Product Recall Insurance Park of Product Risk Planning
By: Julie Davis, CIC, Risk Advisor – Property & Casualty
December 20, 2014 – There may be no word that strikes greater fear in the hearts of individuals in the manufacturing/processing industry than “recall.” Mere consideration of the term may mean that someone has been made ill or possibly died from consumption of or exposure to a product. The response must be inordinately fast and include coordination with federal and state governmental agencies as well as other companies who sit both upstream and downstream of your position in the distribution chain of the product at issue. The aftermath can leave injured consumers and damaged reputations. The monetary costs may include lost profits, recall expenses, civil damages and potential criminal action. Despite excellent quality control, you may find yourself swept into a recall. Advance planning for recalls can make the difference in the survival of your company.
While a written recall plan has long been a regulatory requirement, planning for a recall should include much more than a template form in a file. Recall planning should include record-keeping steps to be taken well in advance of any concerns, but which will make any recall effort more effective. A team of advisors who will serve in various roles in the planning, execution and post-recall process is also a necessity. It should also include Product Recall insurance coverage.
Cost of Recall
The next step to consider after internal procedures are consistently implemented is how much will this cost the company? Loss of sales, not only the company’s lost profit, but that of your customers should be considered. Also consider the damage to the company’s reputation and possible effect on future sales, the added expense for disposal, replacement product, time and mental anguish by management and employees; these are all part of the cost. Many companies look at funding this possible exposure with an insurance policy, but in today’s market, most Commercial General Liability (CGL) policies will not cover a loss in a Product Recall scenario. Do not mistake Product Liability coverage for Product Recall coverage, they are not the same. Some insurance carriers may offer a sub-limit to cover the expense of removal and disposal of the product as part of the CGL, but these amounts may only cover a fraction of total cost.
Product Recall/Contamination Insurance
There are insurance carriers that have policies that pertain specifically to the issue of product recall, contamination and/or tampering. These stand-alone policies may also include crisis management consultants. Product Recall/ Contamination policies are not standardized policies, so one insurance company’s coverage may look drastically different than another.
The following are key issues of the policy, and policies may differ on the definitions. Each policy must be carefully read and understood by policyholders to insure they are purchasing what they need.
- Loss of sales revenues
- Customer loss of gross profits
- Government recall
- Voluntary recall
- Adverse publicity
- Rehabilitation expenses
- Extra expense
- Defense costs
- 3rd Party coverage
- “Pay on behalf” or reimburse language
Depending on who you speak with, the chance of having a serious product recall occurrence is not a matter of if, but when. Serious consideration of a proper game plan in the event could be crucial for the company’s survival. Is this a cost that the company can absorb or is it more cost effective to purchase an insurance policy for the risk? Recently, many large distributors and retail corporations are requiring Product Recall/Contamination coverage in their contracts. In any event, as part of your company’s recall procedure, add an insurance policy review by a competent insurance professional and review all contracts with suppliers and clients regarding the insurance expectations.
IBTX Risk Services can assist your company with Product Reputation, Recall and Contamination Insurance offering comprehensive insurance coverages for your business or organization. IBTX understands your potential risk exposure and stands ready to help you make informed decision about how to protect your customers, your supply chain, and your bottom line. Contact us at 800.880.6689 to setup your policy today.