Beazley

Risk in the digital age: What to expect when you have a product recall claim

April 04, 2022 Beazley
Beazley
Risk in the digital age: What to expect when you have a product recall claim
Show Notes Transcript
Speaker 1:

Welcome to the Beasley podcast risk. In the digital age . In this series, we explore the fast changing nature of risks in the product recall and manufacturing defect industry. I'm your host, Alex Martin head of us product recall insurance at Beasley today's episode is titled what to expect when you have a product recall claim. In this episode, Ryan Cleary and John Zeitler from our Beasley claims team are joined by Simon O and Brennan gray from baker Tilley , a Beasley service provider and forensic accountancy firm. They will discuss the timeline of a claim from notification and coverage review to the accounting review process.

Speaker 2:

So welcome to the podcast. I think the , this is our , the first of what hold hopefully will be several , um, idea here is to sort of give a high level overview of what to expect when you have a product recall claim. Um, so just quick round of intros, I'm Ryan Cleary . I'm a claims team leader at Easley , uh , for global small business, including product recall. Um, and then John, you wanna go next?

Speaker 3:

Sure. I'm a fo group leader , uh , with Beasley handling claims for product recall .

Speaker 4:

Uh , I'll jump in I'm Simon Ody , I'm a partner with baker till and , uh , we handle , um, significant number of product recalls , uh , for the , uh , insurance market.

Speaker 5:

And lastly, I'm Brendan gray. I am an experience manager at baker till as well, working with Simon mean in the property call team.

Speaker 2:

Awesome. So , uh , welcome guys. And so I think the first thing we wanna talk about let's sort of start from the beginning. So we have a problem. Um, you're you are a business and you've, let's say you got a customer complaint or you realize you've got some sort of contamination in a food product. Uh , what do you do? Who do you , who do you notify? What information do you give them ? Maybe John, you wanna start with that?

Speaker 3:

Sure. Um , well you mentioned food , um , you know, backing up a second, you know, you , your listener, you might be , um , dealing with food. In which case you, you might need to contact the FDA. Um, if you're say in the consumer goods or the component parts , um , space, you might need to contact the consumer protection, safety commission, CCP , uh , C PSC , um, um , but you might not need to, or you, don't not sure. Um, give us a call. I could talk to you too . You know, you , you don't like surprises. We don't like surprises. Um, we'll talk you through it and if we need to notify somebody , um, we'll let you know. And if we don't know right off the bat, we've got experts lined up in both areas, right? Um, uh, product safety advisors are on board with Beasley , um , to help us out on the consumer good space , um, uh , Melanie Newman and her folks at , uh , matrix science on the food side. Um, either way we can drill down and figure out what to do. Um, but you know, if FDA needs to be notified, we'll do that same thing on the consumer good space. But , um, you know, basically, you know, we we're , we're gonna wanna find out, you know, what the test results look like. If you've got, say that contamination issue and kind of drill down and , um, you know, we're trying to find out what the root cause of this is and right from the get go , you know, what the source is, and that might involve who the parties are to. Right. We're gonna wanna know, you know, who you are. We'll talk about this sort of, as we go in the sort of chain of events , um, are you the, you know, are you the , are you the manufacturer? Are you the co-packer ? Are you the supplier? Um, you know, and who , who , you know, are you a combination of those things , uh , and does the root cause originate, you know, where in that sort of chain of events. Uh , and so that's kind of the, those are sort of the questions that we ask and, and, and that's how we kind of drill down to, to figure out where we wanna land.

Speaker 2:

So, John, right from the get, go , if I'm calling up, say, let's just say, I'm an insured, I've got a P policy with Beasley. You know, I call my broker and say, Hey, we've got a problem. Is there any document or anything that they should be pulling together right. From the get go that you would want to see from a claims perspective?

