From vehicles to pharmaceuticals to food products, what might risk managers learn from mass media cover of product recalls? For manufacturers of all types of consumer goods, they might serve as a wake-up call to the potential impact of a product recall event and a lesson in what should be done immediately to prepare for potential exposures.
Product recalls or contamination can easily cost millions. In addition to the physical expense of a recall, falling sales due to poor consumer confidence, brand rehabilitation expenses and potential legal actions may also contribute to long-term losses.
Despite recall frequency and the potential for extraordinary costs, most companies don’t adequately plan, prepare and practise for—or buy insurance to protect against—product recall events. In addition to proper insurance covers, careful planning is essential in managing the risk of a recall.
Types of Exposure
There are two categories of exposure for a company faced with a product recall incident: first-party operational losses to the company and third-party liability losses to injured persons.
Unlike third-party losses, first-party loss is often overlooked. In addition to initial recall expenses, the potential long-term losses from the damage to a company’s reputation and loss of sales may continue for months or even years. Since these losses can be catastrophic, this article focuses on ways to manage first-party incident exposures.
Misconceptions and Considerations
It is a common misconception that product recall is covered under a general or product liability policy. Those covers do a good job of covering bodily injury and property damage but generally exclude contamination and recall events. The addition of a product contamination or product recall policy protects your bottom line by covering the direct costs of recall, but transferring the risk is only one part of closing the recall exposure gap.
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