What Is Product Recall Insurance?

Product recall insurance covers expenses associated with recalling a product from the market. Product recall insurance is typically purchased by manufacturers such as food, beverage, toy, and electronics companies to cover costs such as customer notification, shipping costs, and disposal costs. Coverage generally applies to the firm itself, though additional coverage can be purchased to cover the costs of third parties.

Product Recall Insurance Explained

Product recall insurance reimburses policyholders for financial losses sustained a product is recalled. Product recalls can be involuntary (required by a regulatory agency or the government) or voluntary (the manufacturer notices a defect that is unlikely to force an involuntary recall), and can be costly. Some product types are generally not covered under product recall insurance, such as automobiles and related products, explosives, and tobacco.

While good for consumers, more stringent product quality requirements pose difficulties for manufacturers, and the challenge is greater today than ever before, as supply chains are geographically widespread and manufacturing protocols and standards differ among varying locales. The risk of a product recall has increased dramatically in recent years due to increasing numbers of global regulatory standards and an almost constant rollout of new product safety rules. The coverage “trigger” under a product recall policy for a food and beverage company, for instance, would be the knowledge that an accidentally or maliciously contaminated product could cause bodily injury if consumed by the public. Even if the product results in a finding of no liability, the insured is reimbursed for certain financial costs related to the incident.

A company could be forced into bankruptcy if they don'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.

There are five critical factors which should be analyzed when considering the risk of a product recall event. Read on to see if you should consider selecting comprehensive product recall insurance coverage.

Three Reasons To Purchase Product Recall Insurance

1. Product recall events happen almost every day. Rarely does a day pass without news of a company’s goods being recalled for safety or illness reasons. The Food and Drug Administration (FDA) alone recalled 9,469 products in 4,075 separate product recall events in 2012, the highest total in history.

2. Governmental oversight is stronger than ever. As mentioned, the U.S. government is implementing more stringent product safety protocols. The Consumer Product Safety Improvement Act of 2008 and the Food Safety Modernization Act of 2011 are prime examples.

3. The costs for a recall are prohibitive. Expenses of a product recall begin to mount, starting with costs associated with pulling the identified product off shelves and from transit. In many cases, products must be removed, destroyed, disposed of, and then replaced.