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Product guarantee and recall - planning for the unthinkable.

Product Guarantee and Recall - Planning for the Unthinkable

Over recent years, as a result of the general trend towards the use of litigation when problems arise and the growing tide of consumer "activism" backed up by new legislation, both the number and range of product recalls have escalated. Indeed, although confirmed statistics in relation to contamination are difficult to obtain, some interested organisations have compiled figures which show the UK as being second only to the USA in terms of such incidents.

Legislation, such as the Consumer Protection Act 1987, has made the manufacturer or supplier's position far more difficult to defend, making them strictly responsible where a defect in the product reduces the safety of that product to below the level which the consumer is entitled to expect. Prior to the Act, the consumer or user would have had to prove negligence on the part of the manufacturer.

Until recently the only sizeable recalls to receive publicity were those involving the motor industry. However, for some months now recalls involving food or drink products have been appearing almost every week in the national press. It was, for example, reported in the Daily Telegraph recently, that the salmonella, listeria and sabotage difficulties, which beset the food industry last year, have caused complaints about 'foreign bodies' to double in some sectors. And it is not simply a problem facing manufacturers or processors, often the problems arise from the packaging or containers.

In February, public exposure surrounding such events reached a new high with the massive publicity surrounding the problems encountered by Source Perrier. Varying figures are quoted as regards the costs incurred by Perrier, however the recall of around 160,000,000 bottles, their destruction and replacement, allied to massive press advertising to protect market share and reputation, must have amounted to many millions. Less publicised but equally expensive - in relative terms - have been the recalls undertaken by a considerable number of smaller firms who have found themselves caught up in incidents such as the scare over botulism in hazelnut puree for yoghurt.

Perrier were fortunate, they had the resources and the resilience to withstand the blow. For many other firms this would not be the case. So how does a recall arise and what steps can and should be taken by firms to protect themselves?

The necessity to recall usually arises from two types of 'incident'.

Despite well organised quality control procedures, an incorrectly produced or contaminated product is despatched to other producers or the public at large. Alternatively, for varying reasons, a product is tampered with or intentionally contaminated. The reasons for this latter course can range from a disenchanted employee (or ex-employee) intent on causing harm to a gang or an individual seeking to extort money from the producer or retailer.

In either situation, great care must be taken in responding to the problem and considering whether a recall should be initiated. Not to react could result in personal injury to the consumer/user with attendant legal liabilities for personal/financial loss. Goodwill or brand credibility can be totally lost unless the situation is handled promptly and properly.

Two major factors come into play here. The recall should be instigated at the right level, properly timed and correctly managed. At the same time the approach to the media must be handled with extreme care and their co-operation gained, if at all possible. Quite simply, if certain sections of the media can be briefed in such a way that the story is treated in a 'rational' as against 'sensationalist' manner, the level of damage sustained can be reduced accordingly. Expert advice taken in this area will nearly always pay for itself.

Really good recall problem management, however, starts months or even years before a problem arises. If it has not already done so, your firm should be taking five key steps towards protecting itself from the potentially catastrophic consequences of a recall situation arising.

(1) Effective quality control procedures are your major line of defence against accidental contamination or defects arising. However, simply installing such processes is not sufficient; to be effective, they must be maintained and reviewed at regular intervals.

(2) An efficient record keeping systems should be put in place. Knowing which batches, which destinations and which dates are involved can be critical in a recall situation.

(3) Plan ahead, set up a Recall Programme, anticipating the route you would have to follow and the resources you would require, should a recall become necessary.

(4) Effect a Crisis Management Plan. Who will play what role in the high pressure environment surrounding a recall?

(5) Evaluate whether the risk(s) identified should be carried by your own organisation or catered for through the purchase of insurance. If insurance cover is your chosen route, what level of cover will be required. (In most circumstances firms find that 'catastrophe' cover is the most advantageous form. For example, the purchase of cover with an excess-the first 5000 [pounds] perhaps - thereby catering for small scale problems' in-house', whilst insuring against any' major' losses).

Should a potential recall situation arise, the following questions must be asked:

- What is the cause? Is the contamination intentional or unintentional and which authorities and/or interested parties must be advised?

- Is a recall necessary? Your Recall Crisis Management Plan should have designated who will make that decision and he/she will also have the required authority to set up the appropriate information network.

- Publicity? Your plan should determine at what level the resall should be 'pitched' and how publicity is to be handled.

- What legal liabilities and costs will arise as a result of the recall?

Recalls can entail a wide range of different costs and losses for the company involved, all of which vary depending upon the exact circumstances, common areas, however, are:

(a) The costs associated with the return of the products to your premises/depots (transportation and temporary storage), followed by the expense associated with their destruction/disposal in an appropriate place and by a method which is in accordance with the law or in the interests of health and safety.

(b) The cost of examination, including chemical analysis.

(c) Where necessary, the cost of replacing, restoring or re- working the product and of compensating customers or other third parties.

(d) The costs of re-establishing the reputation of the brand name/product and regaining the market share which has been lost.

(e) The cost of correspondence, newspaper advertising, radio and/or television announcements.

(f) Where appropriate, the costs of Specialist Security Management Consultants.

(g) The resultant loss of profit to your company.

As noted earlier, insurance cover can be purchased to meet all of these costs, perhaps most viably by providing protection against the 'catastrophic' loss.

The areas of cover which can be purchased are:

(1) For the costs of removal, recovery, repair, alteration, treatment or replacement of the product concerned.

(2) To pay customers compensation and costs, incurred as a result of any loss of profit which they have suffered due to the product being contaminated.

(3) Recall and/or destruction costs. As a result of negotiations just concluded, we are now able to provide, under the same policy limit, for a recall arising from either intentional or unintentional contamination.

(4) Loss of 'net profit' to the insured company, for 12 months. In certain circumstances it is sometimes possible to provide a limited cover in respect of 'gross profits'.

(5) The cost of restoring the market reputation of your company and its product(s).

It is not necessary for firms to purchase all of the above as a single package, as insurers will consider requests for certain sections only.

The market for this highly specialized protection is an extremely limited one. At Furness-Houlder we originated this form of cover in the early 1970s and are today the leading brokers in the UK market for this form of cover. Indeed, we act for many other brokers and their clients, advising and placing cover as required.

As the 'originators' of this type of cover, we constantly seek to improve its scope and application. For example, as noted earlier, we have recently negotiated an 'all embracing' recall section that, by covering both intentional and unintentional contamination, eases the difficulties which could previously occur when it was necessary to initiate a recall before knowing for certain which form of con- tamination was the cause.

Within this article it has only been possible to present a broad outline of the problem of contamination and its containment by forward planning or insurance protection. What we have sought to do is demonstrate a need for detailed consideration of the exposures, which span not only food producers but also those involved in the supply of packaging, containers and closures, and those who retail the final products.

The author of this article, Roger Jenkinson, is the director of Furness-Houlder Insurance Services (UK) Ltd's, Product Guarantee and Recall Division.
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Author:Jenkinson, Roger
Publication:Food Trade Review
Date:Apr 1, 1990
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