As a food, product, or parts manufacturer, you face unique risks in your day-to-day business. One of those risks is the possibility of a product recall due to contaminated or defective products. No small business thinks they're at risk of this happening—but it does. So how do you protect your company? Consider product recall insurance.
What is Product Recall Insurance?
Product recall insurance is designed to help cover what it costs a business to handle a recall of one or more of their products. It is especially useful for manufacturing businesses. A recall is usually activated due to a “trigger” which can be the imminent threat or actual occurrence of bodily injury/illness or property damage.
A product recall can be voluntary, where the manufacturer notices a defect and recalls the product to prevent lawsuits, illness, or injury. An involuntary recall is when the government issues a recall because of connected illness or injuries. In either scenario it can be quite costly—often millions of dollars. Not only that, but a product recall garners media attention and can tarnish your reputation and alienate your customers. That’s why it’s so important that manufacturing businesses and consumer goods companies obtain product recall coverage as part of their risk management strategy.
Common Categories of Product Recalls:
- Consumer products
- Food and beverage
Why You Need Product Recall Insurance
- Products are recalled every single day. The most common recalls involve children's products such as car seats and toys. Other common recalls are food, medication, and vehicles or car parts.
- The government can enact recallsand set laws. The Food Safety Modernization Act and Consumer Product Safety Improvement Act hold manufacturers to high standards to protect consumers and enforce product safety.
- The cost of a recall can bankrupt a small business. Tyco Integrated Security points out that the average recall costs upward of $10 million. A small business cannot sustain that monetary blow.
If a product defect comes to your attention, it must be reported immediately to the U.S. Consumer Product Safety Commission. They list current product recalls, what the risk is, and how to go about returning/replacing the product.
Product Recalls that Cost Millions
According to an article by Kiplinger, these are some of the most costly product recalls in history:
- In 1982, Johnson & Johnson had to recall 31 million bottles of Tylenol and it cost them $100 million in retail expenses (which would be $250 million today). Why? 7 people died after ingesting Tylenol that was laced with cyanide. This changed the game for product safety regulations.
- In 2010, Toyota had to recall 8.1 million vehicles because the gas pedal got stuck in the floor mat. 89 deaths were traced back to the defect. It cost them roughly $3.2 billion.
- In 2016, Samsung had to recall its Galaxy Note 7 Smartphone. Why? Because the batteries overheated and in some cases started on fire. It cost them $5.3 billion.
These are just a few of many expensive product recall events. They didn’t only cost a lot of money—but they cost people their lives.
What Does Product Recall Insurance Cover?
A product recall policy protects both your company and can also protect any company that distributes your products. Product recall policies typically cover the cost associated with a recall including direct expenses, such as:
- Notification of customers
- Shipping costs
- Storage costs
- Disposal costs
- Loss of gross profits or revenue
- Accidental contamination
- Cost of increased labor force to handle recall
- The cost of pulling products from shelves
It also includes third-party recall expenses:
- Any expenses to remove the product from shelves and replace the product
- Cost to rehabilitate the reputation of the third party
- Any product business interruption or lost income of the third party
Product recall insurance does not usually cover lawsuits or settlements. You'll want to obtain product liability or general liability insurance to handle these recall expenses.
Additional Endorsements to Product Recall Insurance Coverage
- Impaired Property Endorsement: This is coverage if your ingredient or component makes another product less useful (but won’t necessarily cause bodily injury or property damage).
- Worldwide Coverage: If your food or product is sold worldwide, this endorsement expands your coverage to all parts of the world, where allowed by local laws or regulations.
Each individual insurance company may offer other endorsements. Be sure to speak with an agent to determine what additions you may need.
Doesn’t General Liability Insurance or Product Liability Include Product Recall?
Some insurance providers do offer product recall as an endorsement to a general liability insurance policy. However, they usually have low limits ($25,000 to $50,000). Most only offer first-party coverage and exclude coverage for expenses to third-parties. Other insurance companies exclude product recall entirely and only offer endorsements for product liability insurance. Product liability coverage pays for any defense costs, lawsuits, or settlements associated with the recalled product (illness or injury). Product recall insurance does not.
What Does a Product Recall Look Like?
If a defect, illness, or injury is reported to you, there are a few things you must do immediately:
- Determine if it’s a widespread issue or one “batch” of products or goods.
- Determine if the defect was due to contamination, design, labeling, or materials.
- Inform every consumer protection group, every business you supply to, and all customers what product is being recalled and why.
- You must track the shipping and return of every recalled item.
- You need to cover the cost to recall the defective good or product as well as pay to replace it.
- You then have to properly dispose of the defective product.
- You then have the uphill battle of building a plan to restore the reputation of your business.
Product Recall vs. Product Contamination Policies
Product contamination is usually a policy offered to food manufacturers. A product recall happens when the use of your product results in an injury or illness in the marketplace. Contamination policies provide coverage as soon as you find out the product has been contaminated. It may still be in production. So the biggest distinction is the point in the process where the problem is discovered. If a product is contaminated before a recall and you don’t have contamination coverage, the costs may not be covered. Work with an insurance agent to help you determine which coverage you need.
Questions to Ask an Agent about Product Recall Insurance
- Does the insurance company offer a 24/7 crisis management team to guide you through a recall and avoid a public relations crisis? How can they help you lessen the impact on your company?
- Do they offer risk consulting and offer you targeted solutions for your business?
- Is the insurance company specialized in your particular industry?
- Is it a standalone policy or associated with a general liability policy or product liability insurance?
- How does the cost compare to other insurance companies for the benefits you'll receive?
- What are the deductibles and policy limits?
Get a Free Product Recall Insurance Quote
Do you have questions about how much this policy costs? Are you struggling to decide what companies are a good fit for you? Our goal at CommercialInsurance.Net is to answer any questions you may have and make the process of obtaining an insurance quote fast and easy. To receive a quote, complete the form at the top of the page or call us at 877-907-5267. Let us help you manage your risk and mitigate the impact on your business.
Related Articles: Food Manufacturing Insurance, Product Liability Insurance