Companies often underestimate the overall cost of a product recall/contamination and furthermore, many manufacturers are exposed to large recall events because they insist on purchasing only product liability coverage. They often view product recall insurance as a ‘discretionary’ coverage as they face pressures to increase margins and reduce costs. Not wise, since product recall costs could reach billions of dollars along with other types of collateral damage.
There are so many detrimental aspects to a product recall. When looking at all the potential losses, a company would be foolish not to arm themselves with insurance coverage that could protect the massive risk to their brand reputation and financial stability.
As we’ve outlined, the risk of product recall has increased as new stringent regulatory standards and product safety rules are implemented. These in turn are not easy to safeguard when supply chains are often geographically widespread and protocols become difficult to enforce. The charts below break down the potential areas of loss for the food industry, non-food industries and the combined losses.
All business type recall claim income losses (2020)
Non-food recall claims by loss type (2020)
Food recall claims by losses (2020)
Other disastrous implications of a product recall
Large recalls are the ultimate nightmare for senior executive at companies with considerable research and development (R&D) operations. Beyond the staggering remediation and legal expenses that are incurred, there are costs to rework manufacturing processes and reputational damage. One of the costliest recalls in history was Johnson & Johnson’s Tylenol capsule recall in 1982 which cost them $100 million (or $260 million in today’s dollars) to re-establish the brand. This historical recall sparked the conception of product recall and product contamination insurance policies.
The second wave of damage comes with competitors ramping up product development or marketing efforts to gain displaced customers and solidify market share gains. “This double whammy makes recall prevention and effective remediation more important than ever,” shared Ariel D. Stern, an assistant professor of business administration at Harvard Business School. “Product recalls slow many types of innovation for a company that experience them. At the same time, we see that competitors are likely to accelerate their own innovation activities to take advantage of these weaknesses.”
In 2015, it cost Volkswagen, with fines, repairs, and legal costs, more than $30 billion when 350,000 diesel cars at 37 facilities around the U.S. were recalled when they admitted cheating American emission tests. And worse, the company ceded its command of American’s diesel car market to companies such as General Motors, Ford and Mazda which expanded their diesel lineups.
“Whether your firm is making phones or drones or self-driving cars, recalls can divert efforts from subsequent innovations and spur your competitors to take advantage of the market opportunity,” Stern concluded.
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Danielle Kost, “The hidden cost of a product recall”, Working Knowledge, Harvard Business School, Feb. 27, 2019, https://hbswk.hbs.edu/item/the-hidden-cost-of-a-product-recall
David Shepardson, “VW storing around 300,000 diesels at 37 facilities around U.S.”, March 29, 2018, https://www.reuters.com/article/us-volkswagen-emissions-storage/vw-storing-around-300000-diesels-at-37-facilities-around-u-s-idUSKBN1H50GQ
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