Articles - Myth vs reality: knowing your true product recall exposure

 

These trends demonstrate that, even as companies adopt ever more sophisticated quality controls to prevent defects and design faults out of their production processes, recall events can still happen – and at scale. In fact, reliance on ‘failsafe’ systems may lead to a false sense of security. Businesses may operate on the basis that a recall is very unlikely, which may leave them exposed and underprepared when an incident happens.

 

Here, we examine some of the most common misconceptions around product recall risk and insurance to help reduce your business’ exposures and strengthen your resilience. 

 

Even with the best internal quality systems and controls, you need to be prepared for scenarios where your systems fail to prevent an issue that leads to catastrophic losses.

 

Product and supply chain complexity: It can be difficult to keep pace with the growing complexity of products and components or get full visibility of increasingly extended supply chains. Supplier changes and logistical disruption can all undermine quality assurance and traceability, increasing the likelihood of defects or contamination. If suppliers are facing economic challenges, they may be tempted to cut corners or substitute components or ingredients to save money. 

 

Regulatory changes: Regulations are changing what’s required of manufacturers and producers, making it more difficult to ensure full compliance. For example, the EU’s General Product Safety Regulation (GPSR) tightens traceability obligations, incident-reporting duties and oversight of online marketplaces, giving market-surveillance authorities broader powers to detect and remove unsafe products.

 

Human error and damage: No system, however good, can entirely eliminate the risk of human error, or the possibility of malicious tampering or contamination. High staff turnover in some sectors may make errors or deliberate incidents, such as product extortion, more likely.

 

Product launches: Introducing a new product into consumer markets increases the risk of issues being identified, even after extensive safety testing. We’ve seen instances of recalls where products have been trialled using existing methods that are not best suited to test an innovative new product.

 

Perceptions of product recall losses and costs differ from the reality we see in the market. In a recent survey of the food and beverage industry, business leaders thought the biggest losses lay in retailer charges for failure to deliver product, the cost of replacing stock and transportation. However, the largest actual losses can come from business interruption, such as machinery failure, plant shutdowns, supply chain freezes, or loss of retail contracts.

 

The damage to a company’s brand from a publicized recall may also be severe and very difficult to recover from, affecting reputation and sales long after an incident has been resolved.

 

Many businesses, from food & beverage to automotive and consumer goods, have Product Recall extensions to their General Liability Insurance. However, this cover is limited to first or third party costs directly related to the recall. It may limit cover to products that were in the care, custody and control of the client, or provide an list of the costs that can be covered.

 

It’s worth considering the potential scale of losses and liabilities here. For example, if your product or component is incorporated into other end products, the value of those goods can be multiples of the original, meaning the cost of recalling and replacing them is also much greater.

 

A single occurrence like this could exhaust the entire insurance limit for the year, leaving your business exposed – and in breach of contract if you are legally obliged to have recall cover in place. Most extensions will not cover the full costs of a product recall which can go much further than just the physical costs of recalling the product, including:

 

 

Whilst Product Recall Insurance used to be seen as a luxury purchase and can often have a lower priority within clients’ insurance budgets, we’re witnessing lower premiums and broader coverage than ever before, making standalone cover more affordable.

 

The premiums associated with core insurance policies, such as property, have also fallen for many clients and occupancies. This in turn has created room within existing risk management budgets that could be used to strengthen your protection, and resilience, against the impact of a major recall.

 

New policy extensions are being developed to offer previously excluded coverages. This shift in appetite demonstrates how insurers are willing to provide policies that meet the ever-increasing needs of our clients. A recent offering aimed at small to medium sized businesses is the Quality Defect extension whereby a product having an incorrect look, taste or smell can now be covered.

 

Even with the best control systems, recall events can still happen. You need to be prepared for a situation where your systems fail to prevent an issue, leading to major losses.

Most General Liability extensions don’t cover the full cost of a recall, such as business interruption, laboratory costs, legal defense, crisis management and brand rehabilitation.

Product recall extensions may have small limits that don’t cover the scale of a recall.

Standalone Product Recall Insurance is designed to cover the costs associated with a recall, providing both the financial protection and specialist support required to help your business recover swiftly and effectively.

 

Get in touch to find out more about trends in product recall risk and what you can do to strengthen your resilience.