Product recall incidents are complex and dynamic. Strict regulations, rising costs and lengthy supply chains can expose organisations to threats they may have never encountered before. Adopting a consistent risk management approach is essential.
Product recalls are on the rise. In the food sector alone, the number of recalls annually has lifted from 81 in 2015, to 95 in 2024, according to Food Standards Australia New Zealand (FSANZ). Not only is the frequency of recalls mounting, so is the severity, with the fallout likely to have huge reputational and financial consequences. A 2022 study by FSANZ, found foodborne illness costs Australia A$2.44 billion a year, due to lost productivity, direct healthcare costs and premature mortality.
Notifications of recalls in supermarkets and in the news happen almost daily, and with more consumer goods coming into the market, we can expect more of these events in the future. Given this context, preparation and planning is key to addressing these risks.
Novel risks emerge
A range of dynamics, including increasingly strict consumer regulations, is behind the rise in recalls. While aimed at protecting consumers, heightened scrutiny can inadvertently catch organisations unaware if they are not fully compliant.
Today, regulators have more power than ever to shut down production facilities and order recalls. There are also more authorities along the supply chain and more regulations to comply with. At the same time, there is increasing pressure on the supply chain, with local manufacturers sourcing raw materials from overseas to reduce costs. This can lower quality standards, which can eventually lead to recalls.
Additionally, the rise of social media has exposed businesses to a new type of brand damage when recalls happen. Previously, consumers who were concerned about a product would contact a business through an email address or a phone number. Today, consumers can post publicly on social media platforms, amplifying reputational risks.
Understanding product recall policies
A product recall policy is a critical tool for safeguarding assets, operations and reputations. Although primarily a first-party coverage, these policies often include provisions for certain third-party recall costs - for example, when an insured product is an ingredient in a customer’s product.
Lessons can be learnt from previous recall incidents, allowing businesses to understand their risks and how to plan for them.
Case study 1: Peace-of-mind when contamination happens
Accidental or unintentional contamination, impairment or mislabelling is the most common of product recall events, making up approximately 85% of AXA XL recall claims in Australia.
A wide range of these situations are typically covered by product recall insurance, such as mislabelling of a product that does not identify an allergen, or machinery breakdown that causes metal debris to fall into a food product. The policy may be triggered, provided the contamination leads to injury, sickness, disease, death or property damage.
For example, overfermentation leads to bottles to explode at a beverage company, resulting in property damage and injures to customers. A recall policy may be triggered if someone nearby is injured, or if there is damage to transportation vehicles, storage containers or a retail premises.
Typically, covered losses might include recall costs, transportation costs, hiring extra people and overtime for staff to remove the bottles, as well as rent for additional warehouse space, retail slotting fees and retailers’ costs. The policy may also cover the cost to restore the product to merchantable quality, or replace the recalled product, as well as any loss in gross revenue.
While they may respond to defects, most recall policies don’t cover product quality issues, an especially important distinction for food businesses. For example, most moulds are non-toxic and not all listeria strains are harmful. If a policyholder discovered mould in a product, the mould would need to be identified and tested to see if it meets the bodily injury trigger.
Case study 2: Emerging product tampering risks
In respect of malicious tampering claims, the product must be unfit or dangerous for its intended use or consumption or create this impression to the public. One of the most recent incidents was the 2018 needles in strawberries case, with a number of brands forced to recall their produce.
Consumers reported finding sewing needles inserted into strawberries in Queensland, with the incident escalating to other states and territories, due to suspected copycats. Supply chain vulnerabilities were found to be a major problem when it came to tracing the origins of the tampering incident. This can be attributed to the co-mingling of produce from multiple suppliers, opaque distribution lists and a confusing packaging system.
In these situations, policies could cover recall costs such as media announcements, disposal expenses and retailers’ third-party costs related to removing products from shelves, as well as rehabilitation, replacement costs and business interruption losses. The policy may also cover some of the policyholders’ customers’ costs, if the product was an ingredient in a product manufactured by the customer.
Case study 3: Malicious tampering or product extortion?
Product recall policies may also respond to other serious situations such as extortion attempts. The difference between malicious tampering and product extortion is the demand for compensation.
In 2005, a popular snack manufacturer was forced to destroy 3 million chocolate bars of different varieties after receiving extortion threats of poisoning. Three letters and a chocolate bar laced with pesticide was sent to the manufacturer from an anonymous source. The letters warned of seven chocolate bars that were contaminated in the Sydney area. The company set up a hotline for concerned consumers to report illness and although it received 3,500 calls, no cases were linked to poisoning. The incident cost the company A$10 million in lost sales and destroyed stock.
In a case like this, a wide range of losses may be covered by a product recall policy, in particular rehabilitation expenses to re-establish the product to pre-loss sales or market share and extortion costs.
How to prepare for a recall
While every product recall is different, preparing for and responding to one requires careful forethought, and policyholders are encouraged to work with experts well beforehand.
A portion of each AXA XL policyholder’s net premium is allocated towards pre-incident advice and planning with product recall consultants. Taking advantage of these resources is highly recommended to strengthen preparation and response capabilities.
This includes mock product recalls, crisis simulation exercises and business continuity plans. It’s also an opportunity to have experts review product recall plans and deliver media training. The policy includes crisis response and recall support, audit preparation and review, as well as food safety training.
Importantly, a product recall incident requires immediate and decisive action, because what happens initially can have long-term consequences. Prompt, decisive action within the first 24 to 48 hours is critical for containment and minimising damage.
Our dedicated crisis hotline connects insureds with crisis consultants who can provide crisis-response support, media communication assistance, and access to our food-safety experts. It’s important to be aware of this resource and utilise it promptly in the event of an incident.
Following this, other immediate actions include notifying the insurance broker, who will promptly inform the insurer. The insurer will then appoint a loss adjuster to contact the insured to schedule a site visit or a call, gather loss information, discuss salvage options and preserve evidence to support coverage decisions, as well as any recovery.
Ultimately, the goal is fast containment, minimal disruption to operations, and the protection of the insured’s reputation and financial stability. Being prepared and acting swiftly can make all the difference in managing a recall effectively.
