German product protection insurance for the food industry

In recent years, the food industry has witnessed a series of high-profile product recalls. These incidents, ranging from contaminated food to undeclared allergens in ready meals, demonstrate/show that even the most rigorous quality control systems can fail. Contamination can be caused by many factors including insufficient inspections, defective or inadequate sensors, inadequate heating of products, and malicious external interference, such as deliberate product tampering. 

The financial consequences/repercussions extend far beyond the immediate costs of removing products from shelves. They/These expenses encompass lost revenue, damaged brand reputation, and the expensive task of rebuilding consumer trust. The challenges producers are confronted with in such situations are multifaceted: identifying the source of the defect, managing reputational damage, and in severe cases, confronting threats to the producer’s very existence. 

It is against this backdrop that product protection insurance has been emerged on the German market as an essential risk management tool for producers. Such product protection insurance schemes are more than just extended liability insurances because product protection insurance departs from the liability-based model of classic product liability and recall insurances. 

What is the insured event in the product protection insurance and how is it defined?

Typical German product protection insurance policies provide cover against the consequences of intentional or unintentional product contamination. In a first step, the insured event is any unintentional product contamination, i.e. accidental or unintentional contamination, damage, or incorrect labelling of a policyholder’s product as a result of production. The contamination must create a hazard to human or, in some cases, to animal health. In addition, insurance coverage is typically granted if the product is unsuitable for human consumption regardless of whether it poses a health risk. However, product protection policies usually go beyond this liability insurance component, also protecting against intentional product contamination or alleged contamination by third parties aiming to blackmail the policyholder. 

What does the product protection policy cover?

Any product protection policy comes with multiple claims options for different events. 

• Lost profits: The heart and primary focus of this cover is lost profits. This is in clear deviation from classic recall insurances. This is defined as the amount that the insured would have earned from planned but unrealised sales of affected products. Quantifying this loss requires a detailed analysis of contribution margins for specific product lines, comparing actual sales with those achieved in comparable prior periods and projected in business plans. This exercise demands close collaboration between legal advisers, the insured's accountants, and potentially independent loss adjusters with expertise in business interruption claims.
• Recall and investigation costs: The expenses involved in withdrawing products from the market are substantial and multifaceted. These include notification costs to retailers and consumers, investigation expenses to determine the source and extent of contamination, transport and logistics costs for product retrieval, the costs of interim storage facilities, and the price of destroying and disposing of affected products.
• Replacement and rehabilitation costs: Policies cover the costs of restoring and replacing recalled products, enabling manufacturers to resume normal operations and fulfil outstanding orders once the contamination issue has been resolved.
• Marketing and reputation management: Policies often allow for additional advertising expenditure to help rebuild consumer confidence and restore market position, recognising that brand damage can outlast the immediate crisis.
• Professional fees and crisis management: Many policies grant access to specialist services, including crisis planning, quality management and assurance, crisis communication strategies, and ongoing support during the resolution of crises.
• Legal costs and third-party claims: These policies provide protection against liability claims from third parties arising from personal injury or property damage, and cover legal costs incurred in product liability cases. 

Increasingly, many insurers are extending their services beyond traditional insurance offerings. These include for example, advice on preventive measures, quality management consultancy and recall planning services. Some insurance companies also operate an emergency hotline, ensuring immediate access to expert guidance in situations where time is of the essence. In some cases, they even provide ransom concepts and solutions.