Are You Prepared for a Product Recall?
What can a risk manager learn from today’s major recalls and the large amount of media attention they attract? For consumer goods manufacturers and distributors, it serves as a wake-up call to the impact of a product recall event and a lesson in what should be done now to prepare for potential exposures. The federal government generally mandates more than 1,000 product recalls each year. Costs from a product recall or contamination can easily cascade into the millions of dollars. In addition to the physical expense of a recall, reduced sales due to poor consumer confidence, brand rehabilitation expense and potential shareholder lawsuits may also contribute to long-term losses. On top of financial losses, faulty products cause an estimated 27,000 deaths per year.
Despite recall frequency and the potential for extraordinary costs, most companies don’t adequately plan, prepare, practice for or buy insurance against product recall events. In addition to proper insurance coverages, careful planning is essential in managing the risk of a recall
First-Party vs. Third-Party Exposure
There are two categories of exposure to loss for a company faced with a product recall incident: first-party operational losses to the company and third-party liability losses to injured persons.
Unlike third-party losses, first-party loss is often overlooked. In addition to the initial recall expenses, the potential long-term losses from the damage to a company’s reputation and loss of sales may continue for months or even years. Since these losses can be catastrophic, this article focuses on ways to manage first-party incident exposures.
Risk Management Considerations
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 contamination and recall events. The addition of a product contamination or product recall policy protects a company’s bottom line by covering the direct costs of recall, but transferring the risk is only one part of closing the recall exposure gap.
Every company with products on the market, regardless of size, should establish solid product risk management policies and procedures for handling a recall or contamination event.
It’s helpful to understand the three basic contamination perils when designing a risk management program that provides the best protection for the least cost:
- Malicious tampering (intentional contamination)
- Accidental contamination
- Product extortion
Think of your risk management plan as a pyramid that outlines a series of defenses to counter the threat of a product incident. Any threats that escape being eliminated by the first tier should be addressed by the second, and so on. As the pyramid rises, the plan becomes more specific and more effective at isolating and eliminating product incident threats.
- Tier 1-Total commitment to quality
- Tier 2-Prepare with a contingency plan
- Tier 3-Focus with training
- Tier 4-Respond with expertise & decisiveness
- Tier 5-Transfer risk where possible
Transferring the Risk
Insurance for first-party losses caused by product tampering and contamination incidents are broadly labeled as product recall insurance. There are several coverage forms, each designed to isolate some component of first party product exposure. Work with SIA Group to ensure your product recall policy provides indemnity for the following:
- Recall expense
- Replacement cost
- Lost profits
- Brand rehabilitation expense
In addition to transferring risk, 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 for more information.