Easy answer, NO! With minimum premiums dropping as low as $1,000 you can no longer assume your client does not need or want this coverage. The number of recalls has exploded over the last few years and the cost of a recall has increased significantly. In fact, many companies who did not carry the coverage went out of business since they could not sustain the cost of a recall. While most large companies do carry the coverage, they found that 55% of them experienced a recall event over the last 5 years.
Top 5 reasons your clients should carry product contamination/recall coverage:
- It happens more than you think. The current average is more than two recalls a day. The top three organizations that can force a recall are the Consumer Product Safety Commission, National Transportation Safety Administration and the Food and Drug Administration. All have the power to force a recall and start the battle to stay in business. With the pressure to lower costs and hopefully not reduce quality the chance for a potential claim rises. The “human error” factor will always be there and cannot be overcome.
- Governmental Oversight is stronger. With the globalization of manufacturing and distribution the need for governmental oversight has increased. New regulations such as the Consumer Product Safety Enforcement Act of 2008 and the Food Safety Modernization Act of 2011 have given the government expanded powers and have increased standards they manufacturers must comply with. Civil and criminal penalties have also increased and have given the government more clout in dealing with problems. The FDA even has more power now to regulate how food is grown, harvested and processed.
- The costs are prohibitive. When the wheels are set in motion on a recall event, the costs go up significantly. The latest statistics show that the average price of a recall is over $540,000 and going up daily. Not only does coverage cover the costs of the recall, they can cover the gross profit, crisis management expenses and a period of recovery. They is a long trail of failed companies who have not survived a recall event due to the cost of the recall expenses and the recovery period to rebuild their brand.
- The mistaken belief that it won’t happen to our company. No organization is immune from the risk of product recall, even if they have the best safety record, manufacturing and operational controls. One of the main reasons is human error which can never be fully eliminated. With the costs of recalls being so high, many companies still underestimate the actual cost and impact on their operation. Many companies have the expertise to create a great product but are not prepared to deal with a recall even and come out the other side without a damaged reputation. While many times only one product may be contaminated, many retails will pull the whole product line and not wait to get more details in order to protect the consumers. Getting the “shelf space back” may take time and money.
- Product Recall Coverage is the First line of Defense. While product liability will cover the bodily injury and property damage caused by a defective or contaminated product it will not deal with the costs of dealing with the particular crisis. Product recall insurers will provide crisis management consulting services to deal with pre- and post- Incident basis to control the adverse impact the recall event will have on the insured’s brand and reputation. The coverage will indemnify them for actual recall expenses, lost profits, product replacement costs, extra expenses and rehabilitation expenses. Coverage can also include third party losses where your product is a component part in another product.
With product contamination/product recall coverage becoming more mainstream and affordable it may be time to discuss this coverage with them and determine if it is affordable to them. At a $1,000 minimum premium it puts in the affordability range for most manufacturers. Similar coverage to deal with restaurant recovery to deal with a product contamination starts at $500 and should be considered for them too. As coverage such as this becomes more affordable we should be discussing these options with our clients who would most likely say in court that “if I had known it was so affordable, I would have purchased the coverage”.
Kenneth Kukral, CIC – VP of Special Risks – That means, call me if you need help on placing a unique, difficult, large or more complex risk. Kennethkukral@intlxs.com 800-937-3497 ext 2079