Product recall masterclass Demystifying product risks

March 15, 2016

Programme

• Product recall: an accident waiting to happen?

• Regulatory framework and other legal issues

Break

• Insurance aspects of recall risks

• Stuff happens: supply chain regulations and risks

• Analysis of a real deal

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Product recall: an accident waiting to happen? Yuri Cosco Business Line Manager AgriFood, Vinçotte

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What can be present in food that can injure people or make people sick?

4 types of substances / organisms 1 – microbiological hazards

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4 types of substances / organisms 2 – physical hazards

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4 types of substances / organisms 2 – physical hazards

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4 types of substances / organisms 3 – allergen hazards

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4 types of substances / organisms 4 –chemical hazards

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4 types of substances / organisms CASE STUDY – GOOD 2 MEAT

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Regulatory framework and other legal issues Peter van den Broek Attorney-at-law and partner at Kennedy Van

der Laan

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Topics to discuss

• EU rules on corrective actions; food & non-food

• Recall; an international affair

• Liability for unsafe food/products

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Regulatory framework

A European affair:

• General Product Safety Directive (GPSD)

• General Food Law Regulation (GFLR)

• Specific regulations

National Dutch regulations:

• Food and Commodities Act

• Commodities Act Decree on General Product Safety

• Specific regulations

Belgium: comparable national regulations

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Non-Food - GPSD

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General obligations producer under ‘GPSD’

• Permanent risk evaluation: is the product safe?

• Providing relevant information (adequate warnings)

• Being able to take appropriate action (traceability system, sample testing, registering complaints)

• Notifying competent authorities if the product is not safe

• Being able to take corrective actions

• Cooperate with authorities

• Note: Responsibility of all parties in supply chain!

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When to notify (and take other actions)?

Art. 5 GPSD:

• Producers and distributors (!)

• Know or ought to know

• On the basis of the information in their possession and as professionals

• That the product that they have placed on the market

• Poses risks to the consumer that are incompatible with the general safety requirement

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Unsafe product?

Every product that does not comply with the definition of a ‘safe product’:

“any product which, under normal or reasonably foreseeable circumstances of use, does not present any risk or only the minimum risks, considered to be acceptable”

Taking into account:

• characteristics of the product

• effect on other products

• presentation of the product

• categories of consumers at risk

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Unsafe product? Risk assessment (EC Guidelines)

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Who to notify?

• General rule: authorities of all Member States where the product has been marketed or otherwise supplied to consumers

• Exception: only authority of Member State in which producer or distributor is established if:

RAPEX notification; or Notification forwarded to other authorities

Use ‘Business Application’ form

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What to notify?

• Details of authority(ies) receiving notification form

• Details of producer

• Details of product involved (brand, model, photo’s)

• Details of hazard (results risk assessment)

• Details of corrective actions taken or to be taken (withdrawal, informing consumers, recall, modification, monitoring system)

• Details of suppliers/retailers (including number of products marketed)

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Alert

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Actual recall of product?

Only if necessary:

if other measures do not suffice to ensure a high level of safety and health protection

• public alert in national and local newspapers

• issuing a press release

• distributing information at retail outlets

• publish the product safety issue and the recall action on your website

• organize collection actions through retail outlets

• and other actions

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Food - GFLR

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When to take action? Art. 19 GFLR

If a food business operator considers or has reason to believe that a food which it has imported/produced/processed/ manufactured/distributed is unsafe, it shall

• withdraw the food in question from the market

• inform the competent authorities thereof.

Where the product may have reached the consumer, the operator shall also:

• inform the consumers of the reason for its withdrawal

• recall from consumers when other measures are not sufficient to achieve a high level of health protection

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Unsafe food?

• injurious to health:

food that is detrimental to health, both immediately and in the long term

• unfit for human consumption:

food that is unacceptable for human consumption according to its intended use food that does not meet the relevant European and national food safety standards, but as such is not

detrimental to health

normal conditions of use of the food by the consumer

information provided to the consumer

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1. Food injurious to health

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2. Unfit for human consumption

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All parties in supply chain are responsible

‘Van grond tot mond’ – ‘Van boer tot bord’

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Action: Tracing (provide info within 4 hours!)

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Action: Notify

For NL, useful tool = NVWA

‘Meldwijzer’

Who to notify?

Authorities of all Member States

where the product has been marketed

NL: NVWA

BE: FAVV

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Notification through website authorities

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Other actions

• Withdrawal from the market

• Alert

• Actual Recall (if necessary)

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What if the NVWA has a different view?

• How to challenge the view of authorities?

Ask for formal order of authorities

Lodge an objection & start summary proceedings (bestuursrechtelijk kort geding)

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Recall – a European affair with a European approach?

