The debate about how the food and drink industry allowed an illegal carcinogen to get into more than 400 products rages on. But for the companies at the centre of the scandal, there are two equally pressing questions: Who will pay? How can a similar disaster be prevented in the future? Liz Hamson reports

A week after the story broke, the barrage of anticipated legal and insurance claims has yet to materialise - despite the £100m estimated cost of the product recall alone.

The reason for the delay is not that calls to lawyers and insurers have not been made. It is a general insurance policy requirement to notify underwriters immediately of the potential for a future claim.

But first the insurance and legal experts are frantically poring over their clients’ insurance policies and contracts with suppliers to determine liability, cover and the extent of any potential claim.

It is a legal and financial minefield, warn the experts, who are preparing for a surge of claims from businesses. Apart from the estimated £100m product recall cost, there is also the cost of lost sales and profits and the damage to the reputation of the brands to consider, not only for those directly caught up in the scare, such as Unilever, but also innocent victims such as Lea & Perrins.

“As retailers empty shelves of harmful stock, the financial impact of lost sales is beginning to sink in,” says Martin Nugent, director at insurance broker, UK & Ireland Insurance Services. “Manufacturers will also be examining their insurance policies to see whether they are covered. Major multiples will probably be covered, but smaller ones are likely to be hit.”

Cue some desperate passing of the buck up and down the supply chain.

The multiple supermarkets, many of which will be self-insured, will probably try to pass the cost to Premier, say experts, pointing out that other brands involved could also be billed by retailers for loss of sales.

However, Premier Foods’ finance director, Paul Thomas, is adamant the companies that supplied the tainted ingredients, or their insurers, should foot the bill.

The question is: would these companies be able to pay? Are they even insured?

Probably ‘no’ on both counts, warns Lawrence Hutter, partner at Deloitte’s European consumer business practice. “The suppliers in question are small businesses,” he points out. “It’s unlikely that they are insured or have the financial resources to deal with this.”

Even if they did, they would also argue that they did nothing wrong because the chilli powder was imported before the mandatory testing for the dye was introduced in 2003, though this certainly raises the question of why no tests were carried out on batches already in the supply chain when the dye was first detected in 2003.

So will the buck pass back to Premier? “We have insurance against such eventualities,” Thomas told the Financial Times before the company went to ground. However, he refused to reveal what type of cover - as have the three small suppliers involved.

But would the company be covered if the lost sales or the damage to reputations suffered by any of the other brands involved were taken into account? Again, say the experts, the answer is maybe not.

Astonishingly, fewer than 1% of UK companies are thought to have product recall insurance. David Page, executive director, global markets international, at insurance broker Willis, says: “We would expect no more than 10% of UK food and drink companies to have product recall insurance.”

Phil Bell, technical manager of liability at Royal & SunAlliance, explains: “It’s extremely limited in availability and would be regarded as expensive. The only companies that would tend to buy it are large multinationals” - or those whose customers require it.

If Premier Foods does not have product recall cover, it may still have some protection under its product or public liability cover.

However, says Page: “It is unlikely to cover recall costs because recall is historically a standard exclusion on a product liability policy.”

David Upton, director at crisis management consultancy Stirling Reid, adds: “Some people think recall cover is included in their general insurance, but it isn’t. Many people may have product liability insurance but that will only pay out if you kill or injure someone.”

Because there is no “immediate threat” to health, that is not the case here, he says, though some experts predict a rise in the number of personal injury claims related to the crisis.

A lot will depend on the terms of Premier Foods’ product and public liability policies as well as the contracts it has with its suppliers, the experts agree.

Page says: “This is the important thing. They may well be legally obliged to pay the costs.”

The worst case scenario for Premier would be that it gets the bill for every recall cost and financial loss incurred along the supply chain. “It could bury the company,” warns one expert.

But the consensus is that many companies involved will have to cover their own losses.

Bell says: “The cost of recall and consequential damage to sales is normally a risk that a business has to bear itself. I’m afraid it’s part of the day-to-day running of a business.” That could amount to a lot of money, particularly for those who can’t pass any of the costs along the chain.

But the real question is how seriously the general public view the health risk associated with the dye.

They may take the view that the threat has been massively overhyped, that the contamination is a one-off and that while millions of people have been exposed to Sudan 1, they have only been exposed to it in very low doses. They have been told, after all, that the risks are virtually non-existent. On the other hand they may see it as the first worm to have squirmed out from a very large can.

But while there is no escaping the cost of the recall itself, the jury is out over the ultimate damage to sales or reputation of the hundreds of brands affected.

Both aspects are certainly insurable. Some argue that so many companies have been caught up in the saga that no one’s reputation will be seriously affected.

