Contamination and Product Recall Risk - Atlanta SRMC Meeting

1. Product Contamination and Product Recall SRMC Meeting Atlanta, Georgia April 7, 2016 William Harrison Managing Director Product Recall Practice

2. Overview The Risk • Frequency • Severity • Sampling of Industry Losses • Loss Drivers • Risk Areas • 1st Party and 3rd Party Losses Coverage Scope and Loss Triggers • Loss Drivers • Policy Triggers • Covered Losses

3. The Risk

4. The Risk • Business Interruption and Brand Name Rehabilitation Costs • Suffered by XYZ INC. and your customers • …As a result of a contamination or a failing product Recall costs barely scratch the surface of this risk

5. Contamination is Likely • Hazards in food cause an estimated 48 million illnesses, 128,000 hospitalizations and 3,000 deaths a year, all in the safest food system in the world. Roughly translated this means 1 in 6 Americans will develop a food borne illness. (CDC Stats for 2011).

6. Why there are more incidents. • Greater testing at all levels of production of ingredients • Health departments working together to find common causes for widespread food borne illness • Greater level of scrutiny of food processing locations • FDA recall power over all ingredient suppliers • Increased traceability

7. Why are the contamination related losses getting larger? • Social Media • Facebook • Twitter • Blogs • 700 Cable TV channels • How many of these outlets have an editor?

8. What does this all mean……… • There are more reported contaminations and the average loss is getting larger

9. Recall Costs - Perception Vs Reality

10. Large U.S. Product Recalls

11. Blue Bell Expands Ice Cream Recall March 24, 2015 • BRENHAM, Texas, March 24 (UPI) -- Blue Bell Creameries has added another series of products -- single-serve ice cream cups -- to a list of items recalled due to a listeria outbreak.The Brenham ice cream company recalled a number of ice cream novelties earlier in the month after the items were linked to listeria monocytogenes infections in five patients at a Kansas hospital. • Three of the patients died. • All five people were admitted at a Kansas hospital for unrelated conditions and became ill with the infection between January 2014 and January 2015. For the four patients whose food intake was documented, all had consumed milkshakes made with a single-serving Blue Bell ice cream product called Scoops while in the hospital. • At the time, Blue Bell also recalled Chocolate Chip Country Cookie Sandwiches, Great Divide Bars, Sour Pop Green Apple Bar, Cotton Candy Bar, Vanilla Stick Slices, Almond Bars, six-pack Cotton Candy Bars, six-pack Sour Pop Green Apple Bars and 12-pack No Sugar Added Mooo Bars. • That list has grown to include 3-ounce single-serve, institutional/food service ice cream cups in chocolate, strawberry and vanilla, all with tab lids.

12. Egg Recall Hits 550M, One of Largest in HistoryAugust 21, 2010 • More than a half-billion eggs have been recalled in the nationwide investigation of a salmonella outbreak that Friday expanded to include a second Iowa farm. The outbreak has already sickened more than 1,000 people and the toll of illnesses is expected to increase.Iowa's Hillandale Farms said Friday it was recalling more than 170 million eggs after laboratory tests confirmed salmonella. The company did not say if its action was connected to the recall by Wright County Egg, another Iowa farm that recalled 380 million eggs earlier this week. The latest recall puts the total number of potentially tainted eggs at about 550 million.FDA spokeswoman Pat El-Hinnawy said the two recalls are related. The strain of salmonella bacteria causing the poisoning is the same in both cases, salmonella enteritidis.Federal officials say it's one of the largest egg recalls in recent history. Americans consume about 220 million eggs a day, based on industry estimates. Iowa is the leading egg producing state.The recall has put the spotlight on egg production, especially large-scale factory-like facilities like Wright County Egg, where the outbreak allegedly began. The huge plant houses 7 million chickens producing 5.5 million eggs a day. Researchers say even with tougher new FDA regulations, government oversight is too weak with too few regulators to monitor today's mega-facilities, reports CBS News correspondent Bill Whitaker.

