Product Recall Misconceptions and Considerations
Preparing for a Product Recall
It is a common misconception that product recall is covered under a general or product liability policy. Those coverages do a good job of covering bodily injury and property damage but generally exclude contamination and recall events. The addition of a product contamination or product recall policy protects your bottom line by covering the direct costs of recall, but transferring the risk is only one part of closing the recall exposure gap.
Regardless of size, every company offering consumer products—and sometimes those that offer products intended for commercial and industrial use—should establish solid product risk management policies and procedures for handling a recall or contamination event.
From vehicles to pharmaceuticals to food products, what might risk managers learn from mass media coverage of product recalls? For manufacturers of all types of consumer goods, they might serve as a wake-up call to the potential impact of a product recall event and a lesson in what should be done immediately to prepare for potential exposures. According to data from the U.S. Consumer Product Safety Commission (CPSC), there are an average of 35,000 consumer product-related injuries every year.
Costs from a product recall or contamination can easily become many millions of dollars. In addition to the physical expense of a recall, falling sales due to poor consumer confidence, brand rehabilitation expenses and potential shareholder lawsuits may also contribute to long-term losses.
Despite recall frequency and the potential for extraordinary costs, most companies don’t adequately plan, prepare and practice for—or buy insurance to protect against—product recall events. In addition to proper insurance coverages, careful planning is essential in managing the risk of a recall.