Product contamination "horror stories" spawn newly refined insurance coverages. William M. Kidder gives an overview of these increasingly important coverages.

Frankfurt, Germany (1997): A tube of mustard made by Nestle SA is found laced with cyanide.

Murfreesboro, Tennessee (1998): Martha White Foods is forced to recall packets of brownie mix because the package label did not list walnuts as an ingredient. Many people are severely allergic to walnuts.

Columbus, Nebraska (1997): Twenty five million pounds of ground beef made by Hudson Foods is recalled after the discovery of contamination by the deadly e-Coli bacteria.

San Francisco, California (1997): Odwalla Inc. recalls 16 varieties of juices from 4,600 stores in the wake of an e-Coli outbreak among children in California and Washington state.

Dodrecht, Holland (1995): A number of infants are sickened by contaminated baby food. Investigators determine that meat ingredients from an outside supplier had been contaminated by cleaning solvents that came in contact with the meat while on cutting boards.

"Horror stories" like these, coupled with the newly recognized inadequacies of traditional property insurance and non-insurance risk transfer mechanisms, have helped spawn an array of insurance products and risk management services designed to help food enterprises deal with the potentially devastating effects of product contaminations and related recalls.

The insurance coverage I refer to is most commonly called malicious product tampering and accidental product contamination. It is the purpose of this article to give the reader an overview of these increasingly important coverages.

Not surprisingly, I shall use as the model for this discussion the policy designed by my colleagues and myself at Professional Indemnity Agency, Inc. (Pleasantville, New York).

Malicious product tampering (MPT)

As the name implies, the coverage "trigger" here is ". . . the actual or threatened intentional, malicious and illegal alteration or contamination of the Named Insured's products so as to render such products dangerous or unfit for the use for which they were intended by the Named Insured or create such an impression with the public."

Accidental product contamination (APC)

In contrast to MPT coverage, there need not be an element of malicious and illegal intent in order for accidental product contamination to apply.

The term "accidental product contamination" is defined in the policy and includes: ". . . any accidental or unintentional contamination, impairment or mislabeling . . . during the manufacture, blending, mixing . . . preparation, production or processing of the Named Insured's products . . .".

The coverage can also be triggered by a "fault in design specification or performance . . ." of the product or ". . . any formal or informal ruling by a . . . regulatory authority or judicial body requiring a recall of the Named Insured's products."

Of course, explicit in all accidental product contamination policies is the provision that "the consumption or use of the contaminated product either has resulted (or may likely result in) bodily injury, sickness, disease or death . . . or physical damage to tangible property . . .".

An insured can buy these two coverages separately or in combination.

Policy coverages: recall expenses, lost gross profit and rehabilitation expenses

Once it is determined that an insured's product has been the subject of a covered tampering or contamination, the policy will provide reimbursement for three basic categories of expenses.

First is what is referred to as recall expenses. Included in this section is coverage for: chemical analysis, transportation of contaminated products, media announcements, overtime for employees (and costs of additional staff) to help resolve the problem, plus a number of other related expenses.

Also included in this section is coverage for the value of any recalled or destroyed products which have been contaminated.

A particularly interesting feature of the recall expenses portion is what is referred to as customer recall expense. This extension provides coverage for the recall costs of a named insured's customer in the event that customer has to recall its product because of a contaminated component supplied by the named insured.

The second category of coverage is lost gross profit. The intent here is to cover gross profit lost as a result of a reduction in sales attributable to a covered tampering or contamination.

The third category is what is called rehabilitation expenses. The intent here is to cover expenses incurred by the insured in order to: ". . . restore contaminated products to merchantable quality and/or re-establish the reputation and market share of the product line that has been the subject of the product tampering".

Ancillary services: a vital component

Also included in the term "loss" are the fees for the services of post-crisis response experts which are placed at the disposal of the insured in the event of a covered incident.

All carriers prominent in this field hold exclusive retainer groups of individuals or firms that specialize in all aspects of security, plant safety and crisis management. These uniquely qualified teams provide vital assistance in helping firms set up internal crisis management procedures as well as deal with other "public relations" problems such as media "fallout" of product contaminations.

Policy structure/application of limits/policy term

The three aforementioned coverages are included in what the policy wording defines as a "loss".

Each of these three coverages carries its own limit (with rehabilitation expenses usually sublimited to 25% of the limit for the other coverages) . . . all in total subject to an aggregate limit per "loss". The annual aggregate for all "losses" is usually the same as the aggregate per "loss", although all aggregates are negotiable.

Policies are written with deductibles, usually beginning at $5,000; and there is no mandatory co-insurance.

Coverage can be purchased on a one, two or three-year prepaid basis.

All policies are not created equal

While the various policies currently available are similar in their intent, potential buyers should be aware of some key coverage features that not all policies contain. For example:

* Coverage under accidental product contamination for "fault in design specification".

* The customer recall expense extension.

* Automatic coverage for new products . . . with no reporting provisions.

* Full policy limits for value of products.

One carrier buries this coverage in the rehabilitation expense limit where a 25% overall sublimit applies.

* No restrictions in the accidental product contamination wording as respects the time limit for the manifestation of bodily injury, sickness, disease or death.

Do not be misled by claims that MPT/APC insurance is a homogeneous commodity, with the only variable being price. In a "soft" insurance market, there will always be those who, in a scramble for market share, will offer little more than irresistibly cheap prices.

This is a highly specialized insurance coverage, and experienced underwriters have devoted a great deal of time and effort to providing a competitively priced insurance product carefully refined to address a broad range of exposures in connection with product tamperings and contaminations. Equitably judging the relative merits of the policy forms under consideration requires careful scrutiny of key policy provisions as well as the service capabilities of those who stand behind the product.

William M. Kidder is executive underwriting officer for Professional Indemnity Agency, Inc. (PIA), an independent US based coverholder for Lloyd's of London and various insurance companies domiciled in the United States. He is a 23 year veteran of the insurance industry, having begun his career at Chubb. After several years on the brokerage side with Marsh & McLennan and Alexander & Alexander, he joined PIA in 1984 and, since that time, has specialized in underwriting and marketing of malicious product tampering and accidental product contamination, as well as kidnap/ransom, extortion and detention coverage. He has been a featured speaker at numerous seminars and industry trade conventions and has authored several articles on these coverages.