October, 1999

Underwriters at Lloyd's of London

1. INTRODUCTION. Manufacturers of consumable products (food, drugs, etc.) face the risk of having their products contaminated. Such contamination may happen accidentally or it may be the result of an intentional act, meant to disrupt the company's operation or to discredit it for some reason.

One of the most famous product contamination cases in the United States happened during the 1980's when several people died because they took Tylenol capsules that were contaminated with cyanide. As a result, the makers of Tylenol faced huge expenses in recalling their products and reforming their manufacturing process. Shortly thereafter, drug manufacturers stopped marketing drugs in capsules that could be opened.

When such an incident occurs, a manufacturer faces expenses just like Tylenol did. Certain underwriters offer a policy to cover these expenses that arise out of malicious contamination, accidental contamination, and products extortion.

2. CONTACT:
     Control Risks Group
      83 Victoria St.
      London, England  SW1 0HW
     44 (171) 222 1552

3. UNDERWRITING GUIDELINES. Not made available.

4. AVAILABILITY OF COVERAGE. Worldwide.

5. LIMITS AVAILABLE/DEDUCTIBLES. Limits are available to the extent needed by the individual insured.

6. INSURING AGREEMENT. Subject to the insured's payment of the premium and the deductible, the insurer agrees to reimburse the insured for any covered expenses incurred as a result of an “insured event” that is discovered during the policy period. The agreement goes on to list the three “insured events” covered by the policy:

A.     Malicious contamination. This portion of the policy covers pre-recall expenses, recall expenses, product replacement, product rehabilitation, and loss of profits that the insured incurs due to the intentional contamination of the products that are named in the declarations.

B.     Accidental contamination. This part provides coverage for recall expenses, product replacement, product rehabilitation, and loss of profits that the insured incurs due to accidental contamination of their products.

C.     Products extortion. This coverage provides reimbursement for monies that the insured pays “under duress” to meet an extortion demand.

7. DEFINITIONS. The following terms are defined for use in the policy:

A.     Malicious contamination. This is the altering or adultering of the named products, that gives the insured a “reasonable cause to believe” that its products have been made “unfit or dangerous” to use. The altering of the product may be actual or threatened. The act must be “intentional, malicious, and illegal.”

B.     Products extortion. This is when the insured pays money to someone who has threatened to alter the named products, unless certain demands are met. The money must be paid away from the insured's premises and the payment must be made “under duress.”

C.     Accidental contamination. This type of contamination occurs during the manufacturing process. It may involve blending, mixing, packaging, or labeling errors. These errors, in turn, bring about a recall because the insured believes that use of its products would lead to “bodily injury, sickness, disease, or death” of anyone using the products.

D.     Control Risks Group. A company that specializes in international security and crisis management. It has been hired by the underwriters to provide assistance to the insured in case of an insured event.

E.     Pre-recall expenses. The policy specifies two types of these expenses: the fees charged by Control Risks Group and the chemical analysis performed to determine if the insured's products have been contaminated. Such tests also “ascertain the potential effect” of malicious contamination or products extortion. The policy specifies that the deductible and coinsurance do not apply to Control Risks' fees.

F.     Insured event. This is what the policies insures against—malicious contamination, products extortion, or accidental contamination. The definition emphasizes that a series of malicious contaminations or products extortions constitute a single insured event, if they were “carried out in the furtherance, one of another.”

G.     Named products. These are specified on the declarations page as the products being protected against the perils of the policy.

H.     Contaminated products. The “named products” that are the subject of an “insured event”—the specified products that have been contaminated or that are the subject of extortion.

I.     Recall expenses. These are the expenses the insured incurs because of the recall of contaminated products. Such covered expenses include:

     1. Amounts spent for communications, public relations, advertising, etc.

     2. Amounts spent for direct return of the products from customers. These amounts include emergency phone lines, postage, and rebates.

