Is your manufacturing client recall-ready?

Visit the website of the United States Consumer Product Safety Commission and you’ll find a recall list that includes nightlights, plastic toys, fleece sweaters and furniture. Even products as innocuous as pillows and chocolate have been included on the recall list.

No manufacturer, large or small, is immune from product recalls and the business disruption and considerable expense that may result. History’s most famous product recall cases feature well-known brands, and have involved hundreds of millions of dollars in associated costs.

However, one third of product recalls are from companies with five or fewer employees. And, the average cost of a recall is approximately $550,000. For a small manufacturer, such a loss could spell financial ruin.

The good news for manufacturers: Independent agents are in a great position to help protect their manufacturing clients from the stress and potential financial impacts of a product recall.

Recall basics

Whether required by law or voluntary, a product recall is typically in a business’ best interest. It can protect their customers, their reputation and their business.

A recall means expenses for a company, including the cost to remove defective or dangerous products from the market, and dispose of them safely. Companies often have to pay for product testing to see if, in fact, a recall is necessary. They also can be left responsible for the cost to notify customers and users of the product, costs for transporting, storing, and disposing of the defective product, and the inevitable extra expenses including overtime, contractor’s costs, computer time, etc.

The list could go on. Most manufacturers know a recall can place them at financial risk. As risk advisers to manufacturing clients, independent agents understand the benefits that product recall insurance can provide. The right insurance protection can offer peace of mind and help protect a business for years to come. We are seeing agents look for coverages that go above and beyond baseline protection to offer more of a comprehensive approach to product recall. Product recall insurance is usually not included with general liability coverage, and must be added as an endorsement. With the considerable financial risk for manufacturers, we’re seeing agents with the most experience in product recall also recommending optional coverages, particularly for the following:

  • Repair, replacement or repurchasing costs:
    This covers costs incurred to repair a defective product, replace a product with a similar one, and repurchase a product or reimburse customers for payments. It can also cover costs to redistribute and install replacement products or parts sold to customers.
  • Customer’s lost profit:
    This coverage protects manufacturers when a product recall affects customers’ abilities to deliver their goods. For example, a customer may lose profits from the sale of a manufacturer’s products when they are returned, or due to the additional costs of processing the recall.
  • Good faith advertising:
    After a product recall, there may be costs incurred to help repair the manufacturer’s damaged reputation in the marketplace. Often, paid advertising, social media and public relations services are covered for a period of time after a recall.

Covering legal costs of a recall

Agents with knowledge of product recall say that companies that have not been through the experience are often stunned by its far-reaching impact. And because a quick response can help to minimize damages to finances and a company’s reputation, agents often recommend product recall liability insurance as another highly-desirable optional endorsement.

Different from general liability insurance, product recall liability coverage addresses lawsuits brought by a customer over costs associated with a recall. If a manufacturer and a customer can’t agree on the amount to be paid, the customer may sue the manufacturer for recovery. In this case, the recall liability coverage may cover the manufacturer’s defense costs and any sums they are found liable to pay their customer. This also may provide coverage for damages the insured may be legally obligated to pay to a third party as the result of a covered recall.

Beyond financial implications

A product recall can cause serious damage to a company’s reputation. However, when a detailed plan is promptly put into action, a product recall will demonstrate a commitment to customer safety, and may ultimately enhance reputation and customer loyalty.

Independent agents can help serve as risk managers for their manufacturing clients. Inquiring about a client’s product recall plan can help ensure there is an action plan ready to go in the event of a recall. There are three keys to an effective product recall plan. First, have a written plan in place. Operating under the stress and time constraints of product recall is not the time to ask, “How are we going to handle this?”

Second, designate a team of employees who will be charged with coordinating all aspects of the product recall team. Think of them as a rapid response team, who will help the company get out in front of a potentially very disruptive situation.

Third, have a strategy in place for dealing with media; both outgoing news releases and incoming media inquiries.

"Independent agents can help serve as risk managers for their manufacturing clients."

As top agents know, the best way to protect against the costs and broad impact of a product recall is to avoid it in the first place. For this reason, it’s wise to deal with an insurance carrier that provides robust risk solutions services; that works closely with insureds to identify potential risks, and helps implement focused solutions and best practices to reduce the likelihood of a product recall. These value-add services can make a major difference in the success of a manufacturer.

Finally, partnering with the right carrier can also help provide peace of mind for manufacturing clients and agents alike. Look for carrier partners that have a dedicated claims team, ready to deliver when your client experiences a product recall.

Scott Grieco

About the author
Scott Grieco has served as senior vice president of Middle Market at The Hanover since 2012. As an experienced insurance professional, he is responsible for the profit and loss for Middle Market business, which includes accounts with premiums greater than $50,000 in specialized industries relevant to our distributors.