Product Recall - A Tricky Coverage

Some of the most expensive claims in the marketplace today evolve around Product Recall, and often become high profile issues in the United States. Many companies face the concern and critical question: Do I have coverage for "this"? The answer to that question is - maybe!

If your company has a General Liability policy in place it provides coverage for bodily injury, which would include consumer sickness, injury, or death. On the contrary, this coverage is not always an appropriate level of coverage for a company because it does not extend to financial losses to the company (1st Party) or the company that sold the final product (3rd Party).

What coverage should we have if General Liability is not enough?

Product Recall Insurance will provide coverage in the event of any of the company's (1st Party) products are recalled. Coverages under these types of policies are suppose to include expenses incurred in the recall event and liability to the 3rd Party - expenses, loss of income, and/or reputational damages. Ideally Product Recall Insurance should respond to both voluntary and involuntary recalls, but some insurance carriers will require the recall to be "mandatory". The reality is the federal government never formally requires anybody to recall a product because they have gotten companies to do it voluntarily. Therefore, it is important to understand what "triggers" the insurance policy - make sure your broker outlines this for you.

The two major components to Product Recall Insurance are: 1st Party and 3rd Party.

1st Party = Your Company. This will include the costs that your company directly incurs:

- Cost to notify customers of the recall
- Shipping and disposing of the recalled product
- Costs associated with replacing the product (not the product itself though)
- Expenses that are related to contract with the 3rd Party

3rd Party = Company that sells the final product (Distributors, Wholesalers, or Supermarkets). This will include the damages to the 3rd Party's product, reputation, and loss of business income.

Another major component of Product Recall Insurance is: Crisis Management.

There is normally a set sub-limit that the insurance carrier sets aside that will cover the PR and other expenses incurred in addressing a recall event. It will also help with the expenses the company (1st Party) incurs to restore is reputation.

An often forgotten coverage that may become relevant in a recall event is Director's & Officer's Liability (D&O). What if a claim is presented by shareholders, investors, or officers of the company (1st Party) for the financial loss incurred due to the recall event?

When analyzing Product Recall Insurance and D&O coverages remember that not all insurance carriers provide the same policy language. Exclusions, Claim Triggers, and Endorsements are often times different from one insurance carrier to the next; therefore, buying the policy with the "cheapest" premium and the "lowest" deductible may turn out to be a waste of time and resources.