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SYDNEY, Australia-Australian manufacturers are becoming more aware of the risks associated with contaminated products after a string of recent contamination incidents.

As a result, some risk managers are expressing more interest in buying insurance for events like malicious products tampering or product recall.

The most recent case involved an extortion threat that cost an Australian biscuit manufacturer $10 million Australian ($7.9 million) in recall costs and lost sales.

Sydney-based Arnott's Ltd., which is 70% owned by Camden, N.J.-based Campbell Soup Co., commands more than 60% of the country's annual $970 million Australian ($768 million) biscuit market.

Arnott's management has estimated losses at more than $10 million from the extortion threat, which forced Arnott's products off supermarket shelves for 12 days.

Craigh Kenney, Arnott's risk manager, would not comment on the company's insurance policies.

Attorneys say product recall or malicious products tampering policies may cover some of Arnott's losses, depending on the wording. If the company had only an extension to its product liability policy, the policy may not respond, because no actual contamination occurred, lawyers say.

An extortion letter and packets of Arnott's biscuits laced with pesticide were sent to Queensland police, politicians and a newspaper on Feb. 3.

The extortionist threatened to send poisoned biscuits to supermarkets throughout Queensland and New South Wales from Feb. 17 if demands were not met.

The extortionist claimed four Sydney policemen framed a man serving life for a double murder on Queensland's Gold Coast in 1991. The extortionist claimed police had lied in their evidence, and demanded they take lie detector tests.

Police did not submit to the demands, and Arnott's withdrew its products from all retail outlets in Queensland and New South Wales.

All recalled biscuits were destroyed. Arnott's stopped production at its Brisbane and Sydney factories and temporarily laid off some part-time staff.

Police gave the extortionist a week to contact them or they would presume the threat was over. When there was no contact by the deadline, police cleared Arnott's to return its biscuits to the market.

The case has not been solved, though police say they are still pursuing leads.

Raymond Jones, general manager-Australian operations for QBE Insurance Group Ltd. of Sydney, said product recall or malicious products tampering policies could offer "some cover" for Arnott's losses.

But he said there would be no coverage under product liability policies because no product, apart from the few packages sent to police, politicians and a newspaper, was defective.

Most product liability policies offer product recall extensions, but many cover only recall costs from actual, not implied, contamination, Mr. Jones noted. He said public liability cover also would not cover Arnott's, as no member of the public suffered physical damage.

A business interruption portion of an industrial and special risks policy would not respond, as the interruption was not the result of a defined event, such as a fire or earthquake.

Mr. Jones said malicious products tampering policies can insure against the cost of removing products from retailers' stores, transport and destruction, and lost sales from withdrawn products.

But he said such policies are "very rare" for Australian manufacturers because the small size of the Australian market means premiums are too high.

Malicious products tampering is more readily available to manufacturers with worldwide operations, and Arnott's may have coverage through its U.S. parent, Mr. Jones said.

Kevin Toll, Australian manager-crisis management for American International Group (Aust.) Ltd., of Melbourne, said it is "a bit of a misconception" that malicious products tampering is only for multinational companies.

AIG has offered the cover in Australia since 1989. It was initially expensive, but premiums are starting to level out, he noted.

Still, most buyers still are large companies, Mr. Toll said.

Malicious products tampering policies usually include clauses that require a policyholder to keep the coverage confidential, as public knowledge of insurance may encourage a crime.

Mr. Toll said AIG's malicious products tampering policy responds to "any actual, alleged or threatened product tampering which rendered an insured product unfit or conveyed such an assumption to the public."

The policy has a "broad trigger" compared with product recall cover, he said. "It doesn't have to be actual contamination; it can just be a threat."

While product recall policies only cover the expense of the recall, malicious products tampering usually covers the cost of a recall plus net profit on lost sales, Mr. Toll noted.

Mr. Toll said AIG is working on new policy wording that would allow policyholders to recover gross profit lost as a result of a tampering incident, including costs from lost production.

