Understanding Three Basic Perils of a Product Recall


        Preparing for a Product Recall

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It’s helpful to understand the three basic contamination perils when designing a risk management program that provides the best protection for the least cost.

     • Malicious tampering
Intentional contamination is prone to publicity, so it may seem common. In reality, malicious tampering is rare, but when it strikes, it tends to be a very severe loss. Managing this risk exposure can be difficult, as motives vary widely.

     • Accidental contamination
Is an unintentional error in the manufacturing, packaging or storage of a product. This includes mislabeling of ingredients, contamination by a foreign object or chemical, etc. This peril is the most common, but the majority of incidents are discovered prior to shipment. Therefore, these events receive very little publicity. As opposed to malicious tampering, this peril has very high frequency but usually relatively low severity. While most accidental contaminations are small events, historically the largest losses have been due to accidental contaminations.

     • Product extortion
Is the most difficult peril to characterize. Its frequency is between that of malicious tampering and accidental contamination. Its severity, however, is more difficult to quantify. Most extortions are amateurish hoaxes but may evolve into outright tampering cases, which can be very costly.

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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