Product recall insurance can provide strong financial protection for businesses that have to carry out a product recall. This coverage isn't included with general liability insurance, but it can be added as a rider.
Product recalls typically fit in one of two categories:
If your business has to recall a product for either reason, product recall insurance can cover the cost of:
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.
While both product recall insurance and product liability insurance 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:
Product liability insurance:
But a risk management plan can't begin and end with insurance. Product liability law may require you to carry out a recall, so you'll need a product recall plan in addition to small business insurance.
To help you prepare, here are answers to four questions small business owners may have about product recalls.
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:
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 typically 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