There is nothing more concerning than product recalls affecting children’s food. So when New Zealand based dairy cooperative Fonterra, which owns 43% of the Chinese San Lu Group, advised of a melamine1 contamination in baby milk powder in early September 2008 public reaction was understandable.
Government inspections revealed the problem existed to a lesser degree in products from 21 other companies. With an immediate trade recall there were claims of industrial sabotage and bureaucratic delaying of an official recall.
The scandal has affected countries on all continents, including Australia where Cadbury Chocolate Eclairs are among 11 Cadbury products withdrawn internationally.
The World Health Organisation referred to the incident as one of the largest food safety events it has had to deal with in recent years. By late September, 54,000 children had sought medical treatment, 12,900 were in hospital, and four infant deaths had been reported in China with claims the product caused kidney stones and renal failure.
While more than 10,000 tonne of infant formula is to be destroyed, it has also damaged the reputation and integrity of China's food exports with at least 11 countries having stopped all imports of Chinese dairy products.
Fonterra has written off NZ$139 million which they indicate reflects the cost of the product recall and anticipated loss of San Lu brand value.
Unfortunately the San Lu & related recalls are not uncommon. Some major recalls in recent times include:
-
Mattel‘s world wide recall of more than 19 million toys with lead paint in August 2007. It followed their recall in the same month of 18.2 million toys with magnets. Combined recall costs were in excess of US$30m.
-
In July 2005 an extortion threat saw Masterfoods Australia recall & destroy more than 3 million Mars and Snickers chocolate bars. Total losses were reportedly in excess of A$10 million.
-
Pan Pharmaceuticals recall of 1624 products in May 2003 cost around A$450 million and around 1,000 jobs within the industry.
-
Nestle SA, the world’s largest food & beverage company, recalled baby milk in September 2005 after ink from the packaging was found in the product. The cost of the recall in Italy, Spain, Portugal and France was around €1.6 million.
Those never forgotten in Australia include Kraft peanut butter, Arnotts biscuit extortion, and Garibaldi salami.
The cost of a recall can include:
-
Direct costs of the recall including product costs, extra staff, notifying the public, etc.
-
Decline in a publicly listed company’s share price.
-
Loss of customer goodwill and market share.
-
Loss of brand value.
Companies need to weigh the costs of an expensive recall of the product with the risks of not taking action such as product liability claims and government penalties.
General product liability insurance does not usually cover the costs of implementing a recall of an unsafe or contaminated product. There may only be limited cover under a business interruption policy, if at all.
Product Recall insurance or similar2 is an important part of a manufacturer or retailer’s risk management and insurance plan. It can allow the company to recover defined costs involved in the recall. However, limitations of cover may exist including when a product recall is required to prevent damage or contain an emergency. There are also many variations in the terms of recall specific policies.
We recommend broker and legal advice to ensure insurance cover is tailored to the business.
1 Melamine is used in making plastics, fertilizer and cleaning products. It is high in nitrogen, which makes products appear to have a higher protein content. It is also the chemical that was involved in a pet food recall last year when thousands of animals died in the USA.
2 Product Tampering, Product Integrity and Extortion insurance may also need to be considered.
Author
Claim Solutions Pty Ltd.
Insurance Policy
Country: - All
Policy Description: - Public & Product Liability, Product Recall, Product Tampering, Product Integrity and Extortion insurance
Insurer: - Various
External Links
