As implied by the name, product recall insurance covers expenses associated with having to recall a product from the market. Usually, this coverage is purchased by manufacturers in the food, beverage, medical, toy and electronics industries. It protects said manufacturers from the costs of notifying customers about the recall, shipping the product back and disposing of the products safely. Usually, product recall coverage extends to the firm/company itself. However, additional coverage can be purchased to cover the costs of third-parties.
Product recall insurance reimburses companies for financial losses that occur when the product is recalled—whether or not the recall was voluntary, since a regulatory body or government can recall a product as well. Likewise, the manufacturer can recall a product should they notice a defect or other concern. In either case, product recalls can be very financially costly.
For instance, intentional or accidental contamination of food products is not uncommon. In this instance, the product could cause serious bodily injury or even death if consumed. It's likely the manufacturer would be taken to court—resulting in costly lawsuits—and be faced with the logistical costs of a food recall event. This could include notifying the public and tracking down the contaminated product to get rid of it.
Without adequate insurance, a company could go bankrupt—especially small businesses. It's difficult for a company of any size to absorb such losses, let alone reinvest in fixing your brand's reputation after any product liability lawsuits.
Since standards differ across global supply chains, the risk of a product recall has increased dramatically in recent years. New product safety rules and changing protocols are constant, and it's more important than ever for companies to stay on-top of industry standards—while preparing for the worst with adequate coverage.
If you work in an industry where there is a chance a defective product could cause serious issues and be recalled, it's imperative you have the proper coverage. Still not convinced? Keep reading to learn the top five reasons why you should have product recall insurance.
5. Faster communication. With the internet and smartphones, it's much easier for consumers to monitor and report problems. Additionally, your brand's image can be lambasted by the public should your contaminated product go viral.
Protect your business with proper coverage. While your policy may vary slightly depending on your insurance provider, at Krywolt Insurance, one of our qualified insurance brokers will be able to help you establish how much coverage you need for your business. A few coverages offered by a product recall insurance policy include:
Depending on your industry and size of your company, you may want to consider additional endorsements to your policy that will provide further protection.
Worldwide coverage territory. This endorsement expands your coverage to all parts of the world—unless there is a region where this policy is prohibited by local laws, statutes or regulations. This coverage is helpful if you export internationally.
No. Product liability insurance only pays out the costs associated with a customer's lawsuit against you should one of your products cause bodily harm or property damage. It does not take care of the costs associated with recalling your product, like removing it from the market and rehabilitating your brand reputation.
Another key difference between product liability insurance and product recall insurance is that the latter can be used before anyone is harmed, whereas the former is the result of a suit filed against you. For instance, say you produce sunscreen; the product hits the shelves, and the complaints start rolling in about severe skin rashes as a result of your product; then, a handful of people sue, and you're forced to settle. That's covered by product liability insurance.
However, you still have to remove all the contaminated products, notify the public, destroy the defective sunscreen, manufacture new products, and work on recovering your brand image. These expenses are covered by product recall insurance.
If you sell a product that is particularly harmful to consumers in the event of a mistake, you may not be able to purchase product recall coverage. Also, it's important to know that product recall insurance can usually only be used if the contaminated product causes physical harm or property damage. If your product isn't harmful but just doesn't do what it's supposed to, you will not be eligible for reimbursement.
Usually, the list of products that are excluded from product recall insurance varies per insurance provider. That said, common excluded products include:
You may mistakenly believe that compensating dissatisfied consumers is as simple as providing a refund. This is not the case. There are numerous steps you'll have to take—all of which could be financially crippling if you have to pay-out-of-pocket. Some of these costs include:
Regardless of the item you produce or sell, it's important to act quickly in the event of a product recall. While you'll already be facing extensive costs and liabilities, the sooner you handle the problem the sooner you can start rehabilitating your brand and re-earning the trust consumers have in your company. If your business learns about a potential product defect, you may need to: