How 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 vendorand 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 minimise 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
  • Reverse logistics to return the product to the warehouse
  • Inventory destruction (if needed)
  • Customer product destruction and reimbursement
  • Replacement product to stores
  • Fines/penalties (generally not covered by insurance)
  • Lost profits
  • Lost retail shelf space and possible penalties
  • Deductibles
  • 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

Click Here to learn more about Commercial Insurance