Product recall insurance

Product recalls typically fit in one of two categories:

• Voluntary recalls in which a company decides to recall its product without any legal mandate
• Involuntary recalls in which a company has refused to recall a product, but is forced to by government regulators

If your business has to recall a product for either reason, product recall insurance can cover the cost of:

• Collecting recalled products
• Disposing of unsafe products
• Crisis and public relations management

These costs add up. For a small manufacturer, recall costs could be devastating. Product recall insurance can provide important financial protection in the event your product has a defect.

Regardless of the item you produce or sell, a product recall may come with many costs and liabilities for a small business owner. If your business learns of a potential product defect, you may need to:

• Figure out if the defect was due to a problem in the design, materials, or labeling
• Identify whether the defect is limited to a specific batch of products or all products
• Find which supplier and which materials are to blame, if the defect is related to materials
• Inform your customers about the recall
• Inform consumer protection groups
• Pay to collect the defective products and replace them
• Track all products customers send back to you
• Dispose of the defective products
• Implement a plan for rebuilding your reputation

Add up all these actions (and include the potential for product liability lawsuits), and it's easy to see why product recalls can be devastating, especially for small business owners with limited budgets.

Product recalls can be covered under your general liability insurance, a policy which can include two types of product-related protection:

Product liability insurance usually comes standard with general liability insurance. It covers lawsuits over injuries your products cause. If your product is recalled after a customer is injured, product liability insurance can help cover the cost of the lawsuit. However, it will not actually cover the cost to recall the product.

Product recall insurance can help pay for the cost to collect and dispose of a dangerous product. Recall insurance may also cover the cost to hire a crisis management team to consult with your company about public relations and your brand's reputation.

There's one important thing to note about recall insurance: it doesn't automatically come with general liability insurance. To protect your business from recall related liabilities, you'll need to:

• Obtain general liability insurance, which typically comes with product liability lawsuit protection
• Add a product recall insurance rider to your general liability policy to cover the cost of recalls

Product recall insurance and product liability insurance can cover direct and indirect costs for a recall – but you can't rely on insurance alone.

Manufacturers, retailers, and wholesalers should all have a recall plan in place:

• Keep a written copy of your recall plan and conduct annual training sessions.
• Designate a recall taskforce to take the lead.
• Develop a media communications strategy, template letters, and organized records to help you inform customers quickly and stay ahead of a PR crisis.

While recall strategies will vary from one industry to the next, you can look at the Consumer Protection Safety Commission product recall checklist for ideas about what to include in your plan.