Develop Your Risk Management Strategy with Product Recall Insurance

What can a risk manager learn from today’s major recalls and the large amount of media attention they attract?

For consumer goods manufacturers and distributors, it serves as a wake-up call to the impact of a product recall event and a lesson in what should be done now to prepare for potential exposures.

Despite recall frequency and the potential for extraordinary costs, most companies don’t adequately plan, prepare, practice for or buy insurance against product recall events. In addition to proper insurance coverages, careful planning is essential in managing the risk of a recall.

First-party vs. Third-party Exposure

There are two categories of exposure to loss 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 the 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.

Risk Management Considerations

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 a company’s bottom line by covering the direct costs of a recall, but transferring the risk is only one part of closing the recall exposure gap. Every company with products on the market, regardless of size, should establish solid product risk management policies and procedures for handling a recall or contamination event.

Not All Policies Are Equal

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 hit the hardest.

There are several coverage forms, each designed to isolate some component of first-party product exposure.

Work with Lawrie Insurance Group Inc. 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, labour 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 which 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.

Learn More About This Important Coverage

In addition to transferring risk, thorough risk management practices are essential in minimizing the exposure and the cost of a recall event. The product recall insurance marketplace is highly specialized; the team of professionals at Lawrie Insurance Group can help secure the coverage you need and can collaborate with you to develop a business contingency plan that meets your needs.

Contact Aaron MacFarlane at Lawrie Insurance Group by phone at 1-800-661-1518 or email amacfarlane@danlawrie.com to discuss your risk management strategy. LinkedIn: Lawrie Insurance Group – Manufacturing Specialty Group.

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Lawrie Insurance GroupRanked in the top 5% of independent brokerages in Canada, Lawrie Insurance Group is a privately owned and operated insurance brokerage with over 100 employees specializing in all areas of personal and corporate property/casualty insurance, employee benefits, financial services, and group retirement products.

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This is a post by a Guest Author. Disclaimer: The author's views are entirely his or her own, and don't necessarily reflect the opinions of Mentor Works Ltd.

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