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What Is Product Recall Insurance?
Managing a product recall can make or break your business – and its reputation. If you don’t remove a dangerous product from the market right away, it can not only harm your customers but also hurt your financial standing and public image. With product recall insurance, you’ll feel confident knowing that your business is protected from the financial impact of a product recall.
Product recall insurance is an endorsement for your business insurance policy. It’s designed to help reimburse you in the event of a recall for a defective product that you’ve made or sold. You may need to voluntarily recall one of your products if it’s found to be faulty or tampered with or if it caused or is at risk of causing bodily injury or property damage to a customer. This insurance covers your recall costs and provides risk management services to help prevent and lessen the impact of a product recall.
For example, food manufacturers need product recall insurance protection to help cover them if there’s a contaminated batch of product being sold in stores.
Be aware that product liability insurance is not the same as product recall insurance. If you have a general liability insurance policy, it can help cover product liability claims. However, only product recall insurance will cover expenses, such as shipping and waste disposal, from a recall.
How Does Product Recall Insurance Work?
Once a consumer product recall is initiated, your business may face a number of different costs to manage the situation. Product recall insurance coverage can help cover the costs you face during that process, including notifying the media, reputation management, payroll expenses for employees working overtime and costs associated with disposing and replacing the product. This coverage can also help with other expenses, such as reimbursing your business if you need to rent additional storage space and covering costs for extra transportation, accommodations and meals that are purchased during the product recall process.
There are two types of product recalls that are covered under product recall insurance:
Voluntary Product Recalls
Voluntary recalls happen when a manufacturer notices a defective product or issue with a product and recalls it without any legal mandate. These recalls are not required by law, but they are important to consider in order to maintain trust with your customer base.
Involuntary Product Recalls
An involuntary recall occurs when government regulators have required businesses to recall certain products for health or safety concerns. For example, if the Food and Drug Administration finds that a food product has a safety hazard or contamination that makes it dangerous to consumers, they may require an involuntary recall of that product.
Product Recall Insurance vs. Product Liability Insurance
While product recall insurance and product liability insurance often get mixed up, there are important differences between the two that you should know because of the impact that a product recall can have on your bottom line. Combining these two coverages is one of the best ways to fully protect your business.
Product Recall Insurance
Product recall insurance helps reimburse your business for any necessary expenses to recover your product after a suspected defect or danger causes it to be recalled. This coverage gives you protection in the event that you recall your product(s) voluntarily or if a government agency requires an involuntary recall. Although this type of insurance covers costs associated with a recall, it does not cover any customer lawsuits resulting from it.
Note: Product recall insurance is not automatically included in your general liability insurance policy. It’s an optional coverage you can add on as an endorsement.
Product Liability Insurance
Product liability insurance helps cover the costs of customer lawsuits claiming that a product you made or sold caused them bodily injury or property damage.1 Unlike product recall insurance, this coverage is already included in your general liability insurance policy. While product liability insurance helps cover customer lawsuits associated with your products, it does not reimburse expenses associated with managing a product recall. It’s a good idea for businesses to have both product liability insurance and product recall insurance to make sure you’re fully protected during a product recall.
Why Do I Need Product Recall Insurance?
Without the protection of product recall insurance, your business could be forced into bankruptcy. Many business owners don’t realize how expensive and time-consuming managing a product recall can be. Here are the top 3 reasons why a business should consider having product recall insurance:
1. Product Recalls Are Very Common
In 2021, there were close to 1 billion total units of products recalled in the United States.2 In fact, the number of product recalls for consumer products increased by 64% in the first quarter of 2022.3 Product recalls are becoming more common, and having the right type of insurance can help protect your business if it happens to you.
2. Product Recalls Are Expensive
Product recalls can be extremely expensive to manage. Sometimes, the costs force a business to shut down because of it. There are many different types of recall costs to be aware of, including those associated with:
- Removing the recalled product from store shelves
- Disposing of the recalled product
- Replacing the recalled product
- Paying employees for overtime, or hiring temporary staff
- Notifying the media
3. Government Intervention
Government intervention and oversight into consumer products is increasing, which could lead to more product recalls in the future. Product safety requirements for consumer goods like medicine, food, drink and automobiles are becoming more strict, making the likelihood of a product recall higher.
Who Needs Product Recall Insurance Coverage?
Product recall insurance is helpful for businesses in industries that are impacted frequently by product recalls, such as automotive, technology, food and beverage, pharmaceutical and medical device industries.4 The following types of businesses need product recall coverage the most:
- Manufacturers
- Wholesalers
- Retailers
- Technology manufacturers
- Metal manufacturers
- Plastics manufacturers
- Food processors
What Does Product Recall Insurance Cost?
Many factors will affect your product recall insurance cost, like the type of business you have, where you’re located and your coverage limits. Also, what you pay for product recall insurance will vary depending on what industry you’re in.
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Última actualización: 14 de julio de 2023
1 Product liability insurance coverage may not be available to all classes.
2,3,4 Insurance Journal, “U.S. Product Recalls Reach 10-Year High in Q1,” June 1, 2022
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