The baked goods sector has seen a series of product recall events in recent months. Recall events can have a devastating impact where they occur, with potential implications for businesses, their clients, and end-consumers. To mitigate risk to all parties, it’s vital that manufacturers follow risk mitigation best practice. Securing appropriate product recall insurance can further limit the scale of financial loss and operational disruption.
Recalls continue to hit the baked goods sector
In early February, the Food and Drink Administration (FDA) upgraded to Class II the voluntary recall of approximately 2 million baked goods produced by FGF brands. The designation (opens a new window) applies to products that could cause “temporary or medically reversible adverse health consequences”, or have a remote possibility of leading to “serious adverse health consequences”. The cause of the recall was potential contamination with Listeria monocytogenes, a type of disease-causing bacteria.
This is not the only recall to hit the baked goods sector in recent months. In January, a Class I recall, which means there is “reasonable probability that the use of or exposure to … will cause serious adverse health consequences or death”, was issued for NuGo chocolate products (opens a new window). The products, which were labelled vegan, were found to contain milk after the company received 11 reports of an allergic reaction from consumers. And in December 2024, Compass Minerals America Inc., a leading producer of essential minerals, recalled a variety of salt products (opens a new window) due to the potential presence of metal fragments. For bakery manufacturers and retailers, the source of a contamination event could be anything from allergen cross-contaminations and mislabelling during production, to a supplier-provided contaminated ingredient.
In fact, worsening macroeconomic climate and inflationary pressures have squeezed profit margins for firms across the global food and drink supply chain. As businesses accelerate their operations to maximise turnover, this may come at the expense of quality assurance. This argument is reflected in sector-wide data: according to Sedgewick, US recalls totalled 580.43 million units (opens a new window) in the first three quarters of 2024, the highest on record. Tighter regulatory scrutiny, coupled with improved technology to detect issues, and the growth of social media, has also driven an increase in frequency.
The impact of a recall event
The impact of a recall event can be devastating. According to analysis of FDA data, labelling issues alone cost the US food industry an estimated $1.92 billion (opens a new window) in 2024. Notwithstanding the primary costs of recall and destruction of unwanted products, mislabelled or contaminated products pose a clear bodily injury risk to consumers. Businesses may have lawsuits brought against them and, if found to have been negligent, may be required to pay significant compensation. Recalls may also spike consumer and corporate sentiment, depressing income.
Determining liability for a recall will depend on the nature of its origin. Errors may be more likely to occur where tasks, such as labelling and packaging, are outsourced to a third party, owing to the associated lack of oversight. However, this does not mean that all such operations should automatically be brought in-house, as increased control can also mean increased liability. Even if a business isn’t liable for a recall itself, they may still feel the financial and reputational impacts, particularly where a supplier isn’t able to recoup the losses.
Risk mitigation best practices
There is no single solution to prevent contamination events. Instead, businesses should keep abreast of any relevant changes to FDA legislation, and act to minimise the likelihood of contamination.
Key considerations for businesses may include:
Customer and supplier arrangements – for instance, businesses should consider whether they are overly reliant on a single customer or supplier, and whether the cancellation of a key contract due to a recall would threaten operations. In the case of suppliers, over-reliance can be equally problematic. Contracts should be assessed on a regular basis, taking account of factors such as financial health, transparency, certificates of analysis and quarantine procedures for supplied ingredients. Processes should also be in place for suppliers to notify of any raw ingredient or product substitutions, and the implications for labelling and packaging.
Internal quality assurance – a simple labelling and packaging review process will help to identify errors prior to production, minimising costs and reducing the risk of regulatory non-compliance. This should include a robust sign-off procedure. To minimise machine error, equipment should be monitored, inspected on a regular basis, and proactively serviced. To combat human error, managerial oversight is key. Staff should be trained to identify potential sources of error, and prevent their reoccurrence. Periodic mock simulations and training exercises can ensure staff are well-versed in the potential implications of a recall, and help to limit the impact of such events if they occur. Businesses may also seek to address potential sources of burnout or overwork, which typically increase the frequency of errors.
Other strategies may be available to help reduce the impact of a recall. For instance, where the recalled item remains suitable for consumption, businesses could explore opportunities to repurpose the product either as a standalone product, or by recycling it into product supply chains with the proper authorisation.
The benefit of Product Recall Insurance
Product Recall Insurance complements risk mitigation, by providing cover for the financial impact of a recall. This includes the cost associated with identifying and addressing the issue, undertaking the recall itself, and other costs to preserve business continuity. It is especially valuable where businesses cannot guarantee reimbursement from a supplier or contract manufacturer. Businesses that purchase Product Recall Insurance may also receive up to 5% of the premium to invest in pre-incident risk management. For smaller businesses especially, this can make risk mitigation more affordable.
Historically, the market for Product Recall Insurance has been restricted to cover for bodily injury-related issues arising from manufacturing errors. The burden of proof has rested with the insured to evidence that their product would cause bodily harm if consumed.
Fortunately, an influx of insurer capacity into the market has boosted competition. This has led to lower premium rates, larger insurance programmes, and broader coverage. As a result, food and drink businesses may now be able to secure cover for elements of quality coverage. One key example of this has been the introduction mold, pest and rancidity endorsement, applicable in cases where there is no clear evidence that bodily injury would occur.
Despite companies taking action to mitigate risk, product recalls cannot be ruled out entirely. If one occurs, businesses need to be confident in their ability to withstand the costs, making product recall insurance a valuable protection tool.
For more information, reach out to a member of our team.
Further insights are available via our Product Recall and Reputational Risk (opens a new window) page.
