Just released: How to raise venture capital in 2023

Download

A Guide to Product Recall Insurance

Jonathan Selby - Founder Shield
Jonathan Selby

General Manager

According to data from the US Consumer Product Safety Commission, nearly 300 consumer products were recalled in 2022, from baby blankets to hot tubs. These recalls may have cost the manufacturers and retailers millions of dollars. 

Even in cases where a product recall has no consumer injuries, recalling a product could be financially devastating to your business. Besides the costs of pulling products or issuing refunds to consumers, trust in your brand could plummet, leading to fewer sales in the future.

Product recall insurance can help you manage the financial impacts of recalling a product. This post reviews how product recall insurance works, who should get it, and what coverage options are available.

What Is Product Recall Insurance?

Product recalls are generally expensive, costing many businesses millions or even billions of dollars. The exact cost of recalling a product depends on the number of units affected, potential consumer injuries, and length of the recall period. Your response to the recall can also influence the total cost. Consumers generally favor businesses that attempt to address product safety issues with transparency quickly.

Product recall insurance is how businesses can help reduce losses after a recall. Briefly, this coverage is a type of commercial insurance policy that helps cover the cost of recalling a product, including:

  • Collecting recalled products from consumers or retailers
  • Disposing of unsafe product units included in the recall
  • Managing post-recall public relations and brand damage

Is It the Same as Product Liability? 

The short answer is no. 

Product liability insurance is not the same as product recall insurance. However, it’s worth unraveling the common misunderstandings. Many business owners wrongly assume their general liability insurance or product liability policy will cover potential product recalls. However, while product liability coverage helps protect product manufacturers from lawsuits, liability policies often exclude recalls.

Product recall insurance is a separate coverage usually offered as a rider on a business liability policy or as a standalone policy. Businesses hoping to protect their assets from the cost of a recall will likely need product recall coverage in addition to general liability and product liability coverage.

Why Do You Need Product Recall Insurance? 

The most important reason your business needs product recall insurance is to protect your business assets from the high costs of a recall. Most companies don’t have the funds to cover the cost of recalling a product, from safety inspection to reputation management.

For example, suppose you run a produce business selling fresh chicken to grocery stores and restaurants. Your inspection team finds an outbreak of salmonella in your processing plant. Now, your business must cover the cost of locating and getting rid of contaminated products. You’ll also likely face a dip in future sales due to lowered consumer trust in your brand.

Depending on how many products are affected, this outbreak could be costly. If your business has product recall insurance, you may recoup some or all of these costs through an insurance claim.

Who Needs Product Recall Insurance?

It might be tempting to skip product recall insurance. Maybe your business has never had a recall, and you have excellent quality assurance systems. Or, you might assume that your materials suppliers are liable for defective parts or ingredients. As mentioned, some business executives believe their general or product liability coverage is enough to cover a recall.

However, any business that produces products — such as food or drug items, consumer goods, or automotive parts — could benefit from product recall insurance.

After all, even the best quality control systems can malfunction from human or technological error. Additionally, third-party suppliers usually have protections to prevent their liability during a recall. And finally, most business liability insurance (including product liability) excludes coverage for product recalls.

Fortunately, product recall insurance doesn’t have to be an enormous burden on your business. Most insurance carriers can customize your product recall policy to fit your needs. Your commercial insurance provider will help you assess your recall risk and potential costs of a recall to get the right amount of recall coverage.

What Does Product Recall Insurance Cover?

A standard product recall insurance policy or endorsement covers the general costs of product recall, though you must check with your broker about specifics. Traditionally, the most standard coverages include:

  • Rectification coverage: This coverage helps protect your business from the cost of cleaning or rehabilitating defective machinery or equipment. It also covers the cost of removing products from retailers.
  • Regulatory action: To keep consumers safe, government agencies may issue a mandatory recall, even if your product is eventually found to be in good working order. Regulatory or government action coverage helps cover the cost of mandatory recalls.
  • Business interruption: Recalls can cause havoc on your business operations. You may have to halt production and distribution while you address safety concerns. Business interruption coverage helps protect your business from the cost of lost sales while your product is unavailable.
  • Reputation protection: Consumers may be less likely to buy your products after a recall. Negative press and unflattering social media activity can lead to decreased brand trust. This protection covers the cost of repairing your brand’s reputation via crisis media management during and after a recall event.

Exact product recall coverage needs will vary by business. Generally, your insurance provider can add special endorsements to fit your products, industry, and specific risk factors.

For example, animal by-product coverage is a common addition for vegan or vegetarian food producers. If a product labeled vegan is found to have animal by-products in it, this coverage helps provide financial support to recall the product and manage your brand’s reputation.

Likewise, software companies may want to add an endorsement for software product safety. This endorsement helps fill gaps in a recall insurance policy by including software and firmware products for businesses that don’t sell physical products.

Understanding the details of what coverage your company needs can be confusing. Founder Shield specializes in knowing the risks your industry faces to make sure you have adequate protection. Feel free to reach out to us, and we’ll walk you through the process of finding the right policy for you.


What to know more about product recall insurance? Talk to us! Please contact us at info@foundershield.com or create an account here to get started on a quote.

Related Articles

fintech legal risks
February 29 • Risk Management

7 Legal Issues Every Fintech Should Avoid (and How to Diffuse Them!)

With the emergence of new and disruptive technologies, it’s no surprise that fintech legal risks abound for this innovative industry. Let’s break down these threats and provide solutions that will keep pace with the market.

leverage business insurance
February 27 • Risk Management

How to Leverage Your Business Insurance — 5 Tips

When was the last time you considered how to leverage your business insurance? It’s more than a safety net. In fact, this approach can give you a unique edge. Here’s how.

saas cyberattacks
December 11 • Risk Management

How SaaS Companies Can Avoid New Cyberattacks in 2024

Avoiding SaaS cyberattacks means teaming innovative technologies (like AI) with traditional risk management (like education) to stay ahead of the curve. We can show you how.

Legal Risks for SaaS Companies
December 5 • Risk Management

Top 5 Legal Risks for SaaS Companies in 2024

SaaS companies are on the forefront of innovation but face legal risks that leaders must understand. Here are SaaS risks to watch in 2024.

What Is a BOR Letter
July 27 • Risk Management

What Is a BOR Letter or Broker of Record Letter?

What is a BOR letter? Can it help you manage your specialized insurance solutions? We have the answers — and they may surprise you!

Risk Management for Regulation Technology
July 20 • Risk Management

RegTech Insurance: Risk Management for Regulation Technology

Regtech insurance is specifically designed for regulation technology companies — but what risks do regtech companies face? Let’s discuss some prominent challenges and solutions for this sector.