Quality control no guarantee against recalls, liability experts say

People often think bad things “won’t happen to me”, and for many food manufacturers, having confidence in their quality control processes means believing that a recall won’t happen to them.

Yet, many well-known brands have had to recall products despite having strong teams of quality control personnel and state-of-the-art facilities.

Donna Niblock, assistant vice president, crisis management, and Victorian branch manager at Liberty Specialty Markets, notes that in 2023, there were 72 mandatory food and beverage recalls in Australia.

“Depending on where the product is sold and the extent of the contamination, product recall claims can result in costs from $50,000 up to millions of dollars,” says Niblock.

“If the products are sold in the major supermarkets for example, and the contamination has affected several batches, costs can escalate very quickly. Costs include the retailer's or customer’s recall costs, replacement of the products and loss of gross profit.”

In one example, Patties Foods had to recall two frozen berry brands in 2015 because of a Hepatitis A contamination that infected at least 18 people.

In court papers, it noted it had to dispose of $3.8 million worth of berries held in storage and pay compensation to infected customers.

A further $5 million in losses were incurred from advertising the recall, running a call centre, employing public relations professionals, removing products from shelves and using social media. Patties said its loss of earnings totalled $4.4 million.

Why do food safety recalls happen?

Food recalls happen for a variety of reasons. Recent food and beverage recalls, as monitored by Liberty Specialty Markets, include juice powder due to potential microbial (salmonella) contamination, a protein bar containing plastic, beer with secondary fermentation and pizzas containing metal.

However, Derham Daymond, head of Liability Australia at Crawford and Company, says the major cause of recalls in Australia is undeclared allergens found in food products — for example, milk powder that shouldn’t be there.

Food Standards Australia and New Zealand (FSANZ) notes that this can also happen when a food product is not compliant with the allergen labelling requirements, thus posing serious risks to people with allergies.

It adds that there were 191 food recalls due to undeclared allergens in Australia from 2019 to 2023. Most of these were due to the presence of a single undeclared allergen.

However, 21 per cent were due to the presence of multiple undeclared allergens. The most common undeclared allergens were milk, tree nuts, wheat/gluten and eggs.

Food contaminants

Daymond says the next major cause of Australian food recalls is microbiological contamination. “That's when, for whatever reason, the food might contain salmonella, E coli or the harmful strain of listeria that can cause foodborne illness.”

FSANZ says there were 83 food recalls in Australia due to this type of contamination between 2019 to 2023.

The third most common cause, according to Daymond, is foreign objects such as metal or a piece of glass or rubber somehow making its way into the product.

From 2019 to 2023, there were 39 recalls due to this. FSANZ says the most common types of foreign matter were plastic (16 recalls), metal (nine recalls) and plant (five recalls). During this time, there were three recalls involving multiple types of foreign matter.

However, FSANZ says biotoxins (toxic substances produced by living organisms such as fungi, animals and plants) and packaging faults only account for a small proportion of recalls annually. Other causes can include choking hazards and products containing prohibited ingredients.

Niblock says Liberty has seen a shift in why products are recalled and an increase in allergen recalls.

“A key reason is the increase in manufactured food. The more ingredients that go into a product, the higher the risk, especially with the increased use of imported raw materials and finished products imported from overseas.”

Liability vs recall costs

Daymond says recall costs are usually excluded in a standard product liability policy. This means most food and beverage manufacturers will sensibly have a standard product liability policy plus a specific policy to protect them in the advent of a recall.

Niblock says the specific policy will cover the financial loss incurred by a recall as well as financial protection, so companies can recall products from the market as soon as possible and mitigate liability exposure.

“All companies which manufacture, import, wholesale, distribute and retail [food products] should consider product recall insurance. In some recall cases, the company is not to blame," she says. "However, most often the recall costs and loss of gross profit incurred won’t be covered by the party at fault."

Where the company is at fault, no cost will be covered by a third party, so the cost comes directly off the company’s bottom line.

"Companies often think that if they are not at fault, all their costs will be covered by a third party, but in most incidents, this doesn’t end up being the case.”

Understanding terms and conditions

Niblock says Liberty considers a number of factors when setting the terms and conditions of product recall insurance including what quality control processes are in place, how often external third parties audit the processes and how often mock recall exercises are conducted.

“We often ask for a copy of audit reports conducted by external third parties as this gives Liberty a look into the client’s quality control framework and how well it adheres to current legislation and changes.”

She adds that a product recall policy is a first-party policy that only covers the financial loss of the insured and not the defence of the insured, for example, a class action lawsuit.    

That said, Daymond believes class actions related to food issues would be rare in Australia. For example, a piece of glass in cheese is usually a very isolated incident affecting a small number of consumers.

It would probably not lend itself to a class action simply because of the number of people affected. In addition, class actions tend to relate more to people with serious ongoing harm, but most food issues are unlikely to lead to any enduring kind of permanent disability.

As a loss adjuster, Daymond has to ensure a claim satisfies the conditions of a policy, including whether the food issue could cause customers bodily harm or injury.

“That is what a claim stands or falls on,” he says. “If it's just a case of the food having a bad odour, wrong texture or incorrect barcode on the packet, that's not enough to trigger cover under a recall policy.”

Conversely, if you have gluten in a gluten-free product, it is going to make a celiac sick. Likewise, metal or string, rubber or glass in a food product may damage teeth or cause choking while salmonella, E coli or listeria are well known to cause gastro-related illness, says Daymond.

Under the regulator’s microscope

Daymond says food producers must comply with strict processing and labelling guidelines, tests and protocols.

“Ironically, this is leading to an increase in recalls because their risk mitigation measures are becoming more effective. Problems are being discovered not necessarily before the product is sent out, but certainly before a consumer finds something wrong.”

In terms of new regulations, Niblock food businesses have been required to meet new plain English allergen labelling requirements from February 2024.

“These changes mean food allergen information is clearer and easier to find on food labels,” she says.

“The new changes don’t apply to food packaged and labelled before 25 February 2024 which can label allergen information in the older format until 25 February 2026.

"Allergen labelling still applies to food packaged and labelled before 25 February 2024, but the labelling may appear different to foods packaged and labelled after this date.”

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