• Uniform rules: GPSD & GFL

• However:

1. Also national (specific) regulations

2. Authorities (like NVWA) only have competence in their own country

3. Authorities can make their own policy on enforcement of the (EU) regulations

And how about outside Europe?

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Liability – where does it start and where does it stop?

• In principle: ‘the polluter pays’

• Most European law systems: full damages

• So: in principle full liability for defects

However: liability often limited by contract / general conditions

• Companies should be aware of:

Possibilities to limit the company’s liability to customers (Note: not to consumers) Avoiding liability caps in contract with suppliers

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Insurance aspects of recall risks Different risks, different solutions

Johan Broeders Casualty Manager Benelux, Chubb

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Concept and viewpoints

• Definitions… Recall or ‘Recall’

• Safety or quality ?

• Recall damage: with whom ?

• Finished products or ingredients / components ?

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Why do recalls happen?

• Design flaw

• Global supply chain

• Manufacturing defect

• Stricter product safety rules and regulations

• Human element

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March 15, 2016 Financial impact of Recall

RQA Product Recall Guide

Managing the risk

Reducing/avoiding

• Rigorous quality control

• Crisis management procedures

Transferring the risk

Supplier

• Before a recall

Indemnification/hold harmless

Additional insured status

• After a recall

Recovering from supplier Recovering from supplier’s

insurer Insurer - Buying insurance

Assuming

• Paying own losses

• Self insuring up to a certain amount for product recalls

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Insurance solutions for recall risks

Who is buying product recall insurance ?

• Experienced a product recall

• Witnessed a competitor suffering a recall

• Contractually required

• Potential for negative press / publicity / social media

• Risk Management decision

• Brand has become a critical asset and must be protected

• Protect the balance sheet to avoid potential D&O exposure

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What solutions… A one fits all policy ?

I. Consumables

II. Consumer goods

III. Ingredients

IV. Component parts

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I. Consumables

Food & beverage, cosmetics, pharmaceuticals

• Contamination

• Mislabeling

• Tampering & Extortion

Own damage:

• Replacement

• Reputation

• Business interruption

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Property Damage

Related Coverage

Pre-recall expenses

Consultant Costs

Recall and Distribution Cost

Extortion Cost

Clean-up costs (Extra Expense)

Loss of Gross Profit

(extended)

Brand Damage

Loss of contract

Product Damage

Damaged Product

as a direct result of physical loss or

damage to the Insured Product

Business Interruption

Related Coverage (Extra Expense)

Minimum payroll

Increased Cost of Manufacturing

Rehabilitation Exp

Loss of Gross Profit (direct)

Investigation of contamination product

Recall (absence of product from market)

Manufacturing and distribution of replacement product

TRIGGERS: › Accidental

contamination

› Mislabeling

› Governmental Recall

› Malicious Tampering

Coverage CPI – schematic March 15, 2016

Crisis Management

• Recalls can be very complex

• Manufacturing knowledge

• Recall knowledge?

• Use of a consultant has proven to limit potential damage

• Loss mitigation work

• Deployment of product recall

• 24/7 Hotline

• Consultant costs are unlimited and no SIR applies

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Food / other coverage solutions ?

• Loss mitigations costs (art. 7:957 BW) under CGL… a real solution ? (1st party only)

• Recall costs extension under CGL (3rd / 1st party)

• Pure financial loss extension under CPI (3rd party only)

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II. Consumer goods

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III. Food: ingredients

PL-driven

CPI : not perfect fit

Coverage solutions:

• Recall costs extension under CGL (3rd / 1st party)

• Pure financial loss extension under CPI (3rd party only)

• Extended Products Liability extension (EPH module Processing & Treatment )

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IV. Component parts

PL-driven

Trigger ?

Blended Liability solutions

Extended Product Liability (EPH-model)

• Mixing & Blending (module 4.2)

• Processing & Treatment (module 4.3)

• Removing & refitting (module 4.4)

• Defective Machinery (module 4.5)

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Component parts / ingredients

Third party losses like:

• Production costs (ie costs of machinery and staff to produce defective product)

• Damage to final product caused by defective ingredient

• Costs to rework / rectify defective products when technically possible

• Disposal costs of defective products when cannot be repaired /rectified

• Loss of profit / Loss of income / Business Interruption

• Costs incurred by the customer to remove the defective products and re-fit a correct one: transportation, delivery, searching / identification, staff costs

Notes:

• No coverage if the Insured has installed or assembled the component himself

• Automotive suppliers specific coverage for 3rd party Auto Product Recall or dismantling/ re-assembling costs.

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Resuming… One fits all policy ?

I. Consumables

II. Consumer goods

III. Ingredients

IV. Component parts

• Recall costs extension in GL

• CPI-cover

• Recall costs extension in GL

• Standalone (if available..)

