There are a number of concerns one should consider when determining if they are prepared for a Product Recall. The first being one's own knowledge about the subject (i.e. Do I understand what types of losses I am potentially facing? - or - In what ways will I need to respond to recall a product should the event arise?). The second is then possessing a plan of action to implement should a Product Recall be necessary.
One common mistake many businessowners make is that they assume (and we all know what that spells...) that Product Recall is covered by either their General Liability or Products Liability coverage that they already carry; which is INCORRECT.
To begin the discussion on Product Recall, we must first identify the two types of exposure one may have in an incident that necessitates the recall of a product, First Party and Third Party exposure. Third Party Exposures are most commonly thought of by businessowners as they are the more visible aspects of a product recall - the liability losses associated with injured persons. H0wever, First Party Exposures are those associated with the operational aspects of the recall itself and the financial implications can impact a business for months, or even years, beyond the physical completion of a recall.
Many Product Recalls are caused by Product Contamination. There are three basic types of contamination:
- Accidental Contamination: Just as it sounds, it is caused by an unintentional act (i.e. mislabelled products/ingredients, errors in packaging or storing, etc.). Typically found early and usually recieves less publicity than other types.
- Malicious Tampering: Intentional contamination of a product. It is relatively rare, but its financial implications are usually quite severe.
- Product Extortion: Many times can be a simple hoax but can also include actual tampering. It is between Accidental Contamination and Malicious Tampering in both frequency and severity of claims.
There are 5 key ways for a business to defend itself from Product Recall losses and they are listed below in order of priority (first listed being the most important).
- Be Committed to Quality
- Plan Ahead - Have a contingency plan in place
- Training - Make sure to test you contingency plan
- Respond Appropriately - Recall Consultants are never a bad idea
- Transfer Risk - Insurance
Insurance is considered by many to be a major roll in the prevention for and survival of a business through a product recall loss. Though this is actually not the case, it is important but should be considered the last line of defense and not the first or only line. But regardless of how well a business plans and works to eliminate Product Recall exposures, insurance is almost always part of the plan and as such I will outline a few coverage items to note. Remember that just like other specialty lines of insurance, not all Product Recall Policies are created equal.
Here is a list of things that can be covered by Product Recall Insurance, but are NOT always included in each policy.
- Recall Expenses: Most common coverage provided by Product Recall Insurance, but is typically NOT covered by standard General Liability and Products Liability policies.
- Replacement Cost: What good is it to pay to remove a product from shelves is you, the businessowner, cannot afford to restock those shelves with replacement product? This is a coverage that is easily overlooked and seldom not needed.
- Lost Profits: Similar to Business Income insurance for interuptions to your business, this coverage item will cover the net profit lost on the products recalled. This is especially important when one considers the additional overhead and expense associated with a Product Recall and how they are many times far from evening breaking even on the Recalled Products without this coverage.
- Brand Rehabilitation: Most products sustain losses to their brand value and extra efforts and money must be exerted in order rehabilitate the brand back to its pre-recall status. Many carriers will include coverage for these expenses as well, however your Insurance Broker must be knowledgeable and savy enought to negotiate for them on a clients behalf.
Product Recall Insurance is a highly specialized market and one should Ask the Experts at GDI Insurance Agency, Inc. by visiting www.gdiinsurance.com or calling 209-634-2929 in order to obtain an adequate coverage option.
Matthew Davis, MBA, CPCU, AAI