Speaker 3:

Sure. Um, you know, if you've got a contamination, say I'd love to see those test results. Um, and, and , you know, if that's not conclusive, I'll , we'll run those by our experts and, and see we'll with what they have to say. Um, that, that definitely is something that we would wanna see. I don't know . Uh , Brendan , is there something from your perspective that , um, you'd like to see,

Speaker 5:

You know, from the accounting standpoint , uh , at this early stage, we probably would just kind of join in to make sure we're acquainted with the loss and keep up to speed with the scope of the loss, what the perceived position is in the marketplace and the supply chain, what types of products we're dealing with, you know, all that kind of background is important for us down the road. Once we do get into the numbers. Um, the one other thing I just to emphasize, and I think, you know, John alluded to this already was the sooner, the better, of course, the, the early notification is, is key in these situations. Um, from experience speaking, the longer people wait to notify insurers and allow insurers to then get their experts involved and really get this process underway. The more difficult it makes things. So, you know, to John's point, he made , you know, don't , don't hesitate to, to begin the communications in the process, even while you are still conducting your own investigations and trying to figure out everything that's taking place.

Speaker 4:

And just to add, actually, Brenda, you make some really good points. I think we've seen over the years that a lot of these insureds dealing with this for the first time. And so this is the window in which, you know , Beasley with its consultants and experts and the team are ready to help. Right. And I think that's what insureds and the listeners need to need to recognize is make that call because you've got a team of experts that can assist whether it's, you know, from an investigation standpoint or to Brendan to point whether it's, it's just trying to get your head around, what's the scope of this thing. And that's gonna come later as we discuss different things, but understanding the scope, the breadth of the problem, you know, the population of product that could be affected, getting things like that, organized , um, you know, Beasley's got its team ready to help with that. And I think that's the phase you're in early is , especially from these insureds that have not dealt with it before is kind of a deer in the headlight scenario. What do we do, you know, and be Beasley's experienced this and so have his experts. So it's really, I think you implore the listener here, the insurer insureds to just reach out and make that call and , and , and into that systems that Beasley set up , you

Speaker 2:

Know ? Yeah. That's a really good point, Simon. I think, you know, we, we, we are an insurance company, right? So we are a source of financial recovery, if there's a financial impact and it's covered, but we're also a resource because we deal with this day in and day out, this is what we do. So for a lot of , if you're a small company and this is your first time having a problem like this, exactly, that deer in the headlights thing , that's, that's where we can actually come in and help.

Speaker 4:

Yeah. I , I , I think that's really, really valuable here in this market is that there is a ton of experience and, and , and that experience has been , you know , uh , filtered and, and , and , and nurtured to the point where it's available for the policy holder really, to tap into. Uh , and I hope they do.

Speaker 2:

Okay. So we've, we've been notified about the bad event. We make a decision. Everyone makes, comes to the conclusion. You know, what we gotta do a recall here could be food with the FDA, could be a product, a component part, whatever. Um, John, from your perspective, you know, what are the things that people are gonna want to know a client is gonna want to , is , do I have coverage? What do you , what do you need to , to sort of figure out from a coverage standpoint, is this a covered claim? Am I gonna get, is the insured gonna get reimbursed for their loss?

Speaker 3:

Right. So the , the key question typically is gonna be , um, to , to trigger the, like you've got a loss, right? Um, um , that's clear, right? If you , if you've gotta recall the product, you can't sell it. Um , the question is whether there's an insured event and that's gonna hinge on whether or not there's a possibility of bodily injury or property damage based on the defect in the product, or some kind of an adulteration or something like that. Um, and that's typically, we've got to gonna be, what's gonna trigger the policy and to find that out , um, is gonna be , um, those test results. Um, sometimes that's really easy if you've contacted the , uh , the CPSC or the FDA and they've investigated and they've issued a recall, well, then it's real obvious, right? Um, they've determined that the , the product isn't safe. And so they've determined that there's some kind of bodily injury possibility there, or some kind of property damage issue. Um, so then that's real easy. Um, but otherwise , um, short of that, if produce some kind of test results that , that demonstrates that there's some kind of contaminant or whatever, say you , you , you know, never left your facility and you caught it in time, then that's what we would need to demonstrate that sort of thing. But once we've got that in hand, then we can , um, then we can proceed. And , um , and then we're gonna move pretty swift hand that over to baker Tilley , who's gonna try to, you know, well, not try do , um , measure the claim and, and , um, get us get to the , uh, the, the numbers of it as quickly as we can. Um, but that's really the, that's typically what the, the coverage issue is. Um, and then, and then it's just all those kind of loss components , um, about, you know, what your loss revenue is. If there's a third party component, we talked about all those, you know, who, who you are in the chain , um, who the responsible parties are. You might owe somebody money, but also , um, somebody else might owe you money as well. Um, if, if they're the cause of the, the loss, right, this is a reimbursement policy, but , um, but you may not be responsible. And so that's why we're talking early on about, you know , um, who the parties are , um, so that we can sort of find out what the, where the root cause is, and, and who's responsible early on.

