Product Recall Types of Exposure

Product Recall Types of Exposure


        Preparing for a Product Recall

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     There are two categories of exposure for a company faced with a product recall incident: first-party operational losses to the company and third-party liability losses to injured persons.

     Unlike third-party losses, first-party loss is often overlooked. In addition to initial recall expenses, the potential long-term losses from the damage to a company’s reputation and loss of sales may continue for months or even years. Since these losses can be catastrophic, this article focuses on ways to manage first-party incident exposures.

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.


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