Product Recall Insurance - Myths, Minutia and More

Posted by Chris Trombley on Jan 31, 2018 1:37:06 PM
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Product Recall Insurance has never been cheaper. I use the term ‘never’ loosely because I have no idea if that statement is true. The Phoenicians may have only paid a nickel for it. It certainly hasn’t been cheaper in the last 10 years, so that’s good enough. It’s an odd circumstance though: there are more recalls each year, but the cost of insuring recall events has fallen dramatically over those years. It’s the antithesis of insurance cycles. Additionally, more insurance companies are releasing Product Recall Insurance products, so there is more competition for the business. Every recall specialist I speak with agrees that this cannot last since the costs of recall insurance claims will ultimately far outpace the premiums collected. If you are on the fence about adding Product Recall Insurance to your insurance program, this is truly the time to do it.

I often speal about the importance of random sampling and testing, thorough recall planning, and traceability execution to reduce the likelihood and severity of recall events. SOP’s must be carefully developed by a knowledgeable source or group and continuously scrutinized to be successful. However, even the best-laid plans often go awry. It’s written in a famous book, so it must be true.

Executives of food & beverage companies often hear misinformation about Product Recall Insurance, so they dismiss the coverage without an analysis of the benefits. The two major myths are:

Myth #1 – Recall claims require an FDA mandated recall

This is wrong. Voluntary recalls are covered. 99% of recalls are voluntary, so the insurance would be near worthless if it only defended against mandated recalls.

Myth #2 – General Liability will cover a recall

Fat chance! There is a specific exclusion for recalls in nearly every General Liability policy.

Product Recall Insurance is worthwhile for food & beverage companies that are beyond start up and cannot sustain major recalls costs on their balance sheet. The coverage is malleable; it can be endorsed to address specific risks such as loss of customers’ income, extortion, reputation damage, and much more. Since each insurance company creates their own coverage contract (there is no standardized Product Recall Insurance policy), nuances are important to find and understand. There may be exclusions for GMO products. There may be a requirement to notify the insurance company of a potential claim within a short time frame. Your customers may be required to file suit against you to reclaim their lost income. You may find it compelling to focus on the insurance company that offers the best price, but it is critical to compare the coverage offerings along with price. Sometimes the cheapest can be the best when the coverage is modified to fit your needs. A Ford Focus isn’t a bad car, but you’ll want to add some options to make it livable.

If you dismissed Product Recall Insurance because you heard that a competitor’s claim was denied or you’ve never had a mandatory recall, you should talk with someone knowledgeable about the coverage who will walk through the full policy with you. If you haven’t considered this insurance, get a sense of how it works and whether the cost is worth the protection. It may be used as a selling point to your customers as an added layer of protection and stability. Get informed and make a conscious decision about whether it is right for your company.

Topics: Food and Beverage, Product Recall, Product Recall Insurance

Wood Gutmann & Bogart Insurance Brokers is California's premier, full-service regional insurance brokerage. We provide a complete range of commercial, personal and employee benefits insurance products and services. We are proud to be ranked among the Top 100 Independent Insurance Agencies by Insurance Journal and one of the Best Places to Work by the Orange County Business Journal.

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