Product Recall Insurance

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. 

Reasons You Should Have Product Recall Insurance

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. 

1. Product recall events happen almost every day. Since 2006, there have been approximately 200 to 300 food recalls each year in Canada. That doesn't even include toy, drug or mechanical parts recalls. No matter how diligent you are while producing your product, there is always a chance it could be recalled should standards change. 
2. Government monitoring gets more and more stringent. Increasingly, consumers care more and more about the products they purchase, use and consume. For this reason, the Canadian government works hard to ensure stringent standards are put in place. 
3. The costs for a recall can be crippling. We've mentioned it before, but it's worth reiterating. Expenses associated with product recalls can easily force a company into bankruptcy without adequate coverage—between dealing with the fallout, settling product liability claims and replacing all the contaminated products. 
4. Technological advancements. With the leaps and bounds the manufacturing industry has made with innovative technology, it's much easier to detect manufacturing errors. 

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:

• The cost of getting the product back. For instance, you may have to pay for social media advertisements and online news outlets. It also costs time and money to consult with a PR and content team to start rebuilding your brand's reputation.  
• The cost of damage to your product due to contamination. This coverage will cover the value of the contaminated product, particularly if it's been tampered with in any way and needs to be destroyed completely. 
• Loss of profits. This section of your insurance policy will reimburse processors and manufacturers, as well as their business customers (like a retailer) for loss of profits due to the recall—similar to how business interruption insurance compensates profit loss while your business is closed. 
• Extortion costs. In the event you're blackmailed over the potential product contamination, say by a disgruntled employee, this section of your insurance policy would cover the costs. 
• Rehabilitation expenses. Sometimes, a contaminated product can be saved and re-distributed, rather than simply destroyed. The subsequent costs of cleaning, reprocessing and pasteurizing would be covered by this section of your policy. 
• Crisis consulting. This coverage helps with brand messaging in the event of a recall, as well as customer notification, media response and physically getting the product off the shelves. Unless you have an in-house team, a consultant will help you navigate the process. 
• Self-insured retention. It's important that you consider a deductible amount that fits your business' risk and budget, as insurance companies typically don't get involved in a claim unless the product contamination or recall costs are more than the retention listed on your policy.

Additional Endorsements

Depending on your industry and size of your company, you may want to consider additional endorsements to your policy that will provide further protection. 

• Comprehensive product refusal. Sometimes, it's not your business that experiences a recall. But if another business does, say one of your suppliers or another person in your industry, and it affects your sales, this coverage will protect your profit loss. Say for example a strawberry farm sells contaminated berries; all other strawberries farmers may be affected if grocers cancel their orders. 
• Government recall. If a government agency has determined your product presents a danger of injury or death to consumers, this endorsement will bypass the manifestation clause—which requires symptoms to become evident within a defined period. This means you may have access to coverage sooner than is usual.  
• Third-party expense indemnity. This endorsement helps protect you from a customer liability claim, should they not agree with your insurer's assessment of their loss of profits and expenses due to your contaminated product.  
• Forensic accounting and claims service.  If you need to hire your own forensic accounting professionals to help calculate and prove the amount of profit loss to your insurer due to a product recall, this endorsement will cover that expense. 
• Impaired property. This endorsement covers you in the event that a third-party's product can't be used, or is less effective, because it uses your defective product as a component or ingredient—and can be restored by replacement, adjustment, removal or repair to your product. Whereas product recall coverage can only be used if the contaminated product causes immediate harm to a consumer, impaired property insurance can be used if your product has made another product less effective. 

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.

Is Product Liability Insurance the Same as Product Recall Insurance?

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. 

What Are the Key Exclusions of 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:

• Dietary supplements
• Automobiles
• Pet food
• Drones
• Infant carriers
• Cribs
• Tobacco and e-cigarettes
• E-bikes
• Software

Why is Product Recall Insurance Important?

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:

• Shipping, storing, disposing of and replacing faulty merchandise
• Implementing specialized testing to diagnose the cause of contamination or defect
• Hiring additional staff, or paying overtime, to complete the recall
• Notifying the public through advertisements, TV, print, social media and online news agencies
• Investing in a new PR campaign to restore your company's image

What Does a Product Recall Look Like?

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:

• Ascertain if the defect was due to a problem in the design, materials or labelling
• Identify if the defect is limited to a specific batch of products or all your products
• If the issue is with the materials, track down the supplier and let them know
• Notify your customers about the recall; If you're a small business, this could mean tracking down each person who purchased your product to try to keep a low profile; If you're a large company, like a food supplier, this may mean notifying the public 
• Pay to collect the defective products and replace them with new ones 
• Destroy or rehabilitate the defective products
• Inform relevant consumer protection groups 
• Track all products customers send back to you and provide a refund 
• Design and implement a plan to rebuild your brand reputation