     3. The expense to rent additional warehouse space.

     4. Additional personnel, other than regular employees.

     5. Extra money paid to employees as a result of the insured event.

     6. Any expenses the employees in #5 incur as a result of the insured event. This does not include transportation of the employee to and from his/her normal place of work.

     7. The costs to examine and “rework or destroy” the contaminated products.

     Also covered as recall expenses are those incurred by a customer of the named insured. If a customer uses the insured's products in other products and must recall those products, that customer's expenses are covered by this policy.

J.     Product replacement costs. Once the named products are destroyed, the policy covers the expenses to deliver new products to the customer, in order to minimize any loss of profits to the named insured.

K.     Product rehabilitation. These are expenses incurred by the insured in order to “re-establish the reputation and market share” of contaminated products. The policy provides up to 25% of the limit of liability for this coverage. This amount is included in the limit of liability.

L.     Loss of profits. Covered for up to 3 months after the insured event is discovered.

M.     Territory, underwriters representative, investigating accountants, policy period, and coinsurance. These are all specified on the declarations.

8.     WHO IS INSURED. The named insured.

9.     WHAT IS INSURED. The named insured's products are covered against certain insured events.

10.     PERILS. The policy covers the named insured against loss caused by malicious contamination, accidental contamination, or products extortion.

11.     EXCLUSIONS. The following exclusions apply:

A.     Any expenses incurred from any cause other than an insured event.

B.     Any illegal “alteration” of a competitor's products.

C.     Fraudulent or criminal acts of an officer or director.

D.     Any insured event not reported to the insurer during the policy period or within 30 days after the expiration of the policy.

E.     Any third party liability.

F.     Government bans.

G.     Any “loss of public confidence” in the named insured's products.

H.     Millennium exclusions.

I. War and nuclear.

12.     CONDITIONS. The following conditions apply:

A.     Computation of Loss. The amount of loss due to product contamination will be determined by examining the books, accounts, etc. of the named insured. The examination is conducted by the investigating accountants, named on the declarations page. The investigating accountants determine the amount due for “loss of profit” by examining the previous 12 months and making a “reasonable projection” of what profits would be in the absence an “insured event.”

B.     Products Extortion. Before the insurer pays a ransom due to products extortion, the insured must make all possible efforts to determine if the threat to the named products was actual.

C.     Pre-Recall Expenses. While the policy does not provide automatic coverage for such expenses, the underwriters may agree to cover them if they “believe a recall is likely to take place.”

D.     Notice of Circumstances. The insured must give notice of any loss to the control risks group.

E.     Due Diligence. The insured must do everything necessary to avoid or diminish covered losses, including using his/her “best endeavors” to keep knowledge of the insurance restricted.

F.     New Products. The insured must tell the underwriters about any new products at least 30 days prior to their introduction. New products may result in a higher premium being charge or special terms and conditions being applied.

G.     Liquidation. If the insured goes into liquidation, the policy ceases to afford coverage. Note: this is a substantial difference from most insurance policies where the bankruptcy of the insured has no effect upon the obligations of the insurer.

H.     Mergers and Acquisitions. The insured must notify the underwriters of any mergers or acquisitions regarding the control of the company or its assets. A change in control of the assets may result in an additional premium.

I.     Continued Recall after Expiry. If the policy expires while an insured event is in progress, the policy will continue for up to 12 months until the event is completed.

J.     Interim Payments. The insured may request payments during the course of an insured event at a frequency of not more than each 60 days.

K.     Inspection and Audit.

L.     Other Insurance. This policy does not apply at all if the insured has other similar coverage for the insured event.

M.     Salvage and Recoveries.

N.     Subrogation.

O.     Arbitration. Disputes between the insured and the insurer are referred to a “Court of Arbitration.” Here, each party hires an arbitrator and the arbitrators hire an umpire. The decision of any two is binding.

P.     Changes.

Q.     Assignment. Is not allowed.

R.     Cancellation. Cancellation for nonpayment of premium requires a 30-day notice.

S.     Governing Clause. The policy specifies that it is governed by the laws of the country listed as the named insured's address.