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Do You Actually Have Recall Coverage?

Wednesday, April 1, 2020

By: Dan Galos, Sales Executive / Horton Risk Advisory Solutions

Does your business have a Product Recall policy? Which situation do you identify your business with, based on the answers below?

1.“No, I don’t need Recall coverage because I’ve never had a recall.”

    • It doesn’t take much to see why this is an illogical line of thinking. So for now, we’ll move on from this one. If this is your answer, I urge you to re-evaluate your risk management practices and continue reading below to see the potential uncovered exposures that may exist without a Recall policy in place.

2. “I think I already have Recall coverage included in my business owner’s policy.”

    • If this is your answer, you probably don’t have recall insurance! Please read on, so you’re not caught by surprise if your company is involved in a recall event.

3.“Yes, I have a separate Product Recall Liability policy in addition to my business owner’s policy.”

    • Congratulations on exercising great risk management! This article isn’t directed at you, but please feel free to continue reading.

Product recall events and associated costs have increased in the last ten years due to a few significant factors: increased diligence and sophistication of first and third-party testing, more powerful enforcement mechanisms resulting from regulatory bodies, the rise of “precautionary recalls,” larger settlements resulting in a higher number of class-action lawsuits, and more.

If you’ve experienced a recall or know of a business that has, you know just how devastating the cost can be. It starts with the cost of withdrawing products, then replacing the product, notifying customers, damages to your brand and reputation, hiring attorneys and crisis consultants, third-party liability damages, the list of expenses goes on. It’s vitally important for manufacturers and production facilities to protect themselves by procuring Product Recall liability insurance and not simply Withdrawal Expense coverage. Let’s dig into what I mean here.

Product Withdrawal Expense vs. Product Recall Liability

When business owners say that they have “recall coverage,” what they are referring to nine out of ten times is what’s called Limited Product Withdrawal Expense or some similar variation. This is not an actual recall policy and has minimal coverage included. I call this a “throw-in” coverage because the limits are very low, usually $25k, and the coverage offered is minimal.

So what is included here? Limited Product Withdrawal only provides coverage for direct first-party losses in a recall event. These would potentially be things like:

  • notification/communication to customers
  • cost of recovering your product from customers
  • overtime for employees
  • cost of product disposal

In a recall event, it is important to have coverage for these losses, but your $25k limit will be exhausted very quickly. Furthermore, your business would not be covered for any indirect first-party losses or any third-party losses at all from a recall. This is where the real expenses begin to add up.

A simple Limited Products Withdrawal form does not cover any of the following. However, a well-written Product Recall Liability policy would provide ample coverage limits for:

  • Cost to Repair, Replace, Refund (RRR)
    • Refunds to customers
    • Repairing and returning product to customers
    • Replacing products
  • Cost of unfinished stock that can’t be repaired
    • Business Interruption
    • Earnings lost due to covered incident
    • Extra expenses needed to continue operation of business
  • Consulting fees
    • Crisis consulting and management
    • Media and PR
    • Loss mitigation
  • Third-Party Liability
    • Legal defense costs from investigation, negotiation, settlement, or defense of the lawsuit
    • Customers costs incurred by recall of your product
    • Cost to re-establish brand reputation
    • Third-party business interruption
    • Third-party extra expense to maintain ongoing operations

The most common reason businesses seek options for a new Recall Policy is usually due to the start of a new customer relationship that requires this coverage. Big box stores and large retailers will often send standardized contracts to potential vendors in which they ask for high limits of Recall Coverage. Sometimes, a customer may even remove the requirement entirely or reduce their requirements.

If the requirement is non-negotiable, but the increased cost to add this policy is still a concern, there is still hope. Product Recall policies can be structured in many different ways to match what you feel are the most significant exposures to your business. We have helped clients drastically reduce their insurance spend by building a custom policy based not on total sales, but on where they felt the highest risk was. If you’d like to learn more or are interested in what a Product Recall policy would look like for your business, please reach out to me directly.

Material posted on this website is for informational purposes only and does not constitute a legal opinion or medical advice. Contact your legal representative or medical professional for information specific to your legal or medical needs.