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Preparing for a Product Recall

From vehicles to pharmaceuticals to food products, there have been numerous high-profile product recalls that can serve as wake-up calls to the resounding impact a product recall event could have on your organization.

Costs from a product recall can easily add up to 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.

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 recall events.

Oftentimes a separate product recall insurance policy is needed that provides coverage 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, 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 needs to be replaced. This includes the cost of materials, labor, and overhead directly associated with producing the product.
  • Lost profits. This indemnifies the insured for profits that would have been earned on the withdrawn products and for profits that would have been earned on future product sales that were not earned because of resultant future sales declines. This is usually limited to a specified period.
  • Brand rehabilitation expense. 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 in the products.

In addition to purchasing insurance, thorough risk-management practices are essential to minimize the exposure and the cost of a recall event. The product recall insurance marketplace is highly specialized. Our team of experts can help secure the coverage you need and collaborate with you to develop a business contingency plan that meets your specific needs. Contact us today.

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