An introduction to product recall insurance

By Jack Durrant, Associate Director, BA (Hons) ACII and Lucie Dean, Senior Account Executive.

Firstly, let’s understand what a product recall event is. A product recall event happens when a product is withdrawn from the market for safety concerns. In most cases this is a voluntary action taken by the manufacturers and/or distributors alongside the official authorities and regulators, who can sometimes enforce a product recall. There are often significant financial costs to the business associated with this.

What is product recall insurance?

This type of insurance will provide financial protection for a business if a safety recall occurs, and covers:

• First and third-party recall costs, including transportation, storage, destruction, and advertising costs
• Costs to remanufacture and redistribute products
• Loss of sales 

Product recall insurance will cover you for every aspect of a product recall, redistribution, and advertising – so your business remains unaffected by a product recall event. One key thing about product recall insurance is that it can even deliver some rehabilitation costing, such as increasing promotional activity after a loss to re-establish sales, and other marketing activity to help rehabilitate the brand’s reputation.

Additional benefits of the policy are extensive, including access to crisis consultants to help you manage your way through the claim. The consultants will support you as you navigate the pressure from regulators, suppliers, and customers alongside a host of other issues which typically arise during a product recall.

Bear in mind that recall events aren’t small claims! For example, property claims can provide cover for small claims like damage to your property or theft, which might not render a business incapacitated. Comparatively, with a recall, particularly for non-diversified businesses where they are selling only one or two product lines, a recall event can be catastrophic, and can completely change the balance sheet for manufacturers and distributors – and in some cases can spell disaster.

How does product recall insurance differ from product liability insurance?

Sometimes product liability gets confused with product recall insurance, but it’s important for policyholders to know that recall is often an exclusion on product liability cover. Product liability is used for when there is damage or injury because of the use of a product by a third party. Product recall is a first party cover, and very distinct from product liability.

Mostly the product coverage is clear because of its apt name – however many people don’t realise how much further the cover goes than ‘just the recall’. People often assume that the policy will only protect the recall costs, however the wider costs can also be significant, and often larger than the costs of simply recalling the product from the market. The policy is designed to put the insured back into the position that they would have enjoyed prior to a loss. Just imagine the costs for example to remanufacture and redistribute your products, as well as advertising. 

You will no doubt have heard about the importance of business interruption cover. Product recall insurance can dovetail with traditional business interruption, which sometimes features within commercial combined insurance policies. Instead of covering loss for damage or non-supply from a material event like a flood or fire, product recall insurance would provide indemnity for the intervening period where you do not have the products being sold or a downturn in sales due to a recall event.

Who might need product recall insurance?

If you buy product liability insurance, you should be thinking about product recall. This isn’t just for large manufacturers and nationwide businesses with large distribution networks, but for all businesses with a manufacturing exposure. 

Take for example the UK sandwich manufacturer who was thought to be the source of a listeria outbreak. The regulators shut down their plant for more than 20 days whilst the outbreak was investigated before identifying that the source of the listeria was further down the supply chain and did not originate from the sandwich manufacturer themselves. While the site could eventually reopen after this discovery, no less than 48 hours later the company went into liquidation due to the impact of the investigation. Did you know that a recall policy could protect against this?

Types of clients we protect include manufacturers of food and beverages, automotive components, pharmaceuticals, cosmetics, medical devices and other consumer goods.
 

How much does product recall insurance cost?

Prices for this cover will depend on a business’ risk profile and many other factors, so it’s always worth speaking to a specialist if you feel you have exposure as a manufacturer or distributor. Often, we see a contractual requirement to buy product recall cover, especially in the automotive industry. 

Typically, minimum premiums start at around £25,000, however alternative options for SMEs are available. We encourage carrying out a benchmarking exercise to help give businesses an idea of the structure and premium we would anticipate they consider as a starting point.

Interestingly, there isn’t a ‘typical’ business that buy this cover. There are some large global businesses who choose to self-insure the risk, whereas some smaller regional businesses buy it as one of their core insurance products. The most important thing for businesses is to understand the cost of the cover and weigh this up against the benefits of taking the risk off the balance sheet. Considering the breadth of cover, many businesses are surprised at what we can provide for relatively little cost.

Is there anything to watch out for in product recall insurance?

Make sure that cover isn’t restricted to recall costs only. Our team of specialists are always happy to review policies and provide advice on what your cover will offer in the event of a recall event, so please get in touch with us or speak to your existing broker.