13. Chobani's Big Business Lesson Inc Magazine, January 2015 • In April, the Wall Street Journal reported that, as part of its financing deal with private equity firm TPG, Chobani had to replace its chief executive within the year. • The Post's report stands in contrast to a decidedly upbeat Ulukaya, who spoke with Inc. last year, expressing great optimism about Chobani's prospects for 2015. • That hopefulness, however, may mask some problems. Last April, Chobani, an Inc. 5000 company, secured a $750 million loan from TPG, for which it reportedly received a 35 percent stake in the company. Chobani sought the loan after a serious product recall in 2013, when mold allegedly contaminated its product and sickened more than 200 people. • Ulukaya spent $450 million for an Idaho production facility, allegedly the source of the food poisoning. The food safety issues occurred due to inadequate worker training, and a rush to get the factory up and producing at full capacity, according to news reports. The factory was built in less than 11 months in 2012, according to Chobani.

14. Danone to sue New Zealand's Fonterra over baby formula recall • By Naomi Tajitsu and Geert De Clercq • WELLINGTON/PARIS (Reuters) - French food group Danone (DANO.PA) said it would sue wholesale dairy exporter Fonterra (FSF.NZ) and stop buying products from the New Zealand firm following a contamination scare that sparked the recall of infant milk formula across Asia. • The world's largest yoghurt maker did not say how much money it was seeking, but it has previously said it wanted full compensation for what it says were 350 million euros ($476 million) in lost sales following the recall of the company's Dumex and Karicare infant formula products. • Danone is one of Fonterra's biggest milk powder customers, according to analysts who cover the sector. Fonterra, which said it would contest the suit "vigorously", declined to give details on its sales to the French firm…… • Eight companies issued product recalls in August. Danone is the first to take legal action against Fonterra. In December, Fonterra said it had reached agreements to compensate six firms and that it was "very, very close" to an agreement with an affected nutritional company.

15. Bird Flu Eats Up Yum Profits in China By Charles Riley @CRrileyCNN April 23, 2013: 11:21 PM ET HONG KONG (CNNMoney) Yum Brands just can't shake off its China troubles. The fast-food giant said Wednesday that same-store sales in China dropped 20% in the first quarter, as it continues to grapple with the fallout from a food safety scandal and fears over a new strain of bird flu. • The sharp decrease in sales dragged down net income by 26%, from $458 million in the first quarter of last year to $337 million this year.

16. Yum Brands to Cut Ties with 1,000 Chinese Slaughterhouses After Chicken Scare Reuters | Posted: 02/25/2013 12:52 pm EST By Megha RajagopalanBEIJING, Feb 25 (Reuters) - Yum Brands Inc said on Monday it will stop using more than 1,000 slaughterhouses in China as it moves to tighten food safety and reverse a sharp drop in business at KFC restaurants in its top market after a scare over contaminated chicken.Diners began avoiding Kentucky-based Yum's nearly 5,300, mostly KFC, restaurants in China in December after news reports and government investigations in the Asian country focused on chemical residue found in a small portion of its chicken supply.Yum was not fined by Chinese food safety authorities, but its restaurant sales in the country dropped and have yet to recover. As a result, Yum warned this month that it expected 2013 earnings per share to contract, rather than grow.

17. E. Coli Outbreak Linked To Taco Bell AP/ February 11, 2009, 5:39 PM • An E. coli outbreak that has sickened at least 22 people — two of them seriously — was linked by health investigators Monday to three Taco Bell restaurants in New Jersey. Investigators also were examining whether an outbreak on Long Island was connected to the fast-food chain.All but two of the people who fell ill in New Jersey had eaten at one of the fast-food restaurants between Nov. 17 and Nov. 28, authorities said. But exactly what food contained the bacteria was still unclear. • $100M loss

18. McLane Found Clean; Taco Bell on Defense • McLane Foodservice Inc, distributor to the Taco Bell restaurants reportedly linked to the recent E coli outbreak in several Northeastern states, announced that a site investigation by the New Jersey Department of Health and Environmental Services (NJDHES) has found no evidence of improper storage or handling practices by McLane. Comment • It was later proved a fact that there was “ no evidence of improper storage or handling practices by McLane”. McLane delivered contaminated product to Taco Bell and is responsible for a portion of the damage that the product causes. McLane took title to the product that it then delivered to Taco Bell. McLane wrote a meaningful check to Taco Bell.

