Preparing for a product recall

For manufacturers of all types of consumer goods, product recalls or contamination can easily cost millions. These costs can include product loss, costs to withdraw the product from the market, product disposal, product testing, overtime wages and crisis management.

Despite recall frequency and the potential for these extraordinary costs, most companies don’t adequately plan, prepare and practise for – or buy insurance to protect against – product recall events. In addition to proper insurance covers, careful planning is essential in managing the risk of a recall.

Types of Exposure

There are two categories of exposure for a company faced with a product recall incident: first-party operational losses to the company and third-party liability losses to injured persons.

Unlike third-party losses, first-party loss is often overlooked. In addition to initial recall expenses, the potential long-term losses from the damage to a company’s reputation and loss of sales may continue for months or even years.

Misconceptions and Considerations

It is a common misconception that product recall is covered under a general or product liability policy. Those covers do a good job of covering bodily injury and property damage but generally exclude contamination and recall events. The addition of a product contamination or product recall policy protects your bottom line by covering the direct costs of recall, but transferring the risk is only one part of closing the recall exposure gap.

Regardless of size, every company offering consumer products—and those that offer products intended for commercial and industrial use—should establish solid product risk management policies and procedures for handling a recall or contamination event.

Product Recall Insurance

Insurance for first-party losses caused by product tampering and contamination incidents are broadly labelled as product recall insurance. Product recall policies can help to cover 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 — costs that can be devastating because they arise at a time when a company’s revenues are typically hardest hit.

There are several cover forms, each designed to isolate some component of first-party product exposure. We can work with you to ensure your product recall policy provides indemnity for:

  • Recall expense.
  • Replacement cost.
  • Lost profits.
  • Brand rehabilitation expense.

In addition to transferring risk, thorough risk management practices are essential to minimise the exposure and the cost of a recall event. The product recall insurance marketplace is highly specialised. Our team of experts can help secure the cover you need and collaborate with you develop a business continuity plan that meets your specific needs.

 

 

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