There is a big misconception within the product recall marketplace that causes many companies to believe they have sufficient coverage. In fact, they may not have coverage at all or the limited coverage they do have is just scratching the surface. Unfortunately, this provides a false sense of security when companies believe they are protected for product recalls/contamination events under their general or products liability policy.
The cold hard fact is that general liability (GL) and products liability (PL) policies have coverage for liability from bodily injury and property damage. However, the policies do not cover the financial expenses of the product recall itself, such as product removal from store shelves, product replacement cost, or business interruption costs. In reality, standard unendorsed ISO commercial general liability policies exclude the perils of a product recall as follows:
ISO commercial general liability coverage form, exclusions:
n. Recall of Products, Work or Impaired Property
Damages claimed for any loss, cost or expense incurred by you or others for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of:
(1) “Your product”;
(2) “Your work”; or
(3) “Impaired property”;
if such product, work, or property is withdrawn or recalled from the market or from use by any
person or organization because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it.
Risk of significant financial liability
Although some liability carriers may provide an extension for product withdrawal expense, these typically have a very low sublimit and only cover basic first-party recall expenses such as notifying customers, shipping, warehouse and storage, and costs of hiring extra personnel. This is where coverage under the product withdrawal expense form ends, however, the potential financial liability to a company does not. Companies are still at risk of significant financial impact as a result of first-party business interruption as well as for third-party damages they may be legally obligated to pay their customers due to the product recall. This can include, but is not limited to:
- recall expense of any third party for the recall of an insured product
- business interruption losses of others resulting from the covered incident
- cost to repair or rehabilitate brand reputation of others
The benefits of standalone product recall policies
In addition to offering more comprehensive coverage, standalone Product Recall policies also provide access to a wide range of product safety services through crisis management consultants. These services can help companies minimize risk while maximizing preparedness and crisis response.
The chart below illustrates an example of the coverage difference between standalone Berkley Product Recall/Contamination policies and GL endorsements:
Product recalls on the rise
While product recalls used to be relatively rare, their frequency is on the rise due to a greater push for stronger consumer protection regulations and the increase of globalized supply chains. Product recalls can be costly and complex, as well as damaging to a company’s reputation, and no organization is immune to the risk.
Sufficient coverage to include a wide range of costs
The operational expenses and brand recovery costs of a product recall can be defrayed by having sufficient product recall coverage in hand to cover a wide range of costs, including:
- Business interruption costs
- Advertising and promotional costs associated with the recall
- Shipping costs to collect recalled products
- Product destruction and disposal costs
- Product replacement, repair and distribution costs
- Costs incurred by wholesalers, distributors and retailers
- Brand rehabilitation expenses
Having sufficient coverage through a standalone recall policy, with the added benefit of response and risk mitigation services of crisis consultants, could make the difference as to whether or not a company survives a major product recall.
* Centers for Disease Control and Prevention (CDC)
“Product liability, recall and contamination insurance”, Insurance Information Institute, May 14, 2018, https://www.iii.org/article/product-liability-recall-and-contamination-insurance
Berkley Global Product Recall is pleased to share this material with its customers. Please note, however, that nothing in this document should be construed as legal advice or the provision of professional consulting services. This material is for general informational purposes only, and while reasonable care has been utilized in compiling this information, no warranty or representation is made as to accuracy or completeness.