Insuring food risks

An obvious starting point in any discussion about insuring a business is protecting the company's assets. The demands of the food manufacturing sector require quality products within tight time schedules.

As a result, many food manufacturers invest heavily in the plant and machinery to produce the quantities required by major customers, such as big supermarket chains.

Protecting these assets from catastrophic loss due to fire, damage and theft is therefore a basic insurance requirement. However, the broker should aim to avoid duplication in coverage and therefore excessive premium costs to the business.

For instance, if forklift trucks or other items of machinery are employed on a rental rather than an ownership basis, the contractual conditions for hire should be closely examined to determine where the liability lies.

Business interruption cover is an important consideration in the food manufacturing industry. Among the factors which should be taken into account here are compliance with food hygiene regulations and customisation of plant and machinery, both of which may extend the interruption period, and the limited availability of realistic alternative premises for temporary trading.

Brokers should look at extensions to standard business interruption policies to determine whether their inclusion in the coverage is warranted.

These may include additional cost of working, customer and/or supplier, denial of access, failure of public utilities and goods-in-transit extensions.

Again it is important to avoid duplication. A standard business interruption policy will cover most eventualities, but engineering business interruption cover may be appropriate to prevent loss of profit due to deterioration of stock caused by refrigeration failure.

Statutory inspection requirements on relevant plant and machinery items should also be considered.

Motor coverag
Another requirement is compulsory liability coverage to protect the client's motor fleet, including company cars provided to employees and delivery vehicles.

Other than extensive use of refrigerated vehicles, for which an engineering extension may be appropriate, there is nothing particularly unusual about insurance products available to food manufacturers for this purpose.

Under UK law, there is also the requirement for employers' liability insurance to cover damages and compensation paid to employees stemming from any injuries sustained on the job, as well as legal costs arising from litigating such a claim.

The minimum limit required to comply with legislation is £5m per occurrence, although market practice is to provide a minimum indemnity limit of £10m.

It is important for the broker to assess the potential maximum cost of damages from one incident at the food processing premises, including the possibility of a major incident such as a fire or explosion.

Liabilit
Food manufacturers are particularly susceptible to claims arising from public and products liability, so this requires particular attention. The indemnity limit should be selected by the client in consultation with the broker, based on a balance between exposure with premium.

Insurance for products liability is written on an aggregate limit, applying to each and every claim, and in the aggregate for all claims in the period of insurance.

An extension may be required for financial loss, which some insurers will provide. This provides an indemnity against claims for financial losses not accompanied by the usual prerequisite of bodily injury or property damage, such as when food supplied by the manufacturer is found to be unsafe due to contamination found in the wrapping before it has been consumed.

An increasing number of lawsuits are now brought on grounds of misleading description, food allergies and food ingredients.

This highlights the importance of correct food labelling to meet the requirements of product identification, consumer information and marketing essential in reducing losses from this exposure.

Product recall insuranc
The threat to a business of adverse publicity resulting from inadequately managing this risk cannot be overstated. A well managed crisis may actually enhance a company's reputation in the long run.

This applies also to product recalls, soon to be impacted by the forthcoming EU General Product Safety Directive, which is likely to increase the demand in the food sector for product recall insurance.

This cover incurs a heavy additional premium for a relatively low indemnity limit. It can cost five times as much to recall a product as it did to distribute it in the first place, so it does not take long to exhaust the limit.

Moreover, there are typically several principal exclusions, including deliberate acts and products liability claims for injury or damage. These factors need to be weighed against the company's duty to protect consumers irrespective of cost.

Whether or not product recall cover is purchased, food manufacturers can take extra steps to limit their exposure in this area. Detailed records of the supply of ingredients and distribution of products are essential.

It is a good idea to prepare for the worst by maintaining a practical plan for dealing with a product liability crisis and reviewing it regularly.

Periodic practice recall drills will help employees handle these situations efficiently and minimise the damage done to the company by an actual occurrence.

An effective risk-management strategy combined with well-crafted insurance protection may be the critical difference in averting a crisis before it becomes a disaster. The broker's task is to work diligently with the client to identify and implement the combination of coverages that best achieves this goal at the most competitive rate. IT

' Ian Jerrum is managing director of Searchlight Solutions.This feature is based on material taken from Searchlight's insurance e-learning system Tick.

Food manufacturing insurance package tes
1 List two of the considerations for business interruption coverage.

2 List three of the extensions to a standard business interruption policy that may be considered.

3 What distinction from standard motor insurance exists in the food manufacturing industry?

4 What is the minimum limit required to comply with UK employers' liability legislation and what is standard market practice?

5 Name two types of liability to which food manufacturers are particularly susceptible.