For most people, purchasing products at their local grocery store is a mundane event. For those with a culinary spirit, it may be a task that is accomplished with a sense of satisfaction and enjoyment. In either case, it is not an event that typically elicits concerns over the possibility of sickness, or in extreme cases, death.

However, recent events have cast doubts on the safety of America's food supply. Be it peanut butter or dog food, the issue facing risk managers at food manufacturers is how to reduce these escalating risks and manage any unfortunate outcomes.

As it pertains to food contamination claims, there are three primary ways in which a loss can occur:

c Accidental contamination: This is usually thought of as the introduction of an unintended substance into the product. More commonly, however, it consists of mislabeling a product.

c Malicious contamination: This form of product contamination is intentional and can result from any number of sources, such as a disgruntled employee or a customer.

c Extortion threats: In the case of extortion, product contamination may have occurred or there may simply be a threat by someone to contaminate a product. The goal is to extort money from the company.

Regardless of how product contamination occurs, and as any risk manager will tell you, the best kind of loss is no loss at all.

For food manufacturers, the most common system for preventing contamination and applying loss prevention tools is the Hazard Analysis and Critical Control Point system. While the U.S. Food and Drug Administration has not mandated use of HACCP by all food manufacturers, it is the recognized safety standard across the industry.

The seven principles/steps of HACCP are:

c Analyze hazards: What are the potential hazards associated with the food being manufactured--such as physical contamination or biological contamination--and the best methods to prevent and control these hazards?

c Identify critical control points: At which points in the manufacturing process should identified prevention and control tools be applied?

c Establish preventive measures with critical limits for each control point: What are the thresholds or standards needed to ensure that a given prevention or control tool is effective, such as cooking time or the strength of the magnet used to screen for metal contamination.

c Establish procedures to monitor the critical control points.

c Establish corrective actions when monitoring shows that a critical limit has not been met.

c Establish procedures to verify that the system is working properly.

c Establish effective recordkeeping to document the HACCP system.

Use of a co-packer

Some of the more recent contamination events have revealed a fact that, until recently, was not widely known outside the food manufacturing industry--that a fair amount of companies outsource the manufacturing of their products to others, commonly referred to as co-packers.

While there is nothing wrong with this practice in and of itself, those manufacturers that do this should ensure that, in addition to the use of HACCP, they are requiring: certificates of analysis describing the quality control data for a particular lot/batch of product; audits of supplier testing through the use of outside lab testing; and proper insurance and indemnification provisions, i.e. contractual risk transfer, to ensure that the company is being indemnified and held harmless for any losses resulting from the co-packer's negligence or willful misconduct. These steps will ensure that the outsourcing company's quality control standards are strictly observed and that the co-packer maintains some "skin in the game" for any negligent deviations.

Since even the best loss prevention efforts are not 100% effective, it is important to consider how to fund for any losses that do occur. Unfortunately, many company officials believe they have coverage for a product contamination event under their general liability policy. While the typical general liability policy will pay for bodily injury or property damage caused by a hazardous or defective product, it does not typically cover the logistical costs of a recall, which can include transportation and warehousing, employee overtime, additional staffing expenses, product testing and destruction, cleanup and increased costs to subcontract additional products.

In addition, there is a significant risk that a contamination event will result in a loss of consumer confidence, with a corresponding loss in revenue. If this trend is not reversed, the damage to brand value and goodwill can be quite significant and ultimately can destroy the brand.

From a risk financing perspective, the appropriate insurance tool for addressing these exposures is product contamination insurance, also referred to as accidental contamination and malicious tampering insurance. Covered losses under most product contamination policies include product recall expense (first- and third-party), product replacement, extra expense, etc.

However, these policies also recognize the importance of indirect losses, such as lost revenue and damage to brand value. These polices will often provide coverage for: loss of profits, advertising and consumer education campaigns, brand rehabilitation expenses and consultant and public relations assistance.

Often a company will spend years, decades or even a century cultivating its brands. Risk managers of these companies are the stewards of the respective brands, and must take great pains to ensure that contamination exposures are properly identified and mitigated. Only through the use of proper risk control, transfer and financing techniques, such as those identified above, can the risk manager ensure the long-term viability of the company's brands.

Zachary Finn (top) is the risk manager for a Fortune 1000 food manufacturer in Ohio. He is also a member of the Risk & Insurance Management Society Inc.

Timothy Anderson is a claims specialist for Nationwide Insurance Co. in Greensburg, Pa.