Product recall insurance is a kind of insurance that assists companies in paying for the expenses associated with removing a faulty product from distribution. It can assist in covering expenses like shipping, warehousing, disposal, and restocking. When a product poses serious risks to consumers’ health or even results in their death, product recall insurance is activated.
In addition, the chance of product recalls has grown over time due to stricter international safety and regulations. The purpose of product recall insurance is to cover businesses against monetary loss and bankruptcy brought on by product recalls.
How Does Product Recall Insurance Work
Product recall insurance covers the costs associated with recalling a product that is inaccurate, dangerous, or defective. It is an endorsement that is added to a commercial general liability (CGL or GL) insurance policy. This is to support the product liability coverage that pays for lawsuits and other legal costs incurred when a product causes harm to a consumer or causes property damage.
Moreover, it is possible to purchase a separate policy in certain situations. A recall is a legal action taken by a business to prevent damage to products due to contamination or defects. In food and agricultural products, a recall is triggered when actual or imminent bodily injury or property damage occurs.
The business investigates the cause, the number of affected products, and whether any suppliers or vendors are responsible. The insurance carrier will assist in the recall process, coordinating with regulatory authorities, notifying consumers and retailers, and overseeing the retrieval and replacement of defective products.
Product recall coverage can also provide business interruption coverage, reputation, and crisis management, and expenses related to properly discarding faulty products and materials. The insurer will pay the claim up to the policy limits. However, the business is responsible for any deductibles or other costs not covered under the policy.
Types of Product Recall Insurance
Product recall coverage covers the following two categories of product recalls:
Voluntary product recalls
When a manufacturer discovers a flaw in a product, they can choose to recall it on their initiative without being required by law. This is known as a voluntary recall. Although there is no legal requirement for these recalls, it is still vital to consider them if you want to keep your customer base trusting you.
Involuntary product recalls
When companies are forced by government regulators to recall specific products due to health or safety concerns, this is known as an involuntary recall. For instance, the Food and Drug Administration may demand an involuntary recall of a food product if they discover a contamination or safety hazard that puts consumers at risk.
How Much Does Product Recall Insurance Cost
Some of the factors that will affect the cost of product recall insurance are numerous. The factors influencing insurance coverage include the industry, product type, risk level, coverage limits, and the company’s past claims experience. The price of product recall coverage can be influenced by factors such as the chosen deductible, policy coverage, and the company’s risk management procedures. Moreover, companies that are more likely to experience product recalls will often pay higher premiums.
Reasons to Get Product Recall Insurance
If your company doesn’t have product recall coverage, it might have to file for bankruptcy. A lot of entrepreneurs are unaware of how costly and time-consuming it can be to handle a product recall. The following are the top 3 reasons a company should consider getting product recall insurance:
Recalls are still high
Events involving product recalls occur practically daily. Rarely does a day pass without news of a company’s goods being recalled for safety or illness reasons. In the fiscal year 2023, the Food and Drug Administration (FDA) disclosed almost 5,000 product recalls. Moreover, devices account for the majority of product recalls while food and cosmetics make up the second-largest category.
Government oversight
There is more government oversight than ever before. As previously stated, stricter product safety regulations are being implemented by the US government. Authorities now have additional regulatory and enforcement tools, especially when it comes to infant products and toys. To stop food-borne illnesses, the Food Safety Modernization Act, which was passed into law in 2011, established stricter regulations and monitoring standards.
Recall expenses
Recall expenses are unaffordable. The price of a product recall starts to rise as soon as the identified product is taken off store shelves and shipped. Products frequently need to be taken out, destroyed, disposed of, and then replaced.
What Does Product Recall Insurance Not Cover
Lawsuits resulting from inappropriate, dangerous, or defective products are not covered by product recall insurance. A commercial general liability (GL) policy’s product liability section would cover these kinds of claims. Product recall coverage pays a company’s first-party costs directly related to fixing hazardous conditions and reducing the risk of further losses.
How to Get Product Recall Insurance
To get product recall insurance, reach out to general liability (GL) insurance providers, brokers, and agents to compare coverage limits and receive quotes. Simply get in touch with your current agent or company if you already have a GL policy and inquire about a product recall endorsement. It might be suggested that you maintain a different product recall policy, depending on your industry and product.