PREPARE YOURSELF
H
ow well do you know your
stakeholders in your supply
chain? The business symmetry
may appear to be working
until a loss or financial
hardship is incurred. Then the questions
begin to follow. Who in the custody chain
is responsible for the loss? Without any
forethought—including a properly drafted
contract—recovery can be frustrated to
the point of taxed relationships and even
litigation. Take a look at this very typical
example:
SCENARIO:
NRG-4-U is a Canadian family-owned
company that produces energy supplements,
selling millions of units worldwide. Their
new blend of ingredients has propelled their
drink and bar combos into the company’s
most profitable products. Like many food
and beverage manufacturers, NRG-4-U
outsources the packaging and formulation
of its bars to a local vendor and storage
and bottling of the drinks to another. Two
months after the latest product release,
NRG-4-U received several notices from
retailers alerting them that the products
had been compromised and had to be
removed from store shelves. While no
customers had been harmed, several
complaints regarding the product had
been filed. To err on the safe side, NRG-
4-U decided to recall all of their products,
despite the heavy costs they would incur.
QUESTION:
Who is responsible for this problem
and how can companies better protect
themselves?
ANSWER:
The resolution of this type of thorny
situation cannot happen overnight, so the
NRG-4-U business owners should do their
best to remain patient. They will need
to devote time over the coming weeks to
work with insurance adjusters, financial
investigators, government agencies, and
their insurance agent to resolve the
problem. In the meantime, the insured
should devise a plan to minimize their
losses and act quickly to implement that
plan. Here is a look at the complex list of
costs that will need to be investigated to
ultimately resolve the claim:
RECALL COSTS:
•
• On-hand inventory inspection
•
• Inventory destruction (if needed)
Reverse logistics to return the product
to the warehouse
Customer product destruction and
reimbursement
•
• Replacement product to stores
•
• Lost profits
•
• Deductibles
Fines/penalties (generally not covered
by insurance)
Lost retail shelf space and possible
penalties
Impact on reputation
RESOLUTION:
Supply chain networks have many
interrelated components, and when a
loss is experienced, business partnerships
can quickly turn sour. Ultimately, both
vendors will continue to be involved in
the claim, along with NRG-4-U, because
they were contracted for portions of the
products’ manufacturing, packaging,
storage, and handling. Their contracts for
these products will be reviewed carefully
to define who is responsible for each
element of the poor workmanship. The
full investigation will look at what led
to the recall, including factors such as
contamination, packaging, and ingredient
quality.
TAKEAWAYS:
Even businesses with the best intentions
and most trusted stakeholder relationships
can end up in situations like NRG-4-U’s—
especially when large sums of money are
at stake and tensions are running high. For
the sake (and sanity) of all involved, your
insurance agent should be able to anticipate
possible problems and take steps to protect
you. It’s always in your best interest to work
with a seasoned insurance brokerage that
spends enough time with you to really
understand your business—including your
unique challenges and the ways in which
you partner with vendors, suppliers, and
other third parties. Make sure you ask
plenty of questions up front, both to get
a sense of your agent’s familiarity with
your industry and to gather as clear an
understanding as possible of what kind of
coverage you are getting.
Here are some risk management
recommendations that can mitigate these
costly situations:
1) INDEMNIFICATION – You may want to
include an indemnification agreement in
your supply chain contracts that precludes
one party from holding another party liable
for losses involving the negligence of one
party. In some ways, an indemnification
agreement is similar to a liability waiver but
may contain more detail.
2) SPECIFICITY – Each of your business
relationships should follow a written
contract that both parties have agreed
to. It’s a good idea to be as specific as
possible with every detail of the terms and
deliverables to avoid possible problems
down the line. The best contracts will
outline who is responsible for product
liability issues, product recall expenses,
costs to replace defective products, and
other possible scenarios.
3) ADDITIONAL INSURED – You may seek
to be named as an “additional insured” on
certain third-party liability insurance
to address your vicarious liability. This
provides another layer of protection in
areas where you could be vulnerable.
4) WAIVER OF SUBROGATION –
Subrogation essentially precludes one
party’s insurer from going after another
party once a claim has been paid to its own
insured.
5) CERTIFICATES OF INSURANCE (COI) –
Whenever possible, request COIs from third
parties that will evidence:
• The proper insurance and limit is
being carried
• Coverage is compliant with any
contracts in play +
Eric Davidson is a Program Specialist
in the Sports Protect & EventInsure
programs. Please feel free to reach out to
EventInsure directly at [email protected]
or 1-800-463-6503.
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