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Protecting against the impact of a product recall

At a glance

  • Product recalls have affected many of the biggest brands in the world, heavily impacting some businesses as a result
  • Generally a niche product, product recall is not usually included in product liability policies
  • Need for product recall insurance on rise as business landscape is changing significantly

Lawnmowers, luxury cars and outdoor nightlights are just three of the many UK product recalls reported this year alone. These recalls are often expensive and can significantly damage a company’s reputation.

Top tips for selling product recall to your customers

  • Make your customers aware of the differences between product recall and product liability policy covers
  • Ensure that your customers are aware of the total costs of a product recall – it’s normally far greater than people expect
  • Your customer should be aware that the number of product recalls is increasing every year. For example, the annual notifications from the UK to the European Rapid Alert System for Food and Feed (RASFF), which ensures food safety across Europe, increased by 50% between 2008 and 2012
  • Has your customer prepared crisis management communication? Zurich’s product recall policy has a risk allowance towards helping the insured work with our crisis management consultants
  • Zurich can be flexible in how we build policy coverage for you. It can include accidental contamination and malicious product tamper either standalone or together. We can have separate limits for each coverage or one aggregate, and we can flex the business interruption indemnity periods to the needs of your customers

It should also be noted that a firm’s size, industry, location or reputation might not necessarily prevent a company being left in ruins if it does not manage a product recall well.

There is a common misconception that product recall is included in product liability insurance – which requires an actual accident – but, in most cases, it isn’t.

The recent example below highlights the value of having specialist product recall coverage.

Policy in place

Thankfully, one firm, a food processing company, had a product recall policy in place with Zurich when it started to receive some complaints from customers of extreme spice levels in its product. The concentrations of spice were so great that it caused some consumers to suffer burnt lips and mouth.

The product was recalled and investigations began, with standard testing procedures identifying an issue with one in every 100,000 of its products where the spice flavouring was extremely concentrated, making some chicken wings very spicy.

The defect proved to be a batch of a faulty spice flavouring that clumped together and therefore delivered large quantities of spice into the product. This was then compounded by the wrong sieve being attached to the production machinery.

Luckily, the company managed to keep the story out of the press so competitors were not aware and customer confidence wasn’t lost. The business was also not interrupted due to additional products that had not been affected being supplied to the shops.

Having the correct insurance in place saved the firm nearly £1 million. The client had also not waived its rights of subrogation against its suppliers, which allowed Zurich to gain some recourse against the spice supplier.

 Case study table

“Any company that is manufacturing a product and selling it to a third party has a product recall exposure,” said Ross MacDonald, Team Leader, Casualty Specialty Lines at Zurich. “We live in a world of 24-hour news channels which distribute good or bad news immediately where there is increased product regulation, increased consumer awareness and increased use of social media. Commercial supply chains have also become more complex and all of these factors have changed the product recall landscape significantly for businesses.”

Retailer demands

Standalone product recall insurance is also important for businesses looking to trade with large retailers who demand their partners have recall policies in place. Although some may have a degree of cover as part of their general liability policy, the limits are unlikely to be enough to satisfy the contractual demands of these larger players.

“People do not always think about the business interruption cover that they would get and this can be very important,” said Ross. “If they have to shut down their production line for a matter of weeks or months then that would create a big business interruption loss and we would look to cover that.”

Where a product recall has a negative impact on the product’s on-going sales, the recall insurance will also provide financial support to rehabilitate the brand to pre-recall levels. It also provides businesses with access to professional crisis management support, and this is essential to make sure an incident is properly handled and its impact minimised right from the word go.

Image © Getty

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