall of pet food in history, impacted 1,177 products in total andcost the primary company involved more than $55 million inexpenses, plus an additional $30 million in litigation settlementcosts, according to various media reports.

But it's not just food items that are being affected. Outside ofconsumable products, numerous consumer goods and products have alsobeen recalled. As the United States continues to rely oninexpensive products manufactured in China, this reliance hasfueled heightened interest in adherence to consumer safetystandards. Interest in standards picked up after the 2007 recall ofchildren's toys due to lead paint and continues today with concernsassociated with Chinese drywall mounting.

The U.S. government has cracked down in an effort to maintainpublic safety. Standards have continued to become more stringent aswe uncover more about consumer safety and what it takes to keep thepublic safe. Government agencies such as the Consumer ProductSafety Commission (CPSC), the Food and Drug Administration (FDA),the U.S. Department of Agriculture (USDA) and the EnvironmentalProtection Agency (EPA) are all governing authorities. Each entityhas taken on a strong role in insuring the safety of consumers.

The insurance community has alsostepped up and responded to catastrophic events and product recallsby creating crisis management divisions and brand protectionproducts. These insurance vehicles afford balance sheet protectionand restoration of reputational integrity to companies that musttake part in voluntary or involuntary recalls.

Product Recall Solutions

It is important to note that this insurance coverage ispurchased on a standalone basis. It is over and above the potentialcoverage provided by a commercial general liability program, whereunintentional bodily injury and property damage claims would findcoverage due to a negligent act, error or omission.

In the past, recall insurance programs were not readilyavailable or did not have the needed scope of coverage. Today,standalone coverage can be readily found from a number of domesticcarriers. More importantly, it is available to a wide array ofbusinesses--including those involved in the automotive supplysector, a typically hard-to-insure area.

Target industries for consumable products are food and beveragecompanies, pharmaceuticals, cosmetics and pet food companies. Forconsumer goods and products, target businesses are those involvedin manufacture or distribution of equipment, machinery andappliances, toys, sporting goods, furniture and jewelry, to name afew examples.

There is also coverage for component parts that can be a varietyof products that are manufactured, distributed, imported, exportedand sold as part of another manufacturers' product. These are thecritical and non-critical "ingredients" or "parts" of thethird-party product.

Product recall coverage generally has two parts: Coverage A,first-party expense coverage, and Coverage B, third-partyliability. While Coverage A will cover the direct expenses, i.e.recall expense, business interruption, consultant costs andrehabilitation associated with the recall, Coverage B will addressthe damages of a third-party, potentially including the customer'sgross revenue, recall costs and customer product rehabilitationcosts.

More specifically, Coverage B comes into play when a third-partyuses the insured's product as part of its product. For example, therecall of peanuts and peanut products distributed by the Lynchburg,Va.-based Peanut Corporation of America (now in bankruptcy)affected third-party businesses that manufacture crackers and icecream using PCA's peanut butter paste. PCA sold peanut butter inbulk packaging in containers ranging in size from five to 1,700pounds and paste in 35-pound packages to tanker containers.

Carriers are also able to address additional losses as a resultof a recall. The impaired-property expense endorsement responds inthe event that a third party's product cannot be used or is lessuseful because the ingredient or component has impaired theproduct's usefulness.

A standalone coverage form for product recall can be tailored tomeet the individualized needs of an insured. It is able to affectbetter and broader coverage than that that of an endorsement to aCGL program, which generally only covers the notification, shippingand disposal costs surrounding a recall event.

Costs and Management of a Recall

The cost of a recall and the reputational damage associated witha recall can devastate a business. A 2006 article (by LevickStrategic Communications, a crisis communications firm) referencesa Washington State University study putting the average cost of arecall at $540,000--about twice that of an average productlitigation settlement ($217,000). In August 2005, Horsham,Pa.-based Jury Verdict Research reported a similar figure as themedian jury award in product liability lawsuits involving consumerproducts like food and household appliances ($216,300), althoughJVR said the overall median for all categories of products was $1million, with transportation, medical and farm products driving upthe overall figure.

(Editor's Note: An earlier article written by three crisismanagement experts in 2003 references the same recall costsfigures, also attributing them to WSU and describing the $540,000recall cost as the total personnel cost for a product recall atthat time.

Professor Barbara Rasco, a researcher at the WSU department offood science, could not confirm the earlier figures, but reportedto National Underwriter in an e-mail earlier this monththat the direct costs of a recall are roughly 10 percent of thetotal costs. See related text box for direct and indirect costbreakdowns.)

An insurance program can work to minimize the occurrence andpossible toll of a recall on a business. Upfront, a recall programcan educate the insured on how to manage potential exposure. Thecarrier or third-party provider can assist the insured informulating a plan of prevention as well as an emergency crisisresponse plan of notification.

Once a threat is encountered, carrier-assigned crisis managementconsultants work swiftly to respond in the event of a crisis,providing 24/7 assistance and communication. Early and promptmitigation is the most critical component in saving a situation aswell as a brand.

Experts brought in to manage the crises and respond to mediascrutiny are invaluable resources for the insured. The recovery ofthe affected business will often depend heavily on the ability torestore consumer confidence and insurance recall products are vitalin satisfying this need.

It is important to note that balance sheet protection and brandintegrity do not have to be an overwhelming expense. Recall programpremiums can start as low as $5,000 with deductibles beginning at$25,000. This is an expense that many businesses cannot afford tolive without.

Patricia Roth is senior vice president forlarge commercial property, casualty & environmental at S. H.Smith & Co., Inc. in Hartford, Conn. She may be reached [email protected].