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LONDON-Product recalls pose a huge threat to U.K. manufacturers' balance sheets, particularly for companies that rely on one or two product lines for the bulk of their sales.
Food and beverage manufacturers are particularly vulnerable to losses in the event of a recall, whether it is a result of accidental contamination, malicious acts or a threat.
In its last published figures for a twelve-month period ending in 1995, the U.K. Chartered Institute of Environmental Health recorded 15,785 incidents of "extraneous matter" in food and beverages as defined by the Food Safety Act 1990. Not all of those led to a recall of the products involved, but the numbers underline the very real danger manufacturers face, especially when set against a background of increasing public awareness.
There were several national recalls in the United Kingdom late last month, most of which involving removing store brand products from supermarket shelves.
One case involved The Co-Operative Wholesale Society, which recalled 6,500 boxes of its own private label hot oat cereal when a customer found a nut in it. Since the cereal does not normally contain nuts, the packaging did not carrying a warning for people suffering from nut allergies, and the retailer decided an immediate recall would considerably lower the risk to public health-and its potential liability exposure.
Another case involved grocer J. Sainsbury P.L.C., which withdrew its store brand milk for young children after consumption of the product was potentially linked with several cases of salmonella food poisoning.
In both cases, the products in question were packaged under the retailer's name, but supplied by a third-party food manufacturer. It is often this manufacturer that finds itself footing the bill for the costs of a recall, and of destruction of the faulty product and replacement costs.
A spokesman from the Co-Operative Wholesale Society confirmed that it expects the supplier responsible for the faulty cereal to cover all of the recall costs.
Increasingly, U.K. retailers are asking their suppliers to purchase insurance to cover recall exposures, according to David Page, director of the special risks division of London-based Nelson Hurst International Ltd. But he was unsure whether those requests are being met, despite the fact that a recall "could wreck their business."
From the retailers' point of view, the decision to recall a potentially contaminated product is "a question of image," said the Co-op spokesman, particularly when it comes to matters of public safety.
When these situations arise, the Co-op has procedures that ensure that the recall happens swiftly. At the first alert of a possible contamination, a technical group evaluates the problem by product line and batch code. As a result of the group's findings, a decision is made whether to halt supply, pull the product from shelves, or actually put out a public recall. In the recent case, Co-op decided to pull the cereal from the shelves and put out a recall notice to the general public because of the potential danger to people with nut allergies, said the spokesman. "Public recalls are extremely rare," he added.
Nevertheless, Giles Burrows, director of London-based broker Nicholson Leslie Special Risks Ltd., part of the Aon Group P.L.C., noted that all the recall incidents Nicholson Leslie has dealt with have included a full public recall.
"The single most difficult decision to make is whether to recall," said underwriter Tony Cassidy of Lloyd's of London agency Cassidy Davis Underwriting Ltd. "If you don't, what will be the downside to the company-the comeback against the company from the buying public?"
Jennie Seabrook, profit center manager of the crisis management division of AIG Europe (U.K.) Ltd., pointed out that not only are food manufacturers more aware of food safety issues than in the past, but so is the general public. "Because the consumers, or buyers, are more aware, they are almost becoming like judge and jury," she said. "People expect food that is of the highest standard and is 100% safe for use."
Recalls may follow a different pattern if an organization's products are the victim of malicious damage, said Peter Cheney, director of crisis consulting at Control Risks Group Ltd. in London. He warned that retailers and manufacturers should not try to apply the lessons they may have learned from accidental contaminations to cases of product tampering.
One of the problems of malicious contamination is that "there are tons of different motives," he said, "and there is probably no warning."
Perpetrators can range from disgruntled employees and ex-employees to individuals wishing to make a fraudulent compensation claim against the manufacturer or retailer, he explained.
One potential threat in the United Kingdom is from animal rights groups that have threatened to contaminate meat products, said Nicholson Leslie's Mr. Burrows.
These situations are "very, very difficult to deal with," said Mr. Cheney, and often require instant action by food companies or retailers to protect both customers and the organization's reputation.
'There is a very misconceived idea that a company would endanger consumers for financial return," said Mr. Cheney, but "no company really puts commercial safety against consumer safety because consumer safety is its commercial future."
At the same time, making fast but uninformed decisions can put the organization in further danger, he warned, because a recall alone does not prevent the perpetrator from tampering again-particularly in cases where extortion is involved.
By backing up a crisis management team with legal, public relations, recall and crisis control experts, an organization can "make good decisions," said Mr. Cheney.
Control Risks estimates that about 70% of all U.K. extortion cases in the food, drinks, cosmetics and over-the-counter pharmaceutical industries do not progress beyond an initial contact. Of the balance, a "fair few never quite get to the moment of receipt of payment," said Mr. Cheney.
Because of their very nature, extortion cases tend not to enter the media, said Mr. Burrows, though one particularly high profile case in 1989 resulted in a 17-year jail term for a former police officer who put shards of glass into jars of baby food.
As a result of this case, food manufacturers introduced tamper evident packaging in the United Kingdom.
Extortion is "a fairly unusual type of crime," said Bill Ilsley, director of crisis management at security consultant Kroll Associates in London, generally perpetrated by single men between the ages of 20 and 40 whose businesses are failing and who have no previous criminal record. Generally, "they need money urgently to get out of a particular problem," said Mr. Ilsley, and they "try and pit their wits against the company and authorities."
Mr. Burrows said he recently has noticed an increase in interest from food and beverage manufacturers of all sizes in purchasing coverage for contamination and extortion risks.
A new recall insurance product is available within the Lloyd's of London market, called the Total Recall Brand Protection Policy. It is provided separately by the Cassidy Davis Hiscox Consortium and syndicate 623, which is managed by Beazley Furlonge Ltd., to policyholders around the world.
The London market already offers two recall products. The first is products guarantee and recall insurance, underwritten on a lineslip by liability specialists in both Lloyd's syndicates and London market companies. Available through broker Nicholson Leslie, the lineslip was set up about 20 years ago and provides up to oe10 million ($16.4 million) coverage, with further limits available in the excess market. It offers products guarantee, financial loss, accidental and malicious contamination and recall, and extortion coverage for component manufacturers, food and drink suppliers, construction materials manufacturers and domestic electrical products manufacturers.
AIG Europe in London also offers contaminated products insurance to organizations in the United Kingdom and Ireland. Aimed at food, beverage, tobacco, cosmetics and pharmaceuticals companies, limits up to oe6 million ($9.8 million) for accidental contamination and oe40 million ($65.6 million) for malicious tampering are available. Ms. Seabrook has noticed a recent move by the "middle market"-companies with revenues between oe5 million and oe150 million ($8.2 million and $246 million)-to buy contamination coverage.
Total Recall offers worldwide coverage for product contamination, whether malicious or accidental, and extortion, according to David Nicholson, underwriter for syndicate 623. The coverage has limits of around $20 million and additional capacity is available from other sources. "We are aiming the product at middle-market business that has not bought the product before," he said.
In addition to coverage for recall-related costs, the policy also provides up to 25% of policy limits to fund a public relations program, and also includes gross profits coverage.
The product is targeted at small- to medium-sized companies with gross revenues of less than $500 million, said Mr. Cassidy, particularly companies with a single brand name or that market their products through a small number of retail outlets. "It is not reimbursing for damage to the brand name or loss of goodwill-it is for the loss of sales that result from a contamination," he explained.