You may be getting insurance based on contractual requirements outlined by big box stores or online retail platforms. Oftentimes these contracts don’t talk about additional coverages, such as product recall insurance, that are critical in protecting your business from lawsuits and claims.
A product recall is when a defect in a product could harm consumers, hinder functionality, or lead to lawsuits. The product is then asked to be removed from stores so it can be exchanged, replaced, or discontinued. Product recall insurance can help your business legally and financially in the case of a recall.
Product recall insurance is designed to cover the cost of removing a product from the market due to a recall triggered by the risk of bodily injury or property damage that may be sustained from product use.
In other words, if your product is found to have a risk or history of causing bodily harm or damages, it may be recalled. Product recall insurance would then help you cover the cost to remove the product from stores, warehouses, customers, and production.
Product recall insurance does not cover the loss of funds from a recalled product. For example, you need to cease the sale of a product and ask all sellers of the product to return it to your company. Product recall could help you pay to inform sellers and the cost to mail the products back to you. However, it would not cover the lost revenue you may have made from the products you had to pull from the shelves.
Product recall insurance can cover financial losses sustained when one or more of your products is recalled.
Most product recall policies will have first- and third-party coverage. First-party coverage provides insurance to the person or business named on the policy. Third-party coverage allows others you have harmed to claim against your policy.
Because product recall policies are not standardized, there can be varying differences in the coverages and definitions of coverage from company to company. It is extremely important to discuss your needs and review the options available to make an informed decision to protect your business.
Any business that imports or manufactures products for consumer or industrial use have a product recall exposure.
Although product recall coverage is not mandatory, it is a coverage that should be considered. Product recall insurance can protect your business from the reputational and financial harm a recall can cause.
An increase in regulatory activity from agencies and lawmakers is threatening business’s reputations and financial success. According to Insurance Journal, there were 710 recalls in the first quarter of 2022. Additional highlights provided from the report were:
In short, no: product liability insurance does not include product recall insurance. Product recall insurance is typically an additional coverage you can add onto a product liability insurance plan.
Where product liability insurance is designed to cover you for bodily injury or property damage caused by the use of your product, product recall insurance is designed to cover expenses associated with removing a product that has or would cause bodily injury or property damage to a third party.
Let’s say you are a manufacturer of pre-packaged foods and have 5,000 units in the market. You are notified that several people have become ill due to your product. Your product liability insurance would respond to these bodily injury claims, but you have thousands of units from the same batch on the shelves across the nation.
In order to reduce your exposure to more liability claims, you need to pull these products. Your product liability insurance will not cover your recall expenses, so you will be responsible for the recall costs without product recall coverage. How much could your product recall expense exposure be?
A survey of food product recalls conducted by the now Consumer Brands Association in 2011 found that the average food recall cost approximately $10 million. In the report, 81% of respondents reported that the consequences of their recall were either “significant” or “catastrophic.”
Quality Assurance & Food Safety stated that in 2013 a produce recall that resulted in no fatalities and illnesses, and involved fewer than 250,000 units, cost a medium-sized fresh-cut firm more than $2 million.
In any case, the costs are significant, and it would be difficult for any business to withstand a financial hit of this magnitude.
Many carriers provide an option to endorse, or “add,” product recall coverage onto your general or product liability insurance policies. This may appear to be a good and economical solution, but you need to understand the extent of the coverage and its limitations.
One of the challenges with adding a product recall endorsement is that it usually only provides a sub-limit of coverage. This means it is a lower limit built within the coverage endorsement that differs from your policy’s liability limit.
The typical sub-limit for product recall is $25,000 to $50,000 of coverage. This is not very much when you consider recalls can cost hundreds of thousands of dollars (if not more). You could say it’s better than nothing, but in the grand scope of things it probably isn’t enough to properly take care of a recall claim.
In addition, most product recall endorsements will only cover first-party expenses and do not include third-party recall coverage. This can expose you to additional costs not covered by the recall endorsement.
We recommend purchasing a stand-alone product recall policy for maximum coverage. This will provide you more flexibility in policy limit options and provide broader coverages for first and third-party exposures.
Please contact one of our licensed insurance professionals at 844.520.6993 to discuss your product recall options.