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.

Key Takeaways

  • Product recall insurance covers expenses related to recalling a product once it has been released to the public.
  • There are many costs that come with a product recall, including shipping costs, warehouse costs, disposal costs, and restocking costs. Product recall insurance covers these expenses.
  • Product recall insurance is triggered when a product poses severe health risks and/or death to users of the product.
  • The risks of product recalls have increased over the years due to more stringent global regulatory rules and safety requirements.
  • Product recall insurance is intended to protect companies from financial loss and bankruptcy resulting from product recalls.

Understanding Product Recall Insurance

Product recall insurance reimburses policyholders for financial losses sustained when 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.

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 or death 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 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.

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 most common products that experience product recalls are child safety seats, cosmetics, food, medication, toys, and vehicles.

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) on average recalls 4,500 drugs and devices each year. Drug related product recalls in 2019 were 371% higher than drug related product recalls in 2012. The numbers each year do not indicate a linear growth but rather fluctuate.

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.