Product recalls and your business – what you need to know


It may not seem extremely obvious, but product recalls have increased significantly in recent years as concern for consumer health and safety rightfully becomes paramount. Even small defects, where the risk to health and safety is limited, have led to product recalls. As such, insurance to protect businesses against the impact and implications of a product recall is becoming more widely available.

If your business involves the manufacture and/or sale of products, then you may want to give some thought to the challenges your business faces where product recalls are concerned, and whether or not it’s worthwhile insuring against them.

Why have product recalls become more widespread?

Well, there are a few reasons, namely:

  • As manufacturers have looked to cut costs, they have begun to look at overseas options when it comes to suppliers and production, where such options are cheaper, but aren’t typically subject to quality control — which has led to increased product flaws.
  • The government has made legislation surrounding product safety and consumer rights far more stringent, which has also led to an increase in product scrutiny and more active “policing” of such things.
  • Consumers are more aware than ever when it comes to both their rights and their concerns for the safety and quality of products they purchase.


Why should I be concerned?

If you are doing all the right things and are running a reputable business that prioritises customer safety and abides by relevant laws and regulations, then you don’t need to be overly concerned about facing a product recall.

However, sometimes even the most innocuous of flaws or a simple and earnest mistake can lead to a product recall. So while it may seem unlikely to you that you’ll face a product recall given you are making an effort to do all the right things with your business, the financial and reputation impacts of a seemingly improbable product recall are still cause for concern.

Of particular concern for businesses are the following:

  • Damage to your brand — the announcement of a product recall is more and more likely to be accompanied by significant media scrutiny, making it hard to keep your business’s reputation intact among both actual and potential consumers. When consumers lose confidence in a brand, the accompanying loss of sales can result in a temporary loss of profits, if you’re lucky, or put you out of business, if you’re unlucky.
  • Companies, especially larger retailers, are aiming to protect themselves against product recalls and the associated costs by imposing conditions in their contracts with suppliers — and these conditions usually involve the supplier bearing a significant financial burden in the event of a product recall.
  • Regulatory and consumer protection authorities are being given increased power to issue fines and enact a product recall.


What does product recall insurance cover?

Product recall policies are still relatively new by insurance standards, so it’s difficult to make generalisations, but the sorts of events that are typically covered include the following:

  • Accidental product defects
  • Accidental product contamination
  • Extortion
  • Purposeful and malicious tampering of a product


When it comes to costs associated with a product recall, you should be looking for a policy that covers any costs associated with the following:

  • The actual recall itself
  • Extortion
  • Business interruption
  • Replacement
  • Third party recalls
  • Defence — both legal and reputation defences
  • Replacement


Should you consider product recall insurance?

If anything we’ve discussed above has left you feeling vulnerable or seems particularly relevant to your business, perhaps it’s worth your time to investigate your insurance options.

We suggest you speak to a trusted business adviser or an insurance broker who isn’t affiliated with a particular insurance company. Product recall insurance is becoming more widespread, but it’s still a comparatively new insurance product, so if you do decide to chat to a broker, make sure it is someone who is well informed about product recall insurance specifically.


Source: KnowRisk

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