Customers are clearing shelves of non-perishable items as well as fresh staples like bread, meat, and milk.¹ Such increased demand has required that stores make supply chain adjustments by switching suppliers or products and relying on extended supply networks. Challenges could also arise if suppliers are compromised by employee sickness, resulting in the inability to fill orders and sending policyholders in search of alternate products. Depending on the length of the pandemic, some items could be diverted to different vendors. Products originally intended for shipping to corporate or university cafeterias, airlines, cruise ships, and restaurants may be rerouted to grocery stores and retailers. Already some companies that generally sell food to restaurants or other food service outlets are working to offer at-home delivery of packaged items to individuals.¹ On the other hand, restaurants that are closed to dine-in customers are looking for new ways to produce and sell food in order to keep revenue flowing. Some restaurants are venturing into new territory by offering meal delivery services for take-out. Others are creating new freezable products and packaged foods such as make- your-own pizza kits, and some distilleries are producing hand sanitizer for consumer sale while bar service is halted.⁷

FOOD PRODUCTION AND DISTRIBUTION CHALLENGES

New challenges will continue to arise as businesses adjust to changing food demands and the re-allocation of food supplies. Food service providers and large consumer goods companies are both working to balance meeting demand changes with production safety and quality assurance requirements. While the USDA has confirmed that there are no reports of COVID-19 transmission via food or packaging, there are exposure opportunities around potential contamination or recall due to quality assurance errors or distribution issues.¹ There is also concern that if a significant portion of food production and distribution employees are unable to work due to illness or government restrictions, operations may be negatively impacted.

In order to keep pace with demand, production companies may hire less experienced personnel more likely to make mistakes. Walmart has announced plans to hire 150,000 new associates through the end of May to help with increased pressure on stores and distribution centers. Kroger, the United States' largest supermarket chain by revenue, has also announced the intended hiring of 10,000 full- and part-time workers for their retail stores, manufacturing plants, and distribution centers.² Some companies may also shift away from processing for restaurant chains or large institutions to making more packaged products that can be sold in stores, testing Quality Control measures in new ways. If restrictions are in place allowing only essential employees to work, employers will also be asking fewer employees to do more, creating fertile ground for quality issues to grow as employees stretch to do things outside their normal roles.

RECALL/CONTAMINATION INSURANCE PROTECTS FOOD PRODUCTION & DISTRIBUTION SERVICES

Making a new product, engaging workers in different roles, or using spaces for new purposes can change a policyholder’s risk profile. However, actual food manufactures likely have the most direct exposure for recall or contamination. Companies that contract with external partners to manufacture products under their brand name or with distributors handling multiple products may also have significant opportunity for exposure. Strictly retail outlets like grocery stores may have limited exposure due to the in-store production or preparation of meats, baked goods, and deli products.

Food products can be contaminated during manufacture, delivery, or while stored.⁵ Food recalls are most often caused by a breakdown in production or monitoring processes, failure to properly maintain processing equipment or facilities, non-compliance with SOPs, and an inability to track products through the supply chain.⁸

Research shows that recalls are the food industry’s biggest threat to profitability.⁸ A company without coverage would incur the entire cost of recalling and destroying contaminated products and recovering from business interruption during a facility shutdown.⁵ In addition, companies that fall victim to a contamination incident are highly likely to attract negative media attention with disastrous effects on the product or brand reputation.⁴ It’s also not uncommon for lawsuits to be brought against companies over recalled products, and the costs of litigation can add up quickly in conjunction with stiff regulatory agency fines.⁶

Recall and contamination coverage is available to help defray the costs related to lost revenue and business interruption. When evaluating submissions, underwriting takes a hard look at the quality control measures in place based on the size and sophistication of operations. Carriers like to see robust risk management plans in place, including rigorous product testing and third-party quality audits. Clients also have the potential to benefit from a wide variety of available coverage options because each carrier maintains their own endorsement options and manuscripted forms, providing ample opportunity for customizing coverage to meet diverse needs.

BOTTOM LINE

As food providers adapt to changing distribution and product needs, new exposures will arise. Product recalls can be financially devastating, and excellent safety records, strong quality control measures, and manufacturing oversight cannot fully immunize businesses against the risk. Clients such as food manufacturers and distributors who have previously not considered or needed product recall or contamination insurance may be growing, adapting, or contracting with companies who now require it. Recall and contamination coverage is a vital tool in protecting businesses against the direct financial loss of a product recall as well as costs associated with re-establishing a client’s brand.⁴ Policies also enable access to a 24/7 crisis response group that can help clients navigate in the event of an incident.

Partnering with CRC, a knowledgeable wholesale broker with access to all stand-alone markets can help clients prepare to adapt to changing economic needs. Pandemic-driven changes present agents with an opportunity to talk with food providers and distributors about potential exposures they may not have previously considered. Agents with any questions should contact their CRC Group producer to discuss how we can help clients prepare for and protect against food product recall and contamination exposures.

Contributors

• Chris Martin is the Office President of CRC’s Minneapolis office and member of the Casualty Practice Advisory Committee. Chris focuses on Casualty business and specializes in Product Recall placements.

ENDNOTES

1. How Grocery Stores Restock Shelves in the Age of Coronavirus, CNN Wire, March 21, 2020. https://q13fox. com/2020/03/21/how-grocery-stores-restock-shelves-in-the-age-of-coronavirus/
2. They're Hiring! Companies Seek Thousands of New Employees Amid the Coronavirus Pandemic, ABC News, March 24, 2020. https://abcnews.go.com/Business/hiring-companies-seek-thousands-employees-amid-coronavirus- pandemic/story?id=69767851
3. Three Processors Award Coronavirus Bonuses, Food Processing, March 24, 2020. https://www.foodprocessing.com/ industrynews/2020/three-processors-award-coronavirus-bonuses/
4. Product Liability, Recall and Contamination Insurance, Insurance Information Institute, 2020. https://www.iii.org/ article/product-liability-recall-and-contamination-insurance
5. Insuring Your Business Against Food Contamination Claims, The Balance Small Business, June 25, 2019. https://www. thebalancesmb.com/protect-your-business-from-food-contamination-claims-4153960
6. More Than Money: What a Recall Truly Costs, Food Dive, September 26, 2016. https://www.fooddive.com/news/more- than-money-what-a-recall-truly-costs/426855/
7. Closures, Takeout, and Relief Efforts: How Food Businesses Nationwide Are Handling Coronavirus, Bon Apetit, March 30, 2020. https://www.bonappetit.com/story/food-businesses-covid-19
8. Recall: The Food Industry's Biggest Threat to Profitability, Food Safety Magazine, October 2012. https://www. foodsafetymagazine.com/signature-series/recall-the-food-industrys-biggest-threat-to-profitability/