There is an ever-present danger looming over the shoulders of retailers and manufacturers. It happens time and time again, and in many cases, it winds up costing companies millions of dollars. I'm talking about a product recall.
The numerous costs associated with a product recall can be astronomical. In addition to the time and resources required to execute the recall itself and transport the product, you also have to alert consumers, distributors, suppliers and regulatory agencies. Your brand, your market share, and your cash flow can all take a hit. Add in any third party liabilities that could arise and your company could be looking at a financial disaster.
One of the biggest misconceptions about product recalls is how your insurance coverage will respond. Product recalls are not covered by your Commercial General Liability policy. With this in mind, could your company withstand the impact of a recall? Most companies could not and would need to extend their basic coverage to allow for the potential of a product recall.
There are two primary types of product recall coverage available to companies:
- Product Recall Expense Coverage
- Full Product Recall Coverage
The first, Product Recall Expense Coverage, is typically available under Commercial General Liability coverage as an add-on. The coverage must be requested, however, and special attention needs to be paid to the limit being purchased. This coverage is only going to provide a company with a limited reimbursement, and most expenses incurred during a recall situation will fall outside of the purview of these policies. As an example, imagine you have a toy being recalled. This coverage would help with arranging the return of the product and some of the associated costs (packaging, transport, storage, advertising, announcements, or correspondence), but would not cover third party expenses, increased work costs, loss of profits, etc.
Full Product Recall Coverage is much more difficult to obtain and is often very expensive. This covers pre-recall expenses, recall expenses, third party expenses, loss of gross profits, rehabilitation expenses, increased working costs, and product extortion demands. It can also include crisis management, which can easily be one of the most expensive parts of a recall situation. This could come in the form of a phone line for people to call, marketing costs to manage your public image, and expenses related to maintaining the name and quality of the company.
Government oversight is becoming stricter and more aggressive. Don’t allow your company to fall victim to a product recall situation. If caught unprepared, it could mean bankruptcy for the vast majority of businesses. For more information about Product Recall Expense Coverage or Full Product Recall Coverage, contact a CapriCMW Risk Advisor.
Robert Shearar is a Client Executive, Vice President at CapriCMW. He began his insurance career in 2003 as an Associate Account Manager. Since then, Robert has held positions as a Commercial Marketer and Account Manager, specializing in complex manufacturing, construction, wholesale/distribution and commercial properties. His extensive expertise on the issues faced by these industries has proven to be a significant asset to his clientele in his current role.
This article originally appeared in the Fall 2016 issue of CMW Risk & Business Magazine.