19. Nestle Recalls Cookie Dough • A massive Nestle Cookie Dough recall is underway due to the discovery of E. Coli Bacteria by the Food and Drug Administration (FDA). Nestle cooperated with the FDA and CDC by willingly issuing the recall on their refrigerated cookie dough products. The end result was a $100M+ financial loss. Nesquik Recall: Nestle Pulls Cans Nationwide Over Salmonella Risk • GLENDALE, Calif. -- Nestle USA is recalling some of its Nesquik chocolate powder because of a possible salmonella risk.

20. Kellogg • 2008 Peanut salmonella issue - $34M Loss - many injured • 2010 - Cereal - Kellogg recalled approximately 28 million boxes of Apple Jacks, Corn Pops, Fruit Loops and Honey Smacks cereals because a "waxy" smell and flavor coming from the package liners could make people sick, the company said Friday - $70M Loss • 2012 - Mini-Wheats and Frosted Mini-Wheats - $20- $30M Loss

21. ConAgra • 2002 - 19M pounds of beef • 2007 - Peter Pan Peanut Butter Recall - $80M Loss • 2007 - Walmart brand peanut butter recall made by Conagra - $?? Paid to Walmart • 2007 - Chicken and Turkey Pot Pies - $40M+ Loss • 2007 - was a very bad year!

22. Cadbury • 2006 Chocolate Recall Salmonella - $1M pounds of chocolate was recalled - $30M - $90M Loss estimates

23. H. J. Heinz • 2002 Botulism contaminated salmon recalled - $25M Loss

24. Maple Leaf Foods • Listeria Contamination of sliced - Business Interruption related $100M + Loss

25. The Loss Can Come From Anywhere! Dressing Blended in Arizona from TOMATOES grown in Florida, VINEGAR from the Philippines, and SPICES from all over the world Eggs Chickens raised in Indiana Avocado Grown in California Bacon PIGS from West Virginia, shipped to Missouri, slaughtered in Iowa Chives Grown in New Mexico and packaged in Oklahoma Cheese Made in California from MILK produced in Oregon Tomato Grown in New Jersey Onion Grown in Texas Romaine Lettuce Grown and in Arizona Chicken Breasts Chicken born in Virginia raised in Alabama transported to feedlot in North Carolina and slaughtered in Indiana Watercress Grown in Asia, shipped to Maryland, sold in Delaware Cucumbers Grown in South Carolina Packaged in Ohio • Sources shown are only one possibility of origination point. • Illustration of vast diversity in food supply chain.

26. Agreements May Not Provide Effective Recourse Airports Schools Nursing Homes Hospitals Retailing Contracts Direct Ship Food Service Entity Meat/Poultry Baked Goods Refrigerated Disposables Beverage Frozen Dairy Products Input Suppliers, Farmers, Contract Growers, Ingredient Suppliers, Package Manufacturers, Transporters, Imports

27. GL excludes 3rd Party Recall Liability • Standard General Liability Exclusion • Damages claimed for any loss, cost or expense incurred by you or others for the loss of use,withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of: • “Your product”; • “Your work”; or, • “Impaired property”; • If such product, work, or property is withdrawn or recalled from the market or from use by any person or organization because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it. • --Commercial General Liability Coverage Form, 2. Exclusions, n. Recall of Products, Work or Impaired Property.

