There were almost 15 billion product recalls in 2022, according to the claims management service provider Sedgwick. That's a record-breaking number.
The legal liability and extreme financial loss associated with tangible products have created a necessary market for risk transfer.
Who needs product recall insurance?
Even if you’re not actively engaged in manufacturing and you only sell products or component parts, consider where you fit inside the liability chain when a product recall is triggered:
- Consumables (food, beverages, drugs)
- Consumer goods (appliances, electronics, clothes, children’s products, furniture, equipment)
- Component parts (parts contained within the larger whole of a complete product)
- Smaller manufacturing companies (vulnerable to financial loss, with shallow pockets)
- Larger manufacturing companies (complicated branding and global supply chains)
- Distribution of products
- Design of products
- Sale of products
Product liability versus product recall
Product liability insurance covers losses related to injury, property damage and lawsuits. Product recall insurance covers costs associated with recalling a product from the supply chain.
|Product exposure/risk area
|Product liability covers
|Product recall covers
|Manufacturing, assembly and production flaws
|Legal fees, medical costs, compensatory damages
|Defective instructions, labeling or warnings
|Strict liability involving a plaintiff (showing of negligence not required)
|Advertising and notification to launch the product recall
|Shipping costs to collect recalled products
|Wages paid to extra personnel or overtime paid to personnel to recover, collect or repair recalled products
|Product disposal and destruction costs
|Product replacement, repair and distribution costs
|Extra costs to store or warehouse recalled products
|Compensatory damages to third parties (usually those that incorporate your product, such as an airbag in a car)
|Fees to wholesalers, distributors and retailers of recalled products
|Professional crisis management consultants to assist with media relations and brand restoration
|Reputation mitigation and public relations efforts to restore the brand's public image
Product liability insurance
Product liability protects you financially if your product causes property damage, personal injury or death to a third party. If you produce, sell, design or distribute a physical product that can be consumed or used by a consumer, you are legally liable for that product. This is true even in cases of product misuse.
Product liability covers most duties to defend and compensatory damages, but the complex layers of risk exposure a product recall creates can bankrupt a business.
Product recall insurance
A product defect might be found to cause imminent danger to health or property. In these cases, you may decide to voluntarily recall your product for repair or refund consumers. Or you may be forced to recall your product involuntarily, based on a governing agency’s directive. This event would trigger a product recall policy claim. If there’s a recall, a lawsuit is soon to follow. Who will be sued? The short answer is everybody.
Everybody’s in the lawsuit pool — Now what?
A recall from the marketplace can be stressful, confusing and a liability in itself, if handled improperly. You aren't just involved in a legal battle where everything you say or do can be used in court as part of discovery. You’re also forced to communicate with the public and admit fault (on some level) regarding the product recall. This is where product recall insurance coverage can be invaluable.
Risk exposures related to a recall
Product recall insurance covers losses and risk mitigation efforts related to recovering a product from the marketplace for repair or disposal. It can help you address:
- Added operational expenses related to the logistics of recalling or repairing your product
- Business interruption losses to other businesses your product recall has affected
- Financial losses to other companies due to your recall (similar to business interruption insurance, but for third parties)
- Crisis consultation to restore your brand's image and public perception
A word about brand image
Product recall insurance offers coverage options related to direct and indirect expenses your business suffers. It’s easy to quantify direct expenses because numbers are attached. But don’t dismiss the high cost of indirect expenses.
Direct expenses include shipping, notifying customers, added warehousing and storage expenses, product retrieval, shipping and disposal.
Indirect expenses are not as easy to quantify. But they can quickly outweigh direct expenses. For example, how much would a total loss of your brand’s reputation cost you?
Take the Takata airbag recall that started in 2014. Takata is considered the most complex and costly safety recall in U.S. history. It affected 67 million airbags from over 42 million vehicles in the U.S. with an estimated 11 million left to replace as of the end of 2022. The defect caused the deaths of 24 people and injured 400. Ultimately, Takata filed for bankruptcy, yet the long-term cost to consumer health and business income losses connected to Takata is still unfolding nearly a decade later.
Business changes or questions — Contact your agent
Talk to your agent about the products you handle to see if your operations would benefit from product recall protection. Even if you already have product recall insurance, mention any changes to your distribution stream, global expansion efforts or new products. All of these things can affect the type of coverage you need.