Well-known companies that fall victim to tainted food often sue not only for actual losses but also for loss of income caused by damage to their reputation. Possible harm to the company's reputation "is one of our most serious risks," says Nancy Smith, director of risk management for Long John Silver's Restaurants, Inc. The quick-service seafood chain, based in Lexington, Ky, has never been embroiled in a tainted-food problem. The risk for restaurant chains, however, is that when one store is determined to be the culprit in an outbreak of illness caused by tainted food, people often stop patronizing other restaurants or stores in the chain. It may take months or even years to regain the lost business, experts say. "If you supply a contaminated product to a name-brand restaurant chain or franchise and there is a food-borne-illness outbreak, your customer will expect you to pay for their loss of reputation and the resulting loss of income," says John Cavanaugh, director of new-product development for the Chubb Group of Insurance Companies in Warren, N.J.
To address such problems, Chubb recently introduced a prod uct called reputational-damage liability insurance, which can be added to a company's umbrella liability coverage as an endorsement (insurers' term for a provision added to a policy). "It protects us from a potentially very serious risk that would otherwise be unrecoverable," says Joel Kolen, president of Empress International, Ltd., a frozenseafood supplier in Port Washington, N.Y. Kolen, whose company recently signed up for reputational-damage coverage, says, "The real issue for us is the cost of defending yourself in a lawsuit whether you are at fault or not."
More Than Legal Costs
The new reputational-damage endorsement pays for all legal expenses on top of any damage settlements or judgments. "In addition to paying for the legal costs," says Smith of Long John Silver's, "it can give suppliers a marketing edge by showing potential major customers that someone else has put their money on the line and has given a sort of stamp of approval." John Keane, president of Capital Risks Concepts, an insurance brokerage in White Plains, N.Y, says: "This insurance can also strengthen a small company's financial picture. When you apply for a loan, your bank will know that you're covered and [that you] won't go bankrupt if you're caught in a wave of lawsuits." Most reputational-damage coverage is being purchased by food companies—large and small—for peace of mind. "Quite honestly," says Willis Corroon's Benefield, "this is sleep-well insurance for business owners who have all their money tied up in their food enterprises. They know if disaster strikes, they could be wiped out."
Factors In Setting A Premium
Knowing what is and isn't covered is always important in buying insurance. "You should employ due diligence in checking out any reputational-damage insurance before you buy, to make sure the agent explains how the coverage works and what's included and what's excluded," says Robert Massi, a plaintiffs attorney in Las Vegas. He has represented clients who sued a fast-food chain and its suppliers following illnesses traced to tainted hamburger meat. The premium depends on the company's sales volume, the nature of its customers and suppliers, and its quality controls. Chubb's Cavanaugh gives the following example of a company that annually sells $10 million worth of fruit filler for pies, some of which go to a regional restaurant chain.
"The restaurants account for $5 million in sales," he says, "and the other $5 million goes to hospitals and schools, which don't have the same reputational risk as a well-known company. "The supplier has a good product-recall setup and a good quality-control program. With this sales mix, we would charge around 5 to 10 cents for each $1,000 in sales. "The annual cost would come to around $1,000 for $1 million in coverage." For more information on reputationaldamage insurance, check with your insurance agent.
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