28. General Liability vs Product Contamination Insurance • A contamination that causes Bodily Injury triggers both type of coverage • GL covers • the bodily injury/pain and suffering law suits and potential settlement • Product Contamination covers the resulting economic loss • Business Interruption • Brand and Sales Rehabilitation costs • Recall and Replacement costs • Specialty consulting costs • Can cover very similar losses suffered by your customers which are caused by your products

29. The ingredient supplier or distributor The contract manufacturer who makes the product The brand name manufacturer who markets the product The contract manufacturer who makes the product The restaurant that serves the product The supermarket that sells the product  All of the above Who Suffers the Financial Loss Resulting from a Contamination?

30. The ingredient supplier or distributor The contract manufacturer who makes the product The brand name manufacturer who markets the product The restaurant that serves the product The supermarket that sells the product Any of the above Who’s Liable?Who Can Actually Cause the Loss?

31. Buyers of Ingredients or Component Parts and use of Contract Manufacturer Is there a contract with the seller? Is Recall Liability clarified in the contract? Is there a cap? Is anyone held harmless? Contract Manufacturers and Seller of Ingredients or Component Parts Is there a contract with the Buyer? Is Recall Liability clarified in the contract? Is there a cap? Is anyone held harmless? Contracts – The right language can be more valuable than any insurance policy

32. Benchmarking • Of the Top 30 Food Processors in 2016 • 25 have a corporate program • Very likely that there will be 1-2 new buyers in 2015 • Why? • The root cause of a foodborne illnesses is more likely to be found today than ever before. • Supplier caused recalls are an increasing risk due to advances in traceability • The news surrounding a contamination will spread faster than ever before thanks to the social media. • From a shareholder perspective the risk is foreseeable and financially meaningful. Simply put, there are more losses and the losses are getting larger.

33. Large Diversified Food Brands

34. Coverage Scope and Loss Triggers

35. Product Contamination What triggers the policy? • Definitions to understand • Malicious Tampering • Accidental Contamination • Product Extortion • Adverse Publicity • Government Recall

36. Product Contamination Causes of Loss • Mislabeling • Foodborne illness • E. coli, salmonella, listeria • Foreign objects • knives, mixing equipment, metal shavings, plastic • Allergens • peanuts, tree nuts, fish, shellfish, eggs, milk, soy, wheat etc. • Contaminated ingredients or equipment • Poor QA/QC

37. Product Contamination (cont.) Causes of Loss (cont.) • Intentional Contamination - Tampering • Product Extortion • Criminal Intent • Cover for a crime • Animal Rights Activists • PETA, Animal Rights Militia • In 1994, two supermarkets in Canada received a message from ARM saying that it had injected rat poison into turkeys at several stores. “The holidays have finally arrived and so has the Animal Rights Militia,” the message said. “We are here to avenge the mass murder of millions of Christmas turkeys.”

38. Accidental Contamination Example Definition • Any accidental or unintentional contamination, impairment or mislabeling of an Insured’s Product (s), which occurs during or as a result of its production, preparation, manufacture, packaging or distribution; provided that the use or consumption of such Insured’s Product(s): • Has resulted in or would result in clear, identifiable, internal or external, visible physical symptoms of bodily injury, sickness, disease or death of any person(s), within three hundred and sixty five (365) days following such consumption or use, or • Has caused or would cause property damage to or destruction of tangible property other than damage to or destruction of Insured Product(s) or any other tangible property or product in which the Insured Product(s) is incorporated as an ingredient or component. • Great QC program - accidents do happen • Bad or mislabeled ingredients • Broken glass or metal shavings produced in the production process • Breakdown of testing devise • Mislabeling product or omitting ingredients • Lead • Various dyes • Allergens

39. Malicious Tampering Example Definition • Any actual, alleged or threatened, intentional, malicious, and wrongful alteration or contamination of the Insured’s Product(s), whether or not by an employee of the Insured, so as to render it unfit or dangerous for its intended use or consumption or to create such impression to the public. • Murder plot - “Pepsi Cola” “Tylenol”, “R.J. Refrescos Cocaine allegation ”, • Target company - animal rights groups • Chi-Chi’s green onion incident • Wendy’s thumb incident

40. Adverse Publicity Example Definition • The reporting of an actual or alleged Accidental Contamination during the Certificate period in local, regional or national media (including but not limited to radio, television, newspaper, magazines or the internet) or any governmental publication.

