Safety, cover in focus after huge egg recallPosted On: Aug. 29, 2010 12:00 AM CST
GALT, Iowa—The recall of half a billion eggs tainted by salmonella linked to chicken feed likely will cost hundreds of millions of dollars and ignite further debate over whether food producers should buy product recall insurance, experts say.
While interest in the coverage has increased as a result of several recent high-profile recalls, the market for product recall coverage is still developing, they say.
The egg recall began Aug. 18 when Galt, Iowa-based Wright County Egg issued a voluntary recall of 380 million eggs. Two days later, another egg producer, Pennsylvania-based Hillandale Farms of Iowa recalled 170 million eggs due to contamination. On Aug. 26, the U.S. Food and Drug Administration announced investigations linked a salmonella outbreak to salmonella-positive chicken feed at both farms.
The feed, which was produced at a mill that is part of Wright County Egg's operations, was distributed to Hillandale Farms, according to the FDA. The recalls only apply to fresh whole eggs.
The salmonella outbreak is one of the country's largest since 1970, with more than 2,400 cases of illness linked to salmonella, according to the U.S. Centers for Disease Control and Prevention. About 1,470 cases have been connected to the recalled eggs.
Eggs affected by the recall were distributed to grocery distribution centers, retail grocery stores and foodservice companies in at least 23 states, according to the Egg Safety Center, an organization run by the United Egg Producers—a group made up of egg farmers with approximately 95% of the United States' egg-laying hens.
Jackson, Miss.-based Cal-Maine Foods Inc., one of the largest U.S. producers and distributors of fresh eggs, said on Aug. 20 that it purchased 9.6 million eggs from one of the Iowa producers, which accounted for 0.3% of its total sales between April 9 and Aug. 18.
In a statement, the company said it is monitoring the situation and that none of the eggs involved in the recall were produced in Cal-Maine facilities or operations.
Thirty-seven brands reported being affected by the recall. Information on those brands can be found at www.eggsafety.org.
Insurance losses for the event still are unknown, but some experts estimate the economic losses could be “hundreds of millions” of dollars.
“It's going to be awhile before we know, but the (economic) losses will likely be substantial,” said Geoff Mills, a managing director in Marsh Inc.'s product recall practice based in Princeton, N.J. “The peanut recall (in February 2009) is estimated to have cost more than $1 billion. I don't think the egg recall will be that costly, but by the time it's all said and done, costs could well be in the hundreds of millions. As far as how much of that is insured, that's anyone's guess right now.”
Insured losses likely would fall under first-party product recall insurance coverages, insurance experts said, adding that business interruption coverage under that coverage is triggered by a contamination event. In some cases, third-party coverage, which would cover the recall expenses of the producers' customers as well as lost profits, can be purchased. Insurance industry experts, however, said this is still a developing area of coverage and that only a handful of insurers offer third-party recall coverage.
The first-party element of the coverage usually covers the expense of the recall, business interruption and the cost of rehabilitating a damaged brand, which can include advertisements and product education efforts. The coverage also can cover lost profits and bodily injury claims stemming from the recall.
“Product recall insurance is still a growing area,” said Bernie Steves, a managing director of Aon Risk Solutions crisis management practice in Chicago. “Given the number of recalls that have been high profile in nature, you could see even more growth...there certainly has been an increase in interest in product recall insurance in the food and beverage industry since 2006.”
Mr. Mills estimates that between 10% and 20% of companies in the food and beverage industry buy recall insurance.
Recent recall incidents include a 2006 E. coli outbreak linked to fresh spinach and a 2009 peanut products recall after a massive salmonella outbreak killed nine and sickened nearly 700.
Alan M. Maxwell, an Atlanta-based attorney who leads the foodborne illness practice group for Weinberg Wheeler Hudgins Gunn & Dial L.L.C., was involved on the litigation stemming from both events. He said typically companies involved in a food contamination recalls have enough insurance to cover the bodily injury claims associated with the event, but that they can run into trouble when covering business interruption expenses.
“If they have adequate (general liability) insurance, bodily injury usually gets taken care of,” Mr. Maxwell said. “The pressure is really on the business interruption portion. Wright County Egg is probably not receiving payment on its outgoing receivables, which is going to create a cash flow problem. Recalls like this usually end up being a business interruption problem.”
Neither Wright County Egg nor Hillandale Farms could be reached for comment.
Brand reputation and managing the impact of a recall on a business also can pose a sizeable problem. Susan Morton, Boston-based vp with Marsh Risk Consulting, said addressing a recall and possible issues associated with it are “essential” in protecting the brand and the long-term effects of a product recall.
Open communication with the public and shareholders and stakeholders also is important, she said.
“Think through the potential consequences and look ahead when handling a situation like this,” Ms. Morton said. “If you are a company that is touched by (a recall situation) it's important to think proactively when managing the situation.”
The egg recall comes shortly after the FDA issued a rule that enhances egg safety to limit salmonella-related illnesses. There is also important food safety legislation before Congress (see related story).
The egg safety rule requires egg producers with fewer than 50,000 but at least 3,000 laying hens whose eggs are not processed with a treatment, such as pasteurization, to comply with the regulation by July 9, 2012. Producers who sell all their eggs directly to consumers or have fewer than 3,000 hens are not covered by the rule.
The egg safety rule went into effect July 9, but it was after the eggs involved in the recall had gone out to distributors, retailers and consumers. Meanwhile, bills in the House and Senate would boost the FDA's regulatory powers and its ability to ensure food safety.
“You might see that this recall forces Congress to take the legislation more seriously,” Mr. Steves said.