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Should Your Business Purchase Product Recall Insurance?

Product Recall Insurance can provide strong financial protection for businesses that have to carry out a product recall.

Product Recall Insurance isn't included with General Liability Insurance, which means small-business owners will have to decide if they want to purchase it as a rider to their coverage.

Should you get this policy?

It's a good question. Like so many questions in the insurance world, the answer is: it depends.

WHAT IS PRODUCT RECALL INSURANCE?

What Is Product Recall Insurance?

Let's start with the basics. If your business has to recall a product, Product Recall Insurance may cover the cost of:

  • Collecting recalled products.
  • Disposing unsafe products.
  • Utilizing a crisis and PR management.

These costs add up. A Property Casualty 360 article estimates the average cost of a recall to be $540,000. 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.

WHAT DOES A PRODUCT RECALL LOOK LIKE?

What Does a Product Recall Look Like?

You'll want to consider the likelihood of your products facing a recall. It's hard to say who's at risk for recalls, but we can look at recent recalls to get an idea.

In February 2016, the Consumer Product Safety Commission reported the following product recalls:

  • Gas boiler.
  • Freestanding stove.
  • Bicycle forks.
  • Office chairs.
  • Winter coats.
  • Snow boots.
  • Window shades.

Products like boilers and stoves may be dangerous, and small flaws could lead to major injuries and lawsuits. But other products on this list are fairly harmless — on first appearance. Snow boots, dining chairs, window shades — defects with these products could lead to six-figure liabilities.

The lesson: even if you manufacture seemingly harmless products, you could face a recall.

VOLUNTARY VS. INVOLUNTARY RECALLS

Voluntary vs. Involuntary Recalls

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.

Both types of recalls can be covered under Product Recall Insurance, which means that if you choose to recall a product or are forced to by law, your small business insurance may be able to protect you from the cost.

If your business faces product recall liability, investing in Product Recall Insurance can be a smart way to ensure you're protected from a wide range of product recall costs.

PRODUCT RECALL VS. PRODUCT LIABILITY INSURANCE

Product Recall vs. Product Liability Insurance

Given how similar the names are, it's easy to get Product Recall and Product Liability Insurance confused. While both can help business owners who are dealing with defective products, each covers a different liability. Here's how to keep these policies separate:

Product Recall Insurance

  • Isn't included with GL.
  • Covers the cost to recall products.
  • Doesn't cover product lawsuits.

Product Liability Insurance

  • Is typically included with GL.
  • Doesn't cover recall costs.
  • Covers product lawsuits.
3 THINGS TO KNOW ABOUT RECALL INSURANCE

3 Things to Know about Recall Insurance

As you shop around for General Liability Insurance that includes Recall Insurance, remember these three factors to make sense of your small business insurance options:

  • The average cost of a recall is at least a half million dollars — but Product Recall Insurance can help cover collection, disposal, and other recall costs.
  • Product Recall Insurance isn't included with General Liability Insurance. You'll have to add it as a rider (which will cost more).
  • Recall Insurance helps cover both voluntary and involuntary recalls, but it won't cover product liability lawsuits.
RECALL INSURANCE ISN'T ENOUGH

Recall Insurance Is Important, but It Isn't Enough by Itself

Recall Insurance can do a lot of the heavy lifting if your business has to recall a product — but your risk management plan can't rely on insurance alone.

Recalls are expensive (insurance can help with that), but they're also complicated and you'll need to have a recall plan in place to make sure you carry out a recall quickly and minimize damage to your company's financial health and reputation.

There are three pillars to a product recall plan:

  • Have a written plan in place.
  • Designate a product recall team.
  • Have a strategy for communicating with media.

As you build your own recall plan, checkout the Consumer Protection Safety Commission's recall checklist [PDF]. This comprehensive checklist offers 27 steps small-business owners can take to protect their business and ensure their customers receive a message about a product recall.