Product Recall Insurance


        Preparing for a Product Recall

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Insurance for first-party losses caused by product tampering and contamination incidents are broadly labeled as product recall insurance. Product recall policies help to cover the additional costs of a recall, including product loss, costs to withdraw the product from market, product disposal, product testing, overtime wages and crisis management—costs that can be devastating because they arise at a time when a company’s revenues are typically hardest hit.

There are several coverage forms, each designed to isolate some component of first-party product exposure. Work with Scirocco Group to ensure your product recall policy provides indemnity for:

     • Recall expense.
This out-of-pocket expense is associated with executing a large-scale product withdrawal. It includes costs like extra temporary employees, overtime, public safety messages, special testing and handling, destruction and disposal costs and crisis management and/or PR consulting fees.

     • Replacement cost.
As the name implies, this is the cost of replacing any product that had to be destroyed. This includes the cost of materials, labor and overhead directly associated with producing the product.

     • Lost profits.
This indemnifies the insured for profits which would have been earned on the withdrawn products and also for profits that would have been earned on future product sales but which were not earned because of resultant future sales declines. This is usually limited to a specified time period.

     • Brand rehabilitation expense.
Most underwriters will also indemnify the insured for necessary rehabilitation of the recalled product’s consumer image. This includes costs like extra advertising, extra expense to rush a new product to market and special promotions to rebuild public trust in the manufacturer and its products.

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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