The dietary supplement industry has not escaped the product recall spotlight that so many American companies dealt with recently. From peanut butter products to weight loss supplement products, both voluntary and involuntary product recall campaigns are more frequent and costly than ever before. Add to that the recent mood change in Washington, as the new administration faces pressure to clean up the food, drug and supplement industries.
Just last year, Congress considered the Food and Responsibility Act of 2008, which contained a provision that manufacturers of consumer products possess sufficient means (through insurance or otherwise) to cover the entire cost of a recall of their product, including administrative costs, compensatory damages and costs of any product liability or other lawsuit relating to that product. That bill did not pass, but there is speculation that a similar law will be a priority of the new administration.
Expert Says: Loren Israelsen, executive director, United Natural Products Alliance (UNPA): “Our advisors in Washington predict FDA will receive new funding and enforcement powers, including mandatory recall authority for foods, which will likely include dietary supplements. No longer will FDA have to go to court to force a company to conduct a recall. As we have seen, product recalls unfold rapidly and are expensive to conduct. This new insurance will cover the cost of an FDA-mandated recall or a necessary voluntary recall (subject to the “covered event” trigger). It may also be the difference between survival and extinction for a company that experiences a severe recall event.” |
Evolution of Insurance Needs
Many people remember the “Tylenol murders” of 1982, which caused Johnson & Johnson to recall its popular painkiller after it had been tampered with. Although a form of product recall insurance was available before that event, it was little known and less used. After the Tylenol event, this insurance came to the forefront and quickly became known as malicious product tampering insurance. Later, the coverage was expanded to include products that had been accidentally contaminated. Over the years, coverage was further expanded to include coverage for product extortion, loss of profits from a covered recall event, and loss control and crisis management services for a policyholder, the latter paid for by the insurance company as part of their service package.
Does commercial general liability insurance (a.k.a. product liability) respond to expenses and damages associated with a product recall? In fact, it will not. The courts have firmly established that a general liability policy will only cover bodily injury that has already taken place.
In the case of Tylenol, or any of the other recalls where there was bodily injury to victims, the product liability policy generally provided coverage. The simultaneous but separate product recall is undertaken with the idea of preventing bodily injury and, thus, there is generally no coverage for a recall in a product liability policy.
Even with coverage enhancements over time, the market for product recall insurance remained narrow, with just a handful of companies offering it, which meant reduced competition for the insurance that was offered. However, this was also partly a function of low demand, as many companies took the “it will never happen to me” attitude.
A second problem existed as well. Most of the insuring forms were crafted with the retailer of the product in mind. This was not surprising, as the history of U.S. recalls shows many involved large consumer products companies that manufactured and sold their own branded products. But as a practical matter, these insuring forms for retailers did not “fit” for their suppliers, who also needed some form of insurance protection if they were found to be the cause of a product recall.