For many it will have provided the first real insight into the global scope of the supply chain and the scale of food scares it can spawn.

The national press has been quick to move the debate beyond simple criticism of traceability regimes and the efficacy of testing to ask wider
questions about processed food and the true price of cheap food as far as retailers and manufacturers are concerned.

Suffice to say, the general message has been that the industry has not covered itself in glory. If the first view prevails, Premier, which itself is not a customer-facing brand, may ultimately get off lightly while the customer-facing brands take the full brunt of customer ire.

Needless to say, this is something that Lea & Perrins, which has not used any of the contaminated chilli powder and is very much an innocent victim, will be monitoring closely.

One thing is for certain, the latest Sudan1 product recall is unlikely to be the last big scare or the biggest.

As Jessica Burt, solicitor in safety, health, environment and products at law firm CMS Cameron McKenna, says: “Something like this has been expected because of the globalisation of brands.

“In cases like this, it is likely that a large number of products will be affected. There’s no reason it won’t happen again.

“This will give people a wake-up call about risk management. It is vital that companies take lessons from this.”

Arguably the biggest is that companies need to be far more alert to the threat. There are plenty of steps that they could and should take to improve traceability, testing, risk management and damage limitation (see above).

At the very least, they should consider improving their insurance coverage and be prepared to pay more for it.

Nugent says: “Without wishing to hype up a health scare, it could be years before the insurance industry gets to grips with the actual cost of a contaminated food supply and this uncertainty is likely to be reflected in their insurance premiums.”

How the UK's checks and balances must be overhauled
>>UK industry is accused of under-investing in quality processes and systems

That random testing carried out in Italy appears to be more rigorous and sensitive than anything conducted here has left a lot of faces red - not least because the last Sudan 1 scare was only a year ago.

Lawrence Hutter, partner at Deloitte’s European consumer business practice, says: “It should serve as a wake-up call to the industry to improve testing and certification procedures and general traceability systems.

“The food industry in the UK in general has under-invested in the quality of processes and integrity of systems. If you look at what most food manufacturers do, they don’t really do proper batch control. They work on the basis of time windows so, clearly, in the light of this, we’ll see more revisiting of batch control strategies. That requires investment in processes and it’s not cheap.”

A spokesman for the Food Safety and Traceability Forum agrees that the traceability laws need to be tightened up. “Only a small number of the products could be identified from batch numbers. It’s not a requirement of the EU General Food Law to have batch traceability. This needs to be addressed.”

Another weapon that could be deployed is RFID. Richard Matthews, partner in commercial litigation at Eversheds, says: “It may have saved some time and created greater clarity over where products and ingredients are in the supply chain.”

Risk management needs to be reassessed, say experts, as does the question of how to handle the product recall if the need does arise.

Tim Johnson, director, crisis and risk management consultancy, Regester Larkin, says: “Our motto is tell it fast and tell it truthfully,” he says. “It is interesting comparing the responses from Premier and the small suppliers.

“Premier Foods spoke to its stakeholders and to the regulator and talked fast and truthfully. But the smaller companies initially refused to comment.”

He adds: “The second point when you are playing with other people’s brands is to make sure your reputation is in place at every single point.

“We also advise people to consider the worst case scenario. You have to have your reputational risk radar switched on and say, ‘This has been an issue. Have we got all the bases ticked off?”

Unfortunately for many of those caught up the Sudan 1 saga, they didn’t. And with most experts warning that the current system of checks and balances is so leaky that another scare is probable rather than possible, that isn’t good news - not least because of the national media’s determination to seize on every story that exposes any apparent wrongdoing by the food and drink industry.

As Johnson says: “Whenever a problem like this arises, it is going to be major.

“You need to get your checks and balances into place because perception is the only reality.”

Sudan 1 Crisis
>>The story so far...

June 2003: A French laboratory discovers Sudan 1 is being used widely despite the ban and alerts the Food Standards Agency.

July 2003: The FSA traces the origin of the chilli powder and instructs companies that have used it to withdraw the products. East Anglian Food Ingredients is found to have imported the tainted powder. The EU insists on a certificate showing chilli powder is free of substance. Random sampling is conducted.

August 2003: The FSA introduces more reliable test for Sudan 1. Food alerts issued as more products are found to have been contaminated.

January 2004: Nando’s discovers Sudan 1 in chilli powder sourced in Johannesburg and used in its peri-peri sauces.

January 28: Italian lab finds Crosse & Blackwell Worcester sauce is contaminated.

February 7-11: Premier notifies the FSA. Tests confirm Italian findings. Premier contacts supermarkets and tells FSA problem is widespread.

February 14: FSA and supermarkets given list of firms Premier has supplied with sauce and stores begin removing product from shelf.

February 18: Public informed as FSA announces product recall.