Speaker 2:

So that's an interesting one. And we can , can jump in if you guys , um , if you want on the issue of, if somebody else is responsible, because that does come up a bit like, so I assume John, you're talking about the situation where there's like a co packer or supplier or somebody else who mishandled the product in some way. So run us through how, what happens if that's the scenario and that's what we're sort of faced with, and you're the insurer and your product got screwed up somehow by somebody else. What do we do ? Sure .

Speaker 3:

Right. So, you know , um, again, we , we don't, we wanna get as much information as we can as early as we can. And so then we wanna, we're gonna find out who those players are and just like you have insurance with us, we wanna make sure that we are getting their insurers notified , uh , in this case, their liability carriers and , um , you know, getting them on the horn and making sure that they're aware that they may have some liability, ultimately it's, you know , your contractual , uh , agreement with them. That's, that's ultimately gonna get sorted out and , and you'll need to sort that out with them. But , um, as we measure the loss baker, Till's gonna be able to help you measure the loss and then craft that argument , um, to articulate what exactly you are owed , um, by this other third party. Um, and so the quicker that we can sort of nail that down the quicker you can , um , marsh that evidence and, and , um, and pursue that party to, to resolve the claim and, and get moving and get back to doing your , the business that you're, you know, expert at.

Speaker 5:

What one thing to add to, to John's points that I thought is, you know, something we've seen in times past is that we've seen insurers again, this goes to notifying Beasley and tapping into the resources that are available and doing it sooner than later. I know we've talked on that a bit, but we've seen insureds in the past who are hesitant to notify Beasley or other carriers when they think some and else may be at fault, because they're nervous that that's gonna affect premium. It's gonna come across like a claim. It's gonna change something with their policy, that's gonna cost them. Um, and I don't know if John and you can add to this or not, but what we've seen is, you know, they, they can likely contact you or contact us through you, or whoever is the necessary individuals to at least start to discussions with there being minimal or no impact. And John, I don't know if you want to piggyback off of that, but

Speaker 3:

Yeah, sure. Um, I , you know, I mean, it's, it, It's not a mistake to go ahead and notify Beasley. If you've, if like, don't worry about submitting a claim out of a, that it's gonna raise your premium or something like that, the idea is to communicate with us, we are gonna work with you at the end of the day. Um, you know, we can help you, you know, size up your claim and, and use our experts, our consultants, to really hammer home where the liability lies and pursue those other third parties who are actually liable and ensure that their insurance carriers are the ones who pay and not sort of wind up in a protracted litigation that ultimately does wind up being sort of a claims expense, that it winds up being a claim for you, that you have to sort of pursue at the end of the day. If we get out in front of it, we can ultimately sort of lower the claim costs and push it onto another carrier and ultimately, you know, make it sort of better for everybody else. So the I , at the end of the day, it's always better to just contact us at the beginning as much information at the outset. Um, fewer surprises, the better

Speaker 2:

Just like shifting gears slightly now. So one of the things I think , um, maybe sort of in an effort to sort of demystify for people that might be listening. So one of the issues that comes up also sort of traceability sort of like, what's this scope of the recall, how far do I have to ex you know, sort of what documentation do I need? How far back do I have to look, who do I have to notify all those things? And so, I don't know , Brendan or Simon, maybe you guys wanna comment on that issue .

Speaker 5:

Yeah. I , I can take a first stab at this. So, you know, we've talked about notifying different government regulators, depending upon, you know, what product you're manufacturing and who you're dealing with. If you do end up needing to notify them, they're also gonna be able to walk you through that process. And they're gonna have a lot of needs from their standpoint in order to issue that recall and publish it. So a lot of what we'll need, it will be similar to that. And we can work with you on gathering and understanding that documentation. A lot of it relates to production data sales data, and it's really the , the idea is what is impacted by this issue at Hey to the insured event. You know, if it's a contam for food , what is your production window and what production line and what products are affected by it. And then where does that product sit? Is it on hand? Is it at customers? Which customers is it a consumable product in the market that could infect that could impact others? So, you know, you're gonna be dealing with regulators on that standpoint, but it's also critical from our accounting review process in order to assess the financial aspects of your loss, to understand where product sits and who may have it.

