By Emily Miller
By definition, product recall insurance is a type of insurance that covers expenses associated with recalling a product from the market. Manufacturers such as food and beverage, toy and electronics typically purchase it to cover costs such as customer notification, shipping costs and disposal costs.
However, some products – such as automobiles, explosives and tobacco – are not covered under product recall insurance.
There are two types of product recalls – involuntary and voluntary.
Involuntary is when the government or a regulatory agency (e.g., Federal Communications Commission, Food and Drug Administration or Securities and Exchange Commission) issues a mandatory recall.
Voluntary is when the manufacturer notices a defect that is unlikely to force an involuntary recall, but could still cause complications for the company.
Both types of recalls are extremely expensive and include various aspects. In many cases, the product will need to be removed, destroyed, and then replaced. Media relations specialists will work simultaneously to handle customer complaints, manage the press, and issue corporate communications to the appropriate people. All of these efforts can and will add up very quickly.
The risk and likelihood of a product recall has greatly increased in recent years, as global regulatory standards have also increased and new product safety rules have been implemented. For example, the Food and Drug Administration alone recalled 9,469 products in 4,075 separate recall events in 2012.
While these advancements are beneficial for consumers, companies all around the world are being faced with more stringent product quality obligations that are costly to implement and regulate.
In the United States, the government has recently passed the Consumer Product Safety Improvement Act of 2008 and the Food Safety Modernization Act of 2011, which were geared towards protecting consumers and enforcing higher standards for U.S. companies.
This can be especially difficult for a company that operates out of a global supply chain, as manufacturing protocols and standards vary from country-to-country. For example, the United States has stricter regulations on pharmaceuticals drug than the European Union.
While most large, global organizations purchase product recall insurance, many other businesses do not, which can have a devastating outcome if something were to happen.
For those organizations that purchased product recall insurance, they will be reimbursed for financial losses in the event a product has been recalled. However, as mentioned above, there are certain products that are covered through this type of insurance policy.
So, how important is product recall insurance for your business?
Like any other type of insurance policy, product recall insurance is geared towards protecting the unknown and to prevent overwhelming financial loss. For insistence, some companies have been forced into bankruptcy because they didn’t have the necessary insurance to cover the financial loss caused by the recall.
It is also important to keep-in-mind that product recall insurance can be tailored to fit a manufacturer’s specific needs. Generally speaking, companies can select from three different types of policies:
· Consumable products – such as food, beverages or pharmaceuticals
· Consumer goods – such as household products
· Component parts, non-consumable merchandise
