Global marketplace growth drives the need for product recall, crisis coverage
Product Recall and CPI offers very comprehensive coverage when an insured 's product is defective or contaminated, or when the insured is victim of a malicious tampering or extortion incident. These policies cover the insured 's financial loss, product replacement costs, logistic expenses and more.
As Christian Waeldner, National Practice Leader for Starr Crisis Management, a division of Starr Surplus Lines Insurance Company (Starr) explained, "This is not a luxury buy or something that is simply nice to have. Global companies treat it as an essential part of their insurance package. The catastrophic expenses and loss of consumer confidence resulting from a recall can put a company out of business."
Waeldner went on to say that there have been some devastating recalls recently, including recalls of peanut butter, produce, meat, pet food, milk products, toys and others have left some companies bankrupt and significantly damaged others.
"You can rebuild a factory but it is much more difficult to rehabilitate a brand and a reputation once it is damaged," he said.
According to Jill Peev, Senior Underwriter for Starr Crisis Management, "Coverage is much broader than what some in the insurance community understand it to be and new coverage enhancements are constantly developed in response to evolving market needs."
Peev added that while Starr works with brokers dedicated to this niche line of business that understand all aspects of the coverage and exposures, there are others who don 't see it as often and may fail to differentiate between elements of product liability and product recall or CPI. Although those coverages may complement each other, the covered events and covered losses are very different.
Various types of companies can benefit from Product Recall and CPI. There is a policy designed for manufacturers, distributors, wholesaler and retailers of food, beverage and cosmetic products, and a separate policy for hard goods such as textiles, furniture or kitchen appliances. There is now also a policy specifically for restaurants, Starr Response Restaurant Secure, which covers losses arising from a contamination, outbreak of a foodborne illness, public health scare, workplace violence, malicious tampering or extortion at a restaurant.
"Our restaurant clients are not concerned with potential recall costs," explained Peev, "but contemplating lost revenue if a location were forced to close, or the brand damage suffered if an unfortunate incident were spread on Twitter, Facebook or YouTube, will keep them up at night."
There are a number of factors that have contributed to the need for and development of the Crisis Management policies including new regulations. With the passage of the Food Safety Modernization Act, the U.S. Food and Drug Administration (FDA) now has the authority to require a company to recall a dangerous, defective or contaminated product from the stream of commerce.
Also, years ago, manufacturers relied on local or regional markets for their supply of ingredients and component parts and sold their finished products in these same markets. Now Starr is seeing, for example, Japanese Kobe beef, Mexican beer and oranges from Chile. In addition, China 's role in the global economy has substantially changed in recent years and as a consequence, the supply chain has become increasingly complex with ingredients or components coming from all over the world ending up in a single product. Recalls are becoming more difficult and complex to manage, as products manufactured in one location often have to be recalled from every corner of the world.
To help its clients through a product recall crisis, Starr provides access to the consulting expertise of red 24, a global consulting firm, as a critical element of its crisis coverage. red24 consultants have vast crisis response experience in food and non-food industries and are available to Starr 's clients 24 hours a day, seven days a week. Waeldner explained the specific role that the consultants play.
"In the event of a crisis, red24 works solely on behalf of the insured as an advisor, though red24 is not involved in the claims adjusting process," Waldner said, adding that an additional benefit of the policies is the availability of pre-incident consulting funds.
"Each year, the insured can use a portion of the premium towards risk mitigation services. These services include recall or HACCP plan reviews, simulated recall events, media training, and more," he said. "Every dollar spent to prevent or mitigate a loss is money well spent."
There is still a lot of market growth in Crisis Management coverage to be realized. As Waeldner explained, "After 30 years since recall coverage became available, about 30 percent of our customers are still first-time buyers. It is a coverage that companies now recognize is no longer a luxury, but a necessity."
For more about Starr RESPONSE, visit www.starrcompanies.com/coverages/crisis-management.
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(The above piece is part of our continuing Insights series designed to highlight key products and services to our readers. This paid-for Insights was written and edited by Risk & Insurance®
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July 25, 2012
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