Author: Nancy Germond
Costs associated with recall efforts can be astronomical. The standard general liability coverage does not cover the costs associated with recall efforts, nor do most unendorsed product liability insurance coverage forms. Insurers develop these policies to pay only for certain damages arising from a defective product, such as a bodily injury or property damage arising out of the use of the product. Recall insurance can help cover or defray the many of the costs associated with returning the faulty product to the manufacturer. Some Examples of Recent Recalls? Undoubtedly as you watch the news, you’ll hear of recalls, or you may receive a recall notice on a vehicle you own. The U.S. Food and Drug Administration’s Division of Imports, Exports and Recall division (FDA) collects and publishes many recall notices. A recent recall applies for a brand of instant formula for babies that may contain bacterial contamination. Starting in late 2019, a recall of airbags impacted several auto manufactures that had installed the products. In that case, the National Highway Traffic Safety Administration monitored the recall. Food recalls are on the rise, as well, according to one insurer. The pandemic brought food safety into the spotlight. In 2019, the FDA began to develop a plan to improve and modernize food safety concerns. Traceability of any product’s origins is a key focus of the FDA’s new plan, which is still in development. Why Recommend Product Recall Insurance? FDA recalls rose beginning in 2019 and peaked in 2022, according to one recent article. The associated brand damage from a single recall can be catastrophic to a business. Some brands never recover from a single event, let alone a high-profile event. Locally produced produce, often called “farm to table,” only increases the possibility of a recall. Even a small roadside farm stand has an unexplored recall exposure. Increased consumer awareness of food safety means any supplier, grower, or manufacturer is at risk. The Costs Associated with Product Recall Managing a product recall is time-consuming and expensive. Here are just a few of tasks organizations face after a recall. - Tracing and removing products from retail outlets
- Possibly shipping products back to the manufacturer
- Destroying the recalled products
- Restocking the product with non-defective products
- Overtime and temporary staffing costs
- Media management, including notifications and brand repair.
Insurance Coverage Highlights for Product Recall Coverage
Coverage is generally included in the product recall policy for these incidents. - Accidental contamination
- Adverse publicity (now standard in many forms)
- Malicious product tampering
- Product extortion
Coverage will vary by coverage form and may be available for the following exposures. - Brand rehabilitation expenses
- Business interruption expenses
- Crisis consultants costs
- Destruction costs
- Forensic accounts costs and other lump-sum costs passed back by others impacted by the recall
- Governmental recall costs (some forms include automatically, but at a low level)
- Insured product extortion costs
- Intentionally impaired ingredient costs
- Mislabeling
- Pre-incident consultants’ costs
- Pre- and post- recall expenses
- Product refusal costs – An example: Cantaloupe recall in one specific area now makes all cantaloupes suspect, so contracted buyers back out of sale
- Recall costs
- Redistribution costs
- Suspension of operations by governmental order (may include business income losses)
- Replacement costs
- Third-party recall costs
- Customer loss of gross profits
- Third-party recall liability
Want to Learn More About Product Recall Coverage? Coverages that can apply vary greatly by your clients’ exposures. For example, importing products from other countries with varying safety standards (think lead paint) can create a significant exposure. Since recall coverage is complex, many carriers will “manuscript” forms, according to one expert, tailoring coverage to the exposure. Unless you fully understand your clients’ exposures and the intricacies of the coverages, you’ll probably want to work with a wholesaler with deep experience in product recall before placing this coverage directly with a carrier. This is a brief overview of a complex coverage, which continues to evolve to meet the demands of today’s consumers and regulators. However, if you’d like to learn more, this podcast helped in the creation of this article and covers product liability recall insurance well and can help you explain and sell this product successfully. Published: February 16, 2024
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