Product Recall – A Primer: Transferring the Risk

Insurance for first party losses caused by product tampering and contamination incidents are broadly labeled as product recall insurance. Product recall policies help to cover the additional costs of a recall, including product loss, costs to withdraw the product from market, product disposal, product testing, overtime wages and crisis management — costs that can be devastating because they arise at a time when a company’s revenues are typically hardest hit.

There are several coverage forms each designed to isolate some component of first party product exposure. Make sure your product recall underwriter provides indemnity for:

• Recall expense. This is out-of-pocket expense associated with executing a large-scale product withdrawal. It includes costs like extra temporary employees, overtime, public safety messages, special testing and handling, destruction and disposal costs, and crisis management and/or PR consulting fees.
• Replacement cost. Just like the name implies, this is the cost of replacing any product that had to be destroyed. This includes the cost of materials, labor and overhead directly associated with producing the product.
• Lost profits. This indemnifies the insured for profits which would have been earned on the withdrawn products and also for profits which would have been earned on future product sales, but which were not earned because of resultant future sales declines. This is usually limited to some specified time period.
• Brand rehabilitation expense. Most underwriters will also indemnify the insured for necessary “rehabilitation” of the recalled product’s consumer image. This includes costs like extra advertising, extra expense to rush a new product to market, and special promotions to rebuild public trust in the manufacturer and its products.

The key is to do an assessment of risk and quantify the exposure – in that way you can then begin to evaluate how to address this issue properly.