Unless you’ve navigated a recall event before as a business, there’s a good chance you don’t understand the critical role product recall insurance plays in protecting a company’s assets and reputation—or how quickly financial losses begin to pile up during a recall event. “Once a recall hits the news, a company is already losing profits,” says Jencap broker Connor Lalley. Unfortunately, the first news report of a recall is just the tip of the proverbial iceberg. A company is responsible for every costly step in the recall process, including testing, disposal costs, public announcements, and potential lawsuits from affected consumers. For many companies, product recalls are sudden and unexpected, and they bring about financial risks that may not be covered under a general liability policy. This is where having product recall coverage becomes a necessity.
In this blog, we’ll define product recall insurance, break down what it covers, and explain how it safeguards a company’s financial assets and reputation.
What is Product Recall Insurance?
Product recall insurance is a form of first-party cover designed to provide financial protection to businesses facing the daunting task of recalling a product from the market. Now more than ever, this coverage is crucial because nationwide product recalls are on the rise. In 2023, the United States saw product recalls soar to their highest level in seven years, marking an 11% increase from the previous year. That number is expected to increase in 2024 as the Federal Trade Commission (FTC) and the Consumer Product Safety Commission (CPSC) prepare to heighten enforcement of safety policies, particularly those that emphasize the responsibility of the vendor on product recalls. Jencap Vice President Ryan Jennings agrees, “We’re seeing loss trends become more frequent and more severe, making product recall insurance a critical coverage for businesses.” In today’s market, with stricter regulations on the horizon, product recall insurance isn’t just an extra precaution—it’s an essential safeguard for any business that manufactures physical products.
What does Product Recall Insurance Cover?
Many businesses mistakenly believe their general liability policy provides adequate cover for each step of the recall process, but in reality, it might not. A product recall policy protects against many of the unique out-of-pocket expenses associated with executing a large-scale product withdrawal.
In the unfortunate event of a product recall, this insurance steps in to provide coverage in the following areas:
Replacement Costs
If materials need to be destroyed as a direct result of the recall, businesses may be reimbursed for replacement costs. Let’s say a food manufacturer discovers a severe contamination issue in one of its popular products, forcing them to recall it from the market. As a result, current inventory and equipment used in production must also be destroyed. Product recall insurance steps in to cover the replacement costs, including the expenses for sourcing new materials, labor for re-production, and overhead directly associated with the manufacturing process.
Loss of Profits
Product recall insurance provides coverage for profits that would have been earned on the withdrawn products, as well as future decline of sales resulting from the recall. For example, if a food manufacturer faces a recall due to contamination concerns and sales plummet due to a loss of consumer trust, this coverage bridges the financial gap. While this coverage may be limited to a specified period of time, it can be instrumental in ensuring business continuity.
Brand Rehabilitation
If a business’ reputation suffers after a widely publicized recall, with product recall insurance, the manufacturer can allocate funds for brand rehabilitation efforts. In the case of the food manufacturer, this may involve launching an extensive advertising campaign to regain consumer trust, expediting the launch of new food products, or offering special promotions to rebuild confidence in the brand among consumers.
The Importance of Leveraging Brokers with Product Recall Expertise
At Jencap, our expert brokers specialize in the ever-evolving landscape of product recall insurance. We’re always ready to offer support and guidance to our retail agency partners and their clients, no matter what challenges or opportunities the risk may bring. Contact Jencap today for more information about our product recall capabilities and to secure a quote.
