Product Recall Insurance

In the Food, Beer, Toy Business? Here’s Why You Need Product Recall Insurance

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The Food and Drug Administration announced recently that it plans to notify the public more quickly when a food or medical product has been withdrawn from market.

product recall insurance

CCIG’s Scott Carlson

In fact, the government’s warnings will not only come more quickly, but increasingly will be issued even before it has wrapped up its more-complex evaluations.

FDA-ordered recalls are all-too-common, of course.

In fiscal 2017, the FDA recalled more than 9,000 products, including nearly 1,500 Class I recalls of products it believed posed a “reasonable probability” to cause serious adverse health consequences or even death.

To those of us in the insurance business, these figures naturally prompt a fundamental question: are you covered for that?

If you’re a business that manufactures food, beer, tires, toys, anything at all, really, it’s imperative to consider recall insurance.

A product recall can hit any company, even those with the best safety records, manufacturing and operational controls. Why? Because of nothing more than the inevitability of human error.

Recalls can hit any company, regardless of size or sophistication. Just ask Samsung, Takata, General Motors, Johnson & Johnson, Toyota, Pfizer and countless others.

The risks posed to manufacturers by their own defective products is, in fact, one of the greatest perils they face.

According to one major insurer’s recent study, defective products have caused insured losses in excess of $2 billion over the past five years, making them the largest generator of liability losses.

So, what does recall insurance do and how does it work?

For starters, it covers the cost of crisis management consultants, because managing a product recall is as much about protecting your brand as it is about the coordination of the recall.

It also can cover business interruption losses and associated additional costs of continuing manufacturing elsewhere. If, for example, a listeria outbreak forces a food company to close a plant and cease production, these policies can cover the cost of using an alternative plant or competitor to produce the goods.

Product recall insurance typically kicks in when a product causes actual bodily injury or property damage, or poses an imminent risk of doing so. But it can also be extended in some circumstances to include other triggers, such as malicious tampering in the food and beverage sector.

In the automotive sector, the main trigger is typically bodily injury and property damage, but policies can also include product impairment coverage, which kicks in when a product is recalled because it fails to perform the function for which it was manufactured.

Thanks to stricter regulations, there’s hardly any doubt we’ll see rising numbers of recalls in the years ahead. But that’s not the only factor driving this trend. Complex global supply chains are part of the issue, as are growing consumer awareness and even the rising influence of social media.

One note of caution in all of this: When you’re considering a recall policy, be especially careful to review coverage triggers. Most policies will go to work if your product has caused or is reasonably considered to have caused bodily injury or property damage. However, with the FDA (and other regulators) ready to issue a recall without an illness or injury occurring, some policies might fall short. In other words, it’s critical to understand exactly what the insurance company will cover and when.

Scott Carlson is a Vice President at CCIG. Reach him at ScottC@thinkccig.com or 720-330-7925.

CCIG is a Denver-area insurance brokerage with the full-service capabilities of a national brokerage. We do more than make sure you have the right policy. We also help you manage your long-term cost of insurance with our risk and claims management expertise and a commitment to service excellence.

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