Product recall is a request from the manufacturer to return a product after the discovery of safety issues. Or product defects that might endanger the consumer or put the maker/seller at risk of legal action. The product recall insurance is provided as an add-on to the product liability insurance policy.
Product recall insurance within the product liability policy covers expenses associated with recalling a product from the market if it poses an imminent threat of bodily injury or property damage. It does not provide coverage for defective products that simply do not work. The trigger for product recall insurance is the same as that for product liability insurance – bodily injury and property damage.
As long as the property damage or bodily injury trigger is met, recalls can be voluntary (the manufacturer notices a defect that is unlikely to force an involuntary recall) or involuntary (required by a regulatory agency or the government), and can be costly. A company could be forced into bankruptcy if it doesn’t have product recall coverage, especially smaller companies. While many large organizations have the resources to address the impact of a product recall, smaller organizations simply cannot absorb such losses.
The risk of a product recall has increased dramatically in recent years due to increasing numbers of global regulatory standards and an almost constant roll-out of new product safety rules. Therefore, the most common products that experience product recalls are child safety seats, cosmetics, food, beverages, medication, toys, electronics, and vehicles.
Product recall insurance indemnifies the insured for those sums that may legally obligate them to pay as compensatory damages. Arising out of recall, removal, recovery of possession or control, or disposal of the manufactured product, sold, marketed, handled, or distributed by the insured.
The two parts of product recall liability policy coverage are –
First Part
- Direct Expenses or First-Party Expenses
- Notification of customers
- Shipping costs
- Warehouse and storage expense
- Cost to dispose of products
- Cost of extra personnel required to conduct the recall
Second Part
- Third-Party Expense
- Recall expenses of the third party for the recall of any product that uses your product. That includes the cost of repairing or replacing the product
- Business Interruption (lost income and expenses) of third parties using your product
- Cost to repair and rehabilitate third party’s reputation
- Additional cost to purchase substitute products to replace your products
Third-party product recall coverage should be purchased if –
- There is a third party between your company and the end-user of the product because the third party can claim loss of income or reputation due to the recall.
- Also, the company manufactures a component or finished product, sold under a third party’s name.
- Thirty-party coverage is not needed when you sell products under your label.
Optional add-ons available in the product recall liability policy are –
1. Impaired Property Endorsement – This coverage endorsement responds if a third party’s product cannot be used or is less useful because it uses insured components or ingredients and can be restored by replacement, repair, adjustment, or removal of the insured’s component or ingredient. The trigger for the impaired property is your ingredient or component has potentially made another product less useful.
2. Cost To Refund, Repair, or Replace Endorsement – This coverage amends first-party coverage to include the costs to refund, repair, or replace the insured’s
3. Worldwide Coverage Territory – This endorsement expands coverage to all parts of the world. So, with the exception of regions in which this policy might be prohibited by local laws, statutes, or regulations.
About The Author
Rajesh Mehta
MBA Finance
Rajesh has become a distinguished expert in liability insurance with over 8 years of extensive experience in the insurance industry. As a dedicated writer for SecureNow, he crafts insightful and informative blogs and articles that help businesses and individuals understand the nuances of liability insurance, from policy details to industry trends. Throughout his career, Rajesh has developed a profound knowledge of various types of liability coverage, including professional, general, and product liability insurance. Their expertise enables them to break down complex topics into accessible content, making it easier for readers to make informed decisions about their insurance needs.
