Brand is everything! The ability and opportunities to extend a brand’s reach are vast, with the smallest companies able to brand globally. Equally important is protecting an established brand. Competitors and consumers can criticize, attack, protest, boycott, complain about and even “nitpick” a brand at will. Protection against brand or reputation crisis events requires 24/7 vigilance. In an environment that allows an immediate response, companies must take effective and efficient action straightaway to successfully survive a brand attack.
Product contamination insurance (PCI) policies were developed to help companies manage crisis events. Critically, PCI policies provide hotline access to a panel of experts, including public relations professionals, and unique specialty coverages, including brand rehabilitation. Adverse publicity coverage was developed to broaden the coverages offered under PCI policies.
In a June 2015 article entitled “Food Safety Insurance and the FDA's Forthcoming Rule,” which appeared in Law360, we noted that due to the impending regulations under the FDA Food Safety Modernization Act (FSMA), food companies will find an increasingly hostile regulatory environment and will need to enhance standard insurance portfolios. As discussed below, the impact of the new regulations and the recent filing of a libel suit in China by a western restaurant brand raise interesting questions about adverse publicity coverage.
Adverse Publicity: Libel Suit Filed in China
After finding thousands of stories and rumors containing libelous claims about its food products circulating on the Internet, including the use of chickens with six wings and eight legs, a western restaurant brand recently filed suit against three Chinese companies alleged to have used their social media sites to spread the false claims. The suit seeks the immediate cessation of such activities, approximately $242,000 in damages and an apology from each company. At present, Shanghai Xuhui District People’s Court, the trial court, has accepted the complaint and if its judgment is appealed, Shanghai No.1 Intermediate Court will issue the final decision.
The libel suit is a reminder of the harsh realities food companies face every day in the hyper-competitive Internet marketplace. Whether international or domestic, brands face fierce competition, especially in the food industry. With regard to the libel suit, no one has publicly stated the reasons why the three companies have spread the false rumors, and there is absolutely nothing wrong with the brand’s food products. However, because people are willing to believe Internet content, a brand must properly handle and respond to the crisis.
The New Reality: False Positive Test Results
As new FSMA regulations come on line beginning in late summer 2015, companies will have to create and develop quality assurance and testing regimes pursuant to compliance requirements. As with any new system, there will be bugs (no pun intended), and with them comes an insidious type of harm to food brands – false positive test results.
Here is a simple, yet increasingly common, example: A company in the middle of a supply chain conducts a newly developed quality assurance test and receives a false positive result (FPR) for a pathogen or other foreign substance. The FPR starts an avalanche of recall regulatory procedures and negative publicity:
- Brands and products appear on government agencies’ websites.
- The regulatory investigation is costly in terms of time, effort and money.
- Stories about the affected brands appear on websites and infamous “mom” blogs.
- Lost profits and recall costs quickly mount as customers begin to leave for competitors’ brands.
- The furor caused by the FPR literally sweeps away the brand efforts of each company involved with the affected supply chain.
For brands, the critical issue raised by this scenario is that while there may be nothing wrong with a brand’s products – no contamination, impairment or mislabeling – perfectly good foods, such as the associated brands, are considered tainted. Without expert assistance, how can a mid-cap or small food company respond to or survive brand crisis events?
Why Brands Need PCI Policies
PCI policies provide assistance in the form of crisis response experts and coverage for brand crisis events. However, as with any insurance, standard PCI does not cover all incidents of loss. To broaden PCI coverages, brokers and underwriters developed adverse publicity and government recall coverages, which may be triggered when claim circumstances present an incident involving potential product contamination that is not covered under standard PCI coverages.
Generally, stand-alone adverse publicity coverage requires reporting of an alleged or implied insured event in national, regional or local media or in a governmental publication where the insured and/or insured products are named or otherwise identified. Adverse publicity is a unique specialty coverage in that, unlike other PCI coverages, it is dependent on the satisfaction of triggers contained in the other Insured Event definitions. In other words, adverse publicity is triggered when all of the respective triggers contained in the accidental contamination, malicious product contamination or governmental recall definitions are implied or alleged.
While an adverse publicity endorsement will broaden the coverage provided under a PCI policy, issues are raised as to the extent of the coverage. In addition, because wordings differ and some are more extensive than others, experienced PCI brokers and underwriters can assist brands in determining whether adverse publicity is an appropriate coverage and which wording best fits their insurance portfolio.
Potential Contamination Events: A Brand’s Worst Nightmare
A food brand’s worst nightmare is a widely publicized, massive recall caused by the supplier of a simple, ubiquitous ingredient, such as the recent peanut butter recalls. Past recalls received extensive adverse publicity for all of the companies involved in the numerous supply chains. Mom blogs listed, discussed, blamed and held responsible each and every brand that was involved with the affected supply chain. Yet, the vast majority of brands were innocent victims and their products were unadulterated by the claimed pathogens. Despite the fact that brands were involved with a potential, as opposed to an actual, contamination event, losses ensued, and for many mid-cap and small brands the losses were catastrophic and the brands did not survive the crisis event. PCI policies endorsed with adverse publicity or government recall coverages would have made the difference for many of these brands.
After the release of the new regulations under the FSMA, food brands will face their toughest tests and be challenged by the most hostile of environments. The pending regulatory regime will present operations obstacles and require new testing procedures. A brand’s failure to properly perform will bring about an avalanche of regulatory intrusions, adverse publicity, and costs and expenses associated with withdrawal or recall that may prove catastrophic. PCI policies can assist brands in surviving the inevitable crisis event.
NOTE: Jin Qian (Director of Information Research Services-New York) and Shengao Xu (Law Clerk-New York) assisted in researching and drafting this Alert.