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 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 policy – 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, beverage, medication, toys, electronics, and vehicles.
Product recall insurance indemnifies the insured for those sums that may legally obligate 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. Therefore, two parts of product recall coverage are –
- Direct Expense or First-Party Expense
- Notification of customers
- Shipping costs
- Warehouse and storage expense
- Cost to dispose of products
- Cost of extra personnel required to conduct the recall
- Third-Party Expense
- Recall expenses of the third party for the recall of any product that uses your product. That is including the cost to repair or replace 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 does not need when you sell products under your own label.
Optional add-ons available in product recall 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 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 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 prohibit by local laws, statutes, or regulations.