There has been much interest in AIG's malicious products tampering policy since the Arnott's incident, he said.

"Companies are checking whether or not they need it, or have enough cover," he said.

But no matter how comprehensive the insurance cover, it must be supported by a crisis management plan, Mr. Toll said.

"If there are no plans in place, the situation could get out of control," he said. "How a company handles a crisis is what the public remembers."

Under AIG's malicious products tampering cover, policyholders have 24-hour access to crisis management and public relations consultants.

Graeme Berwick, managing director of Melbourne-based Willis Corroon Richard Oliver Pty. Ltd., which places product liability coverage and provides risk management consulting services nationally, said if a crisis is not managed properly, it does not matter how much insurance a company has. "You can't buy consumer confidence."

The Arnott's extortion threat was well-handled and, while the total recall was expensive, it would have been harder for the company to regain public confidence in its products if it had not recalled them, he said. "If they hadn't done something, the public may have felt cheated."

Crisis management and public relations surrounding contamination incidents is becoming increasingly important for Australian companies, according to Mr. Berwick.

"Those that do it poorly take years to recover their brand position and often end up going into liquidation.

"The problem is that a lot of companies' risk management plans are on the bottom shelf and are not updated regularly," he said.

QBE's Mr. Jones said while insurance can recover some losses from crises, such as product contamination, there is no cover for lost sales or market share after the event.

The long-term effect of incidents on sales and profitability depends on how well the crisis is managed and added that Arnott's did a "magnificent job" managing the extortion threat, he said.

Implementing a complete, early recall shows the company was interested in consumer safety and should help the company rebuild confidence and lost sales, Mr. Jones said.

Product contamination cases are becoming more prevalent in Australia. While the Arnott's case raised unusual insurance and risk management issues, it followed product contamination actions against Melbourne-based peanut butter manufacturer Kraft Foods Ltd. last year (BI, Sept. 2, 1996), and Adelaide-based meat processor Garibaldi Smallgoods Pty. Ltd. in 1995 (BI, Oct 16, 1995).

In contrast to the praise Arnott's management's drew over their handling of the crisis, Kraft management was criticized at the time for not implementing a quick recall of all affected products immediately after a contamination problem was identified.

Other recent food contamination incidents that made the news include a hepatitis outbreak from contaminated oysters from Wallis Lake in northern New South Wales, home to many oyster farmers. and an outbreak on board Qantas flights when passengers became ill after eating contaminated food.

And last November, over a four day period more than 500 Qantas passengers en route from Cairns, north Queensland, to Asian destinations, were affected by salmonella food poisoning.

AIG's Mr. Toll said Australia is a "very high-risk market" for product contamination following incidents in recent years. "Many (contamination incidents) have made the press, but many more do not," he said.

But Willis Corroon Richard Oliver's Mr. Berwick said Australia's product contamination record is no worse than other countries and is not symptomatic of major problems.

He agreed there has been an increase in Australian product contamination cases but said it does not indicate underlying problems with Australian manufacturers' production or risk management techniques.

"Some people say we are only seeing the tip of the iceberg and there are a lot more underneath, but I don't agree."

Mr. Toll said interest in product liability coverages also has increased among Australian manufacturers, particularly food, beverage, pharmaceutical and cosmetic companies.

Brian Crews, national president of the Assn. of Risk & Insurance Managers of Australia, agrees there is an increase in contamination cases in Australia, but said it is "not an epidemic stage."

He said risk managers need to consult their brokers and "weigh the pros and cons to see if they can get a cost-effective cover." He warned them to examine wording carefully to ensure they are buying cover for all eventualities.

The cost is "probably prohibitive" for smaller companies, but if an entity can get "an economical, broad form cover it may be viable, depending on the products they produce."

As risk managers become more aware of the potential problem, consumers are also becoming better educated about their rights and are more inclined to take action against companies they perceive have caused them an injury, he said.

Mr. Crews said there is a danger of "copy cat" crimes when incidents like the Arnott's case are publicized, but said there is little the risk manager can do to prevent that.