Product Recall – A Primer: Risk Management Considerations

There are two categories of exposure to loss for a company faced with a product recall incident: first party operational losses to the company and third party liability losses to injured persons. 

Unlike third party losses, first party loss is often overlooked. In addition to the initial recall expenses, the potential long-term losses from the damage to a company’s reputation and loss of sales may continue for months or even years.

Since these losses can be catastrophic, this article focuses on ways to manage first party incident exposures.

Risk management considerations

It is a common misconception that product recall is covered under a general or product liability policy. Those coverages do a good job of covering bodily injury and property damage, but generally exclude contamination and recall events. The addition of a product contamination or product recall policy protects a company’s bottom line by covering the direct costs of recall, but transferring the risk is only one part of closing the recall exposure gap.

So what to do? Any company, regardless of size, that puts products into the marketplace should establish solid product risk management policies and procedures for handling a recall or contamination event.