5 things to know about product recall insurance

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The United States accounts for over 50% of the global commercial liability insurance market, with $86.6 billion in premiums written in 2014 (the next highest market was the United Kingdom, at $11 billion). This trend remains on the rise. And while recalls may be considered rare, the legal liability and extreme financial loss associated with tangible products has created a necessary market for the transfer of risk.

If you’ve already got product liability insurance, you’re ahead of the curve. But did you know that product liability insurance does not protect you in the event of a product recall?

Who needs product recall insurance?

Even if you’re not actively engaged in the manufacturing process and you sell only products or component parts, you need to 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, without “deep pockets”)
Larger manufacturing companies (complicated branding and global supply chains)
Distribution of products
Design of products
Sale of products

Product Liability Insurance vs. Product Recall Insurance
Product exposure/risk area	Product liability covers	Product recall covers
Manufacturing, assembly or production flaw	X
Design defect	X
Legal fees, medical costs, compensatory damages	X
Defective instructions, labeling or warning	X
Misleading or marketing	X
Strict liability (showing of negligence not required) involving a plaintiff	X
Advertising and notification to launch the product recall		X
Shipping costs to collect recalled products		X
Wages paid to extra personnel or overtime paid to personnel to recover, collect or repair recalled product		X
Product disposal and destruction costs		X
Product replacement, repair and distribution costs		X
Extra costs incurred to store or warehouse recalled products		X
Compensatory damages to a third party (usually a party that incorporates your product, such as an airbag in a car)		X
Fees to wholesalers, distributors and retailers of the recalled product		X
Professional crisis management consultation to assist business with media relations and brand restoration		X
Reputation mitigation and public relations efforts to restore public image of the brand

Product liability insurance coverage

Product liability offers financial protection if property damage, personal injury or death occurs (to third parties) due to the use of your product. 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, even in cases of product misuse.

Product liability covers most duties to defend and compensatory damages, but the complex layers of risk exposure created by a product recall can bankrupt a business.

Product recall insurance coverage

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 for refund to the consumer. 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 are they going to sue? The short answer – 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. Not only are you involved in a multi-layered legal battle where everything you say or do can be used in court as part of discovery, but 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 the losses and risk mitigation efforts needed to recover a product from the marketplace for repair or disposal. It can assist with coverage to address:

Added operational expenses related to the logistics of recalling or repairing your product
Business interruption losses suffered by the other businesses affected by your product recall
Financial losses suffered by other companies due to your recall (similar to business interruption insurance, but for third parties)
Crisis consultation for the purpose of restoring your brand image and public perception

A word about brand image

Product recall insurance offers coverage options related to direct and indirect expenses suffered by your business. It’s easy to quantify direct expenses because numbers are attached. But don’t dismiss the high cost of indirect expenses.

Direct expenses

Direct expenses include costs related to shipping, notifying customers, added warehouse/storage expenses, product retrieval, shipping and disposal.

Indirect expenses

Indirect expenses are not as easy to quantify. In fact, indirect expenses can outweigh direct expenses pretty quickly. For example, how much expense is associated with a total loss of your brand’s reputation?

Take the Takata airbag recall in 2014. Takata is considered the most complex and costly safety recall in U.S. history. It affected over 40 million vehicles, and the defect caused the death of 24 people. Ultimately, Takata filed for bankruptcy, yet the long-term cost to consumer health and business income losses connected to Takata is still unfolding.

Business changes or questions – contact your agent

Talk to your agent about the products that you handle. Even if you already have product recall insurance, be sure to mention any changes regarding distribution stream, global expansion or new products. All of these things can affect the type of coverage you need.

Manufacturing Insurance that Fits Your Business

Kapiloff Insurance knows your industry, and can match you up with the custom coverage you need to protect your business when the unexpected happens. Through our innovative approach we represent a large network of insurance companies, and are always ready to tailor a policy to your needs.