Spot Market Purchase Causes Supply Chain Problems

Manufacturers often have a complicated production process involving multiple materials and components incorporated into a finished product. Further issues can arise where the manufacturer’s product is a small component, part of a far more complex product.

Product quality, supply issues, production breakdown and human errors can all cause complications in a supply chain. Not only will this result in delayed production internally, but it will also have a knock on effect with connected suppliers.

In this product recall case study, we explore how a steel casting manufacturer opted to use the spot market to fill a product shortage but suffered severe consequences as the supplier had not been vetted or verified.

The insured, a privately-owned steel casting manufacturer with a portfolio of standard castings and custom-made products, specialises in carbon steel flanges. This sector of its business has an annual revenue of USD 25,000,000 and makes up 40 percent of the overall company revenue. The flanges are used in consumer products such as automobiles, fridges and HVAC units. The manufacturer has been in operation for 30 years.

FAULTY PRODUCTS DISCOVERED
The insured was first notified of a problem by its customer, an automotive component manufacturer in Michigan. The component manufacturer had performed some pressure tests on the supplied steel flange and discovered that the steel snapped at very low temperatures (which mimic conditions in Northern Michigan during winter).

The insured had not retained any samples from that production lot and requested that the customer return any stock available so it could investigate the issue with the flange. Due to a logistical mistake, the customer initially sent back rods from a prior production lot, which added on a three-week delay to the investigation. When the correct steel was returned, the insured ran various physical tests which confirmed that it was far more brittle than expected.

Metallurgical analysis then revealed that the carbon composition of the steel was higher than intended, which was the cause of the increased brittleness. The steel casting manufacturer traced the raw material used in that production lot to determine how many days of operation are affected with the faulty produce. This also indicates where the faulty produce would have used been by other companies in the supply chain. The tracing exercise showed that the particular raw material in question was purchased on the spot market after the insured’s usual
supplier was not able to fulfil requests over a four day period. The insured very rarely uses spot markets, but on some occasions it is necessary and is quite common in the industry.

The complaint from the component manufacturer was the only issue raised directly to the insured, and was addressed by shipping replacement steel and a small payment to cover expenses – an overall cost of USD 35,000. However, because the carbon composition of the affected batches was in breach of what most customers considered an acceptable range agreed, the insured decided to notify all of the customers who may have purchased parts made with the substandard steel.

ESTIMATING THE LOSS
Rather than offer refunds for the faulty steel, which would have topped USD 450,000 and more than depleted the insured’s cash reserves, the insured instead offered to replace the steel. However, given the time delay between the sale and the defect notification, many of its customers had already incorporated the flange into their products and instead claimed for financial compensation from the insured citing the following unexpected costs:

  • Cost of disposed products due to incorporation of faulty flange
  • Costs of removing components which incorporated
    faulty flanges from in-progress and finished vehicles
  • Credits charged for future purchases
  • Loss of sales, as one customer lost a contract with a
    large car manufacturer due to this issue
  • Various administration costs

The amount claimed against the insured by its customers totalled USD 3,500,000, and the insured was legally liable for these costs according to their supply contract with the customers, as well as common law (i.e. the insured was negligent).

The insured did not have sufficient cash reserves to satisfy even a third of these claims, especially as they needed to purchase raw materials to continue operating and fulfilling other orders. Additionally, three new customers filed lawsuits and the insured’s in-house lawyer required the help of external counsel who charged USD 450 per hour and required a USD 20,000 retainer.

PRODUCT RECALL POLICY AND RECALL EVENT LIABILITY
As a result of the recall, the insured suffered a significant financial and reputational loss, and the viability of the business was under threat due to the impact on cash flow. Luckily, the insured’s product recall policy included an extension for recall event liability, which covered their legal costs for compensation and lawsuits, as well as any sums which they were legally obligated to pay. The purchase of the policy ensured the survival of the business and
safeguarded their cash flows, ensuring they could continue purchasing supplies and conducting business as usual.

The companies and circumstances in this case study are fictional, but the scenarios are realistic and reasonable based on our experience.

You can print and share the case study here.

Webinar: US Food & Beverage Recall Landscape Update

Yesterday we held a webinar which discussed the Food and Beverage Recall Landscape in the USA. 

The risk landscape for food & beverage manufacturers in the US is changing dramatically – picky millennial consumers are growing less tolerant of allergens and food quality issues, the FDA is making a push for greater efficiency and transparency in its recall process, and an increasing number of retailers and grocery stores are mandating recall insurance for their suppliers.

You can watch the webinar here and download the slides here.

Webinar: Product Recall

Two man in protective clothing and holding a clipboard standing in a factoryAs part of CFC’s series of e-learning sessions, the Crisis Management team is holding a webinar to walk you through product recall insurance.

Handling the fallout from a product recall can be a daunting prospect for businesses. That is, if they are aware of what a recall can entail – because for many, this kind of incident is a really abstract notion, with lots of confusion around what it is, how it can happen and why insurance cover is so important.