• Recall costs extension in GL

• Extended PL : Processing & treatment

• Recall costs extension in GL

• Extended PL : Removal & refitting

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Analysis of real deals

Incidents 1. Coverage

I. Coverage

II. Coverage

III.

A.1 Injury claims consumers B.1 Recall notification costs

B.3 Shipping and additional logistics charges, warehousing

B.4 Value of recalled products, replacement costs B.5 Retailer admin charges

B.6 Cost of production stoppage /shutdown (BI)

B.7 Lost sales due to recall

B.8 Post recall advertising /brand recovery (rehabilitation costs)

B.9 Recourse by Sjoppie for injury claims consumers

B.10 Recall costs Sjoppie

B.11 Claim Sjoppie for value of recalled products, replacement costs

B.12 Claim Sjoppie for lost sales due to recall C.1 Recourse by Dr. Cooker for injury claims consumers C.2 Claim Dr. Cooker for recall notices in press C.3 Claim recall expenses Dr. Cooker C.4 Good2Meat replacement costs C.5 Product liability claim Dr. Cooker-> G2M (property damage meals)

Incident 2. Coverage

I. Coverage

II. Coverage

III.

1. Dr. Cooker claim for recall costs + admin charges

2. Good2Meat own replacement costs

3. Product liability claim Dr. Cooker towards G2M (property damage meals)

4. Dr. Cooker claim for lost sales due to recall

5. Lost sales G2M due to cancelation of the contract with Dr. Cooker

Case I. Food – answers Risk Assessment & Insurance

Stuff happens: supply chain regulations and risks Caspar ter Horst Managing Director, ProductIP

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SAFETY HAS BECOME WELL-BEING

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REALITY CHECK

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Waste of Electrical and Electronic Equipment

source: http://www.cwitproject.eu/wp-content/uploads/2015/09/CWIT-Final-Report.pdf

REALITY CHECK

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100% of the 35 LED bulbs investigated failed to comply with any of the applicable directives.

50% of powerbanks investigated failed to comply with RoHS directive.

source: www.rapex.eu and www.cpsc.gov

PIECE OF CAKE LTD.

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PIECE OF CAKE LTD.

• ONE PRODUCT

• ONE PCS / DAY / PERSON

• WE SELL OR GIVE AWAY

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CONSUMERS BUY BRAND PROMISE

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Any economic operator that either places equipment on the market under his own name or trade mark or modifies equipment in such a way that compliance with this Directive may be affected should be considered to be the manufacturer and should assume the obligations of the manufacturer.

source: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:JOL_2014_096_R_0357_01&from=EN

NEW LEGISLATIVE FRAMEWORK

• MANUFACTURER / BRAND-OWNER

• IMPORTER

• DISTRIBUTOR (RETAIL, eCOMMERCE)

• AUTHORISED-REPRESENTATIVE THE ACTUAL FACTORY IS NOT MENTIONED

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RISK ASSESSMENT

• MUST EAT BEFORE

• CONDITIONS OF STORAGE

• PACKAGING IS FOOD CONTACT MATERIAL

• INFORMATION ON THE PACKAGING

• TRACEABILITY

• CAN PARTS END UP IN THE PIE

• QUALITY / TASTE

• ?

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INTENDED USE

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source: https://www.youtube.com/watch?v=VMKCEXND0-8

- RECORD ?

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UNINTENDED USE!

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Do not think like a consumer!

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RED & GOLDEN DELICIOUS

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IT’S GOING TO BE DELICIOUS !

KNOW APPLES FROM ORANGES

RED DELICIOUS & GOLDEN DELICIOUS

TASTE GREAT

BUT ARE UNSUITABLE FOR APPLE PIE

(SAME AS GALA AND CORTLAND !)

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WE GO PREMIUM!

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“DON’T YOU WORRY MY FRIEND!”

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“DON’T YOU WORRY MY FRIEND!”

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IT’S GOING TO BE DELICIOUS !

“WHERE CAN I FIND THE RoHS COMPLIANT PRODUCTS?”

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Formal compliance Technical File

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THIS IS NOT NEW!

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China? Brands lacking manufacturing DNA!

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RAPEX: EU NON-FOOD RECALLS

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source: www.rapex.eu

Success not regulationsmake things complex!

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CONSUMER EMPOWERMENT

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source: http://www.consumerphysics.com/myscio/

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Analysis of a real deal

Case A. safety critical defects Coverage I.

Coverage II.

Coverage III.

1. Notification costs

2. Other recall costs

3. Removal/refitting costs

4. Business interruption claim Phoenix

Case B. – off spec parts Coverage I.

Coverage II.

Coverage III.

1. Removal/refitting costs

2. Business interruption claim Phoenix

Case II. Non-Food – answers Risk Assessment & Insurance

Chubb. Insured.