41. Government Recall – Coverage Implications • What businesses is my client involved in? Who has authority over these industries? • Ordered by Government entity with Authority • Who has actual authority to order a Recall • Ordered or recommended • FDA, USDA, CPSC etc • Government ordered Shut down of a manufacturing, processing plant or Restaurant location

42. Product Contamination • What are the covered losses? • Business Interruption • Brand Rehabilitation • Recall, Replacement, Testing, and Destruction costs • Consulting costs Each Program has a retained Crisis Management Response firm

43. Covered Losses: Third Party Recall Liability • Consequential damages suffered by your customers as a result of a Contamination/Recall caused by your products • Business Interruption • Brand Rehabilitation • Recall, Replacement, Testing, and Destruction costs • Consulting costs • Consequential damages • Contractual protection • Liability caps • Is there anything that can be done to limit the number of customers who receive a portion of any one batch or run of product?

44. Client Specific Risk • Food Related and Life Sciences • Restaurant • Food Processor • Ingredient Supplier • Contract Manufacturer • Retailer • Wholesale/Distributer • Do they take title? • Non-Food • Auto Parts • General Component parts • Mechanical Items/ Appliances • White Goods • Wholesale

45. A potential XYZ Inc. Program outline for Underwriters • Which Base Policy • Which endorsements • 1st Party Risk • 3Rd Party Risk • CLOP • Recall Liability • Which version of Government Recall? • Insured Products

46. Consulting • The Acheson Group • RQA Inc. • Red 24 • Edelman Worldwide • Fleishman Hilliard • Operational Consulting • High Level Governmental Contacts • Crisis Communications

47. Recent Policy Issues • ….solely and directly… • Application issues • Government Recall applicability specific to client

48. Product Recall Organization Chart William Harrison Product Recall Practice Leader Geoffrey Mills Product Recall Practice Leader Marsh Forensic Accounting Services Paul Ritchie Product Recall Leader Casualty Manager Marsh - Bermuda Ryan Roth Product Recall Broker David Palmer Product Recall Leader Marsh - London Marsh Claims Robert W. O’Brian Washington D.C. Sandra Richards-Vance Vice President Marsh - Bermuda Adam Nisenson Product Recall Broker Tim Nash Product Recall Broker Marsh - London Thomas Grey Charlotte, NC Amanda Rudnicki Product Recall Broker Canada Beth Murphy Assistant Broker Vincent Missonak Chicago, IL Susan Messmer Billing Specialist Michael Galvin San Francisco, CA Ken Chung London

49. Contamination Incident Claims

50. In the Event of a Contamination Incident Underwriter – To Be Determined • In the event of a covered event, the policy requires that XYZ INC. call the respective Crisis Hotline. The crisis consultants will answer the phone. The crisis consultants is the appointed Crisis Management firm for this program. They are very experienced in helping Insured's respond to a food related contamination crisis having responded to hundreds of incidents. They are available to XYZ INC. to provide information, advice and guidance. The crisis consultants are not there to force XYZ INC. to make any particular decision. XYZ INC. always makes the final decision. • Although the crisis consultants fees are covered by the policy, during the course of this process, the crisis consultants work for XYZ INC. . Anything you share with the crisis consultants is confidential and will not be shared without your permission. 24 hour Crisis Hotline - (XXX) XXX- XXXX • Please also call Marsh Product Recall (XYZ INC. specialty insurance broker for this risk). They have also been involved in hundreds of claims both as brokers and as underwriters of this risk. In addition to anything they might be able to do to help during the incident; they need to report the incident to the underwriter. Marsh product recall will notify FACS, our forensic accounting specialists, to help calculate the loss. Marsh Product Recall - Bill Harrison (609) 216 2994 (24 hr mobile)