Speaker 4:

And just adding to that, Brendan , it , it , where it is you mentioned is , is critical because it , that brings in a new element, right? If it's out at customers, let's say you're in a supply chain and you're merely the supplier of a , an ingredient or something that's used elsewhere, right. That product is now in the supply chain. And you've gotta kind of understand where it is as Brendan says, that's important. But what that now means is you've got customers, right, that are gonna be turning around and, and coming back to you as an insured , uh , as the insured and, and the supplier here saying, Hey, we've got this product from you and we've got this. So sort of getting a handle around that. Is it the loss that's sort of contained within your own walls? Let's say a lack of a better description, or is it a , is it a problem, a financial damages problem? That's, that's bigger than that. It's gone out to customers, cause those customers are gonna start knocking on the door and sort of saying, Hey, you're gonna have to take care of me . You year , you're gonna have to figure out some financial damage, right? And, and that, that changes the dynamic quite a lot as to what you ought to do as the supplier, in terms of really getting their cooperation as much as possible. We see it a lot. We see customers who just send back a, we call demand, if you will , uh, poorly documented poorly information, not a great deal of documents to show what they're re what they're demanding and, and the quantity and the values associated with it. And you get a supplier or insured who isn't necessarily switched on as to what they should ask their customers for what sort of information should they gather to make this reimbursement process through the insurance plan , uh , more , um , more easy to navigate, right? More easily navigated . So that, that , that's kind of where the product is really just sets the tone as to how you need to be able to react in terms of documenting the loss. Is it gonna be documents that you yourself hold, or is it gonna be documents that somebody else has that you are gonna need to request IE, the customers who are coming back to you with , with demand . So knowing that traceability piece what's effective, where is it obviously drives some of the decisions in how you gonna handle that recall and doc the financially .

Speaker 5:

Yeah, absolutely. You know , can't emphasize enough the need to manage these customer notifications and the responses they're in after appropriately. You do not wanna just be cutting checks for everything that your customer sends back to you without investigating it further. Otherwise, as we've all seen, it can make the insurance process , um, very difficult for us. You know, when we don't know what you're cutting a check for, why you're cutting a check and you're not able to answer the question cuz you didn't get that information from your customer. It just muddies the water quite a bit. Um, and you know, again, it speaks to the sooner, the better that you get folks involved to manage that always helps because what we see a lot of times is we start asking these questions 6, 7, 8 months down the road from a recall in other situations outside of our work with Beasley and people come back and say, well, we've already paid our customer and it's been way too long and we can't go back to them again. And now you're kind of stuck with your hands in the air saying, what do you , what do we do next? Um, how do we get over this hurdle? And it it's a difficult hurdle to get over sometimes. So , um, definitely important to get ahead of that process , uh , as soon as you can

Speaker 2:

And you alluded to this idea of a component part versus a finished good. Um, so is there, is there notification requirements or do , do you handle those differently? Let's just say you're a component part manufacturer. You make something that gets then put into somebody else's product and then that goes out to market versus you're an insured and you just make a finished product that goes on the shelf somewhere and someone buys. And so how does that differ or is it the same? Yeah,

Speaker 4:

I mean, yeah, typically what we've seen is that those finished goods, the scope and breadth of the recall population for a finished good typically is a little smaller and less complex than a component part. I mean, if you think about it, right, a component part is going from you, you manufactured it or an ingredient, you manufactured it, it goes to your customer, they use it. You may or may not know where they use it, how they use it. And then it just continues and can continue to go downstream, right? They may sell a part that then gets used by somebody else, their customer. And so you can start to sort of visualize what I'm describing. There's just this giant spiders web of sort of connectivity between your product and where it ends up. And so that complexity just is in our experience way greater, as far as trying to get, you know, cooperation of the , the supply chain, as far as documenting that loss, that's a much bigger challenge and task than, you know, finished good that you made and you sold to a retailer, right? It's a fairly one step removed supply chain. It's a little, little , it's a narrower scope and it's just a , a less complicated scenario. It's not without its challenges, but it , you can see the difference, I think, between the two there, the spider's web , um, versus maybe just a more linear supply chain that you can maybe communicate and get documentation.

