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Why product recall cover is a must-have for manufacturers

At a glance

  • Product recalls can prove costly for manufacturers and threaten a company’s reputation, sometimes beyond repair
  • Product recall cover with Zurich starts at £7,500 for smaller manufacturers, but dealing with a recall can run into millions

A product recall situation can prove to be a costly and harrowing time for a company, not to mention the reputational threat it poses. But for smaller manufacturers especially, thinking about how to manage a product recall incident often only starts when it’s too late.

This is because many view product recall preparation and insurance as expensive and unnecessary. Many brokers find it hard to sell to anybody but the largest manufacturers, or those who are often obliged, through contracts with their customers, to hold this cover.

But it’s not just manufacturers who are exposed to product recall risks. Many companies who form part of a supply chain are at risk from it – including those involved in the storage and distribution of products.

Increased globalisation, too, may increase the risk of a product recall as cross-border supply chains are difficult to monitor, and safety must be ensured through importation.

Escalating costs

Once a manufacturer becomes embroiled in a product recall incident, the costs – both direct and indirect – can quickly spiral, unless they have properly prepared for it and have product recall insurance in place. This can cover the cost of recovering stock, transport of the product, overtime of staff, repair or replacement of product, and subsequent loss of profit.

The cover is there to protect customers in worst-case scenarios

Ross MacDonald, Team Leader, Casualty Specialty Lines at Zurich

One of Zurich’s smaller manufacturing customers had a claim of over £1 million on their product recall policy against a premium of only £30,000. And in the past 12 months alone, two other Zurich customers, one with a turnover of £15m and another of £10m, have had £2m and £500,000 product recall incidents, respectively.

Having product recall cover in place protects against the cost of recalling a product, as well as subsequently replacing the product.

“Customers often don’t understand what is actually picked up under a standard product recall cover – and the cover is there to protect customers in worst-case scenarios,” says Ross MacDonald, Team Leader, Casualty Specialty Lines at Zurich.

“Then there is the business interruption associated with a product recall, where, for instance, contamination of a site or a production line shutting down, can have a big impact on a business. Any loss of production and loss of sales in the period would be compensated, too.”

Incidents can happen at any time

Recalls are, unfortunately, a regular occurrence in Britain. From food and drink, to pharmaceuticals and consumers goods, all manufacturers must ensure that their products are safe for consumers, and are legally obligated to communicate recalls to product owners.

Companies of all sizes can be hit by product recall. In 2014 alone household appliance brand Russell Hobbs was forced to recall thousands of irons after reports of some models bursting into flames. While Trewithen Dairy, a small family-owned business, had to recall some of its cream and milk products after they had been contaminated with cleaning fluid. Even Lazenby’s Gourmet Sausage undertook a precautionary recall of its ‘Black Farmer’ Premium Pork Sausage in December, due to contamination with small pieces of metal.

Further reading:

Previous Insider article ‘Protecting against the impact of a product recall’

Zurich product recall document:  ‘Product safety and recall insurance’

In today’s digital environment, social media can exacerbate any product recall situation – unless handled properly. In 2010, Toyota was forced to recall millions of its vehicles and was slammed for not publicly discussing the problem until seven months after an initial fatal crash, and three months after the product recall, by which time sales had dropped by 16%. For a smaller company without the financial and marketing resources of a giant like Toyota, the situation could be much worse.

Understanding risks

Product recalls then, can be extremely expensive and should be a growing concern for businesses of all sizes. No matter how positive their reputation, one breach of quality control can potentially change this overnight.

For smaller manufacturers especially, understanding and calculating risks to a business can help steer them towards effective solutions.

Zurich provides market-leading product recall cover as an integral part of our Corporate Focus proposition. Minimum premiums start at £7,500, and we can help manufacturers implement an effective risk-management strategy for all aspects of a business, weighing up its unique product recall risks and helping to mitigate and even eliminate these risks.

Zurich has Casualty Underwriters in all of our market-facing locations, who have authority to write product recall either in isolation or as part of a combined package.

For brokers, this concept of the ‘total cost of risk’ is an effective way of helping change customer perception that product recall insurance is overly expensive, as one costly product recall incident could prove catastrophic for a business.

To learn more about how we can help you and your customers manage these risks, please speak with your local Zurich contact.

Image © Getty

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