Insurance and the Peanut Butter Sandwich

Okay, I admit it.  My food choices are boring.  Every single day for lunch, I eat a peanut butter sandwich.

I’ve always been uneasy when I hear a report about peanut butter being contaminated with salmonella.  As soon as I get home, I check whatever brand we have in the kitchen and then (usually) breathe a sigh of relief.

I never thought about the financial consequences of the recalls on middle-market manufacturers of peanut butter and other food products, especially manufacturers who don’t have sufficient recall liability insurance.

As reported in a recent industry article, food contaminated with E. Coli or salmonella can cause economic losses to an entire product line, not just the contaminated product.  A middle-level manufacturer which produces several products may have recall liability for all of those products, as there is the chance that other products may have become infected.

Additionally, the frequency of recall claims is increasing as diagnostic techniques to detect food-borne pathogens become more sophisticated.  More than 3,000 food product recalls were initiated by the US Food and Drug Administration (FDA) in 2011.  The article notes that on January 4, 2011, President Obama signed the FDA Food Safety Modernization Act, which gives the FDA the authority to mandate, instead of just recommending, food recalls.

A number of insurers are currently offering product recall policies.  As opposed to typical liability policies, these policies cover the expense of recall even when no bodily injury or property damage has yet occurred.

What other manufacturers or distributors might benefit from recall insurance?  Are there any ways that a company can mitigate its recall risk, in addition to the purchase of recall insurance?  If recall insurance is relatively expensive for a company, are there options they can pursue to bring the premium down? Tell us what you think.

Rebecca Freitag, FCAS, MAAA, is a Consulting Actuary at Merlinos & Associates.