Speaker 2:

Yeah . So that's a good segue . So I guess, so the last thing we wanna touch on a high level today , um, is the sort of damages once you have a recall , um, and you've talked about sort of starting to track that from right from the get go , but maybe you can give us , uh , branding , give us a high level sort of overview on, you know, what we're looking at to , to quantify what the damages are in a product recall claim.

Speaker 5:

Yeah, absolutely. Um, you talk about tracking it from the get go and that's , uh , a key message to deliver is we've seen too often insureds who are, you know, obviously under some serious stress as a result of these recall and their , their key focus is getting a grip on what the scope of this recall is and who has product and getting it out of the market because that could just lead to bigger issues and understandably that's their focus. But what ends up happening is they lose sight of tracking the financial aspect while doing so. And it's a working backwards process to them where they're trying to figure out what costs they incurred when they incurred it and backtracking to try and figure out what documentation they do and don't have. So don't wait for the investigation to end and to have that grip, to think about financial components of your loss and tracking those components. Um, we've seen some really successful of ways people do that. One of which is things like creating separated GL accounts, where you track and capture all of your costs simply into a new line item on your account records to be reconciled after the fact , um, keeping written correspondence of situations , uh , with customers, other parties , um, you know, the FDA or other gun mental bodies that you're dealing with, you know, all of that is important to kind of make sure you are doing and tracking from day one while trying to get your grips around this recall and what the scope of it is and how you need to manage it. Um, you know, flipping to the financials themselves specifically, you've got a few key areas and out touch on them , really high level here. Um , those key areas typically are your inventory on hand , um, your third party damages, which we've touched on , uh, and your business interruption and loss of gross profits and , uh , a fourth , you know, other area to keep in mind are extra expenses or incremental operating costs. Um, we , you know, those are all the key areas. Inventory on hand tends to be one of the easiest areas that if you track it properly, like we've talked about through the traceability exercise and you work with us on that information, we typically can get that area of the claim buttoned up relatively quickly and work with John and Ryan in presenting that portion of the damages to them for consideration. Wow , we continue to work on other areas. Uh , the business interruption loss of gross profit is clearly one of the more complex areas that typically takes a bit more to work through . Um , and your third party damages are , you know, you can manage those as they come in and work, you know, work simultaneously while you, you know, with insurers while you respond to that. Um, I'm not gonna get into the weeds of these too much though, cuz we do have some other podcasts coming out in the future where we're gonna take a really deep dive into all these areas specifically because we could be here for a very long time talking about that.

Speaker 2:

Excellent. Well, that was great. Um , good talking to you guys. Thanks for everybody getting together today. Um , looking forward to the next one , we can , uh , dive a little deeper into some of the financial , uh , impact of a , of a breach, I mean , of a recall and how we're gonna help you over those hums and , and uh , yeah, we'll talk soon guys. Thank you.

Speaker 5:

Thanks .

Speaker 6:

Thanks. Bye . Thank you.

Speaker 1:

Thanks for joining us today for another addition of risk in the digital age , I'm Alex Martin and I hope it's been an enjoyable podcast for you. Be sure to keep a lookout for future podcasts in this series and to learn more about this topic and others, please visit beasley.com for an extensive library, videos , podcasts and blog posts.

Speaker 7:

This podcast is for preliminary informational purposes. Only Beesley insurance products are available on an admitted basis in some but not all us jurisdictions through Beesley insurance company, Inc, and are available on a surplus lines basis through license surplus lines, brokers underwritten by Beasley syndicates at Lloyd's the exact coverage afforded by any product described here in is subject to and governed by the terms and conditions of each policy issued the publication and delivery of the information contained herein is not intended as a solicitation for the PR purchase of insurance on any us risk Beasley USA services Inc is licensed and regulated by insurance regulatory authorities in the respective states of the us and transacts business in the state of California as Beasley insurance services licensed number zero G 5 5, 4 97 .