Social media increases reputation damage

by Resolve Editor, Kate Tilley

Social media has increasing the risk of brand reputation damage in product recall cases.

That was one revelation at a panel session at the AILA Qld Insurance Law Intensive, moderated by Sparke Helmore partner Kiley Hodges.

Crawford & Co director Martin Miller said Australia’s first claim was in 2000 after a person trying to sell tamper-proof packaging put arsenic into Herron Pharmaceuticals capsules. The extortionist was convicted and later committed suicide in jail.

In China, three people were arrested after one of the world’s largest product contamination incidents in 2008. Mr Miller said melamine was added to watered-down infant formula and milk to pass protein level tests.

Many babies died and others were hospitalised. Mr Miller said two men arrested were shot. A woman was sentenced to 100 years’ jail, but shot after an unsuccessful appeal.

The strawberry contamination that began in Qld in September 2018 was an ongoing claim. Initially sewing needles were inserted into some strawberries, but the incident sparked copycat actions and resulted in significant profit losses for all strawberry growers.

Donna Niblock, assistant vice-president, crisis management, with Liberty Specialty Markets, said the incident prompted a surge in calls from brokers seeing cover.

She said the incident “went straight to social media”, which meant increased brand reputation risk but also alerted consumers to the safety issue.

Growers whose products were not contaminated still suffered sales downturns, but could not claim on business interruption cover because there was no property loss.

Global supply chains meant many stakeholders were involved in product contamination and associated recalls. Consumers wanted product traceability, but that could be difficult with imported products.

As Australian manufacturing declined and more finished products were imported, there were challenges because of different standards overseas, particularly for food products. Ms Niblock said importers did not conduct enough checks on products. “About 50% of recalls are for undeclared allergens” in food products.

Mr Miller said recall costs were substantial and major retailers charged manufacturers and suppliers for recalls. The minimum cost was about $200,000 and higher fees applied for recalls conducted after 1pm and even higher costs for after 5pm.

“Costs escalate quickly, there’s a lot of logistics involved in getting product off the shelves.”

Mr Miller said malicious product tampering was the least damaging incident for a company’s reputation. A deliberate negligent act was considered more culpable than inadvertent contamination.

Ms Niblock said product recall insurance was not simple and brokers needed more education to engender confidence to sell the product. The policy was intended to cover recalls for threats of bodily injury.

Retailers often sought product withdrawal for quality issues, but that was not a recall.

For small companies, quality-related recalls could be catastrophic. She said the “contagion issue” needed an insurance solution because multiple growers were affected in the strawberry contamination case, even though their own product was not contaminated.

Ms Niblock said Australia’s first recall policy was written in 1986 and “it really hasn’t changed”. Liberty was considering new coverage to “plug the gap for smaller-end clients”.

She said business interruption varied according to how clients handled recalls. Full disclosure with crisis management assistance could see sales rise after the problem was resolved because consumers trusted the organisation.

There was a lot of double insurance because public and products liability insurance often included recall options.

Steve Elms, Gallagher’s national head of food production, agreed, saying there was “a lack of understanding about where a general liability policy starts and stops”.

Ms Niblock said key drivers for buying product recall insurance were:

• contractual obligations
• brand damage potential
• increased exports, which made it harder to recover from overseas companies
• and events, for example the inundation of calls seeking cover after the strawberry contamination incidents.

Mr Miller agreed, saying product recall cases were fertile grounds for lawyers because of the potential for dual insurance.

Mr Elms said appetite for cover had “taken off in the last few years”. It was previously a “hard sell” to show clients the benefits of insurance.

Product recall insurance covered:

• Accidental contamination or defect
• Malicious product tampering
• Product extortion
• Adverse publicity
• Alleged contamination
• Government recalls
• Intentionally impaired ingredients.

Most policies included:

• Recall costs
• Customer and retailer recall costs
• Replacement costs
• Business interruption
• Rehabilitation expenses
• Extortion costs
• Consultants and advisers’ costs
• Fines and penalties.