The Importance of Product Recall Insurance
It’s a common misconception that product recalls are covered under a general or product liability policy. Those coverages address bodily injury and property damage but typically exclude product contamination or recall of products. The addition of a product contamination or product recall policy protects a company’s bottom line by covering the direct costs of recall, but transferring the risk is only one part of closing the recall exposure gap.
While the manufacturer is generally held liable for the injury or loss, any seller of the product can also be held responsible under tort liability. The Federal Government mandates over 1,000 recalls each year most of which are initiated by the manufacturer. Businesses that should strongly consider product recall coverage include product manufacturers, food products companies, distributors and other similar companies.
Types of Product Recall Exposures
First party product recall exposures include the additional costs of a recall, including product loss, costs to withdraw the product from market, product disposal, product testing, overtime wages and crisis management. In some cases, loss of profit can also be covered.
Third party product recall exposures include loss to a third party as a result of a recall event. The losses are similar to first party but the costs associated aren’t included in a first party product recall policy. This being said, it can leave the supplier/manufacturer with a large uninsured loss.
An unexpected loss exposure to companies that maintain only a first party recall coverage is that some large big-box retailers will pull product from their shelves and handle disposal of those products themselves. The cost is then tendered back to the supplier/manufacturer. A first party product liability policy won’t cover this expense.
Costs and Issues Related to Product Recall
- Time and expense of the recall event
- Business interruption and resulting loss of profits
- Brand protection and future loss of sales
- Supplier relations
- Limited experience with recall actions
- Product traceability
- Increased regulatory authority and enforcement such as the FDA Food Safety Modernization Act which gives the FDA authority to order a recall
Benefits of maintaining product recall coverage are many and can help a business owner avoid a catastrophic loss. Carriers offer many options within a policy to cater to the specific needs of a business based on size, product and distribution footprint. Want more information? Contact the Assurance ‘A’ Team!
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