In this webinar, we answer these questions and show how our recall policies are designed to help businesses get back on their feet quickly after an incident. All along the way, we share case studies and insight which will help you sell this product better. So tune in!

Tune in on Wednesday, 20th September at 12pm EST to learn more about this topic. Registering couldn’t be easier, simply go to the below link and enter your name and email:

https://attendee.gotowebinar.com/register/2556215386050808577

If you have any questions ahead of the webinar, please email Matt Hagan at mhagan@cfcunderwriting.com.

CFC launches product recall scheme for BIBA members

CFC launches product recall scheme for BIBA membersHaving been the approved cyber insurance scheme provider for over a decade, we’re pleased to announce the launch of our new product recall scheme for members of the British Insurance Brokers’ Association (BIBA).

Product recall is a crisis management tool for companies wanting to ensure business continuity in recall and contamination situations, and the new scheme will help BIBA member sell this insurance more effectively.

Suitable for businesses operating in a wide range of industries, the scheme offers two policies tailored for specific sectors. A product recall policy for manufacturers and distributors of non-food consumer products and automotive parts, and a contaminated product recall policy for food, drink and personal hygiene manufacturers.

Exclusive benefits for BIBA members include an increased provision for pre-incident consultancy work of 3.5% of gross premium, compared to standard offering of 2.5%, to assist with crisis management and business continuity. The scheme also provides marketing and training support and we will offer sub-limits for ‘retailers’ expenses’ extension to BIBA members’ clients to cover fines and penalties.

Mike Hallam, BIBA’s Head of Technical Services, said: “A product recall can be a worrying prospect for any business, with the potential for not just financial loss, but significant damage to their brand and reputation. We are pleased to offer this product to members with enhanced benefits and the support that they need to sell this complex product.

Our product recall policies are unique in that they also include cyber product tamper and software product safety – increasingly important areas of cover in the age of the Internet of Things.

Patrick Brice, our Business Development Director, said: “We’re very excited to launch our second BIBA scheme, reflecting our commitment to helping members access specialist insurance products, expertise and education on emerging risks in a simple way. We look forward to working even more closely with BIBA and their members in 2017.”

A webinar is available to BIBA members who want to learn more about this scheme on Friday, 7 April 2017 and more information on the new scheme is available at https://www.biba.org.uk/members/biba-schemes/product-recall-insurance.

CFC launches new product recall suite

CFC launches new product recall suiteSpecialist lines underwriting agency CFC today announces the launch of its new suite of insurance products for the product recall market.

This follows the appointment last year of Natasha Catchpole as the Crisis Management Practice Leader and the subsequent recruitment of George Beattie from Willis.

Commenting on the launch of CFC’s new product suite, Natasha says: “I joined CFC in order to create a suite of recall products that really advance the market. Current products are often unclear and fail to address the issues faced in today’s modern manufacturing and distribution businesses. I’m really proud of what we’ve produced and looking forward to sharing them with our partner brokers.”

Available globally, CFC’s suite of products is aimed at a wide variety of industries, from food and beverage, through to automotive component parts and consumer product industries.

Recognising the emerging risks faced by today’s modern businesses, some innovative features of CFC’s product suite include cover against recall events stemming from the hacking of automotive products, malicious product tampering caused by an electronic attack and failure of food and beverage products to meet religious specifications. Insureds will also benefit from access to CFC’s diverse range of crisis consultants available to provide specialist support depending on the individual recall situation.

Product recall coverage can be easily packaged together with any of CFC’s other insurance products to facilitate seamless and comprehensive risk coverage.

For more information, email ncatchpole@cfcunderwriting.com or call 0207 220 8500

CFC appoints product recall underwriter

CFC appoints product recall underwriter24 Jul 15: Specialist lines underwriting agency, CFC has appointed Natasha Catchpole to build a new team focused on developing product recall solutions.

Formerly an underwriter at Ark Syndicate Management where she spent just over three years writing product contamination and product recall business, Natasha has been working in the London insurance market for over 20 years. Previous roles include almost five years as an underwriter at XL Insurance specialising in product recall and over four years at QBE focused on D&O and management liability.

Andrew Holmes, CFC’s Chief Underwriting Officer, says: “The risk of a product recall has increased exponentially in recent years as global regulatory standards have increased in number and new product safety rules are implemented. Good news for consumers of course, however it means that food and beverage companies and manufacturers and distributors of component parts, amongst others, have ever more stringent obligations. The challenge is even greater for those that operate across multiple regions around the world. Regardless of varying global standards, mistakes will inevitably occur and the lack of adequate product recall coverage can have devastating consequences.

“We believe there are tremendous opportunities for CFC to build a new line of business, blending this cover with some of our existing products as well as creating standalone cover. Natasha has extensive experience in this class and we’re looking forward to welcoming her on board to help us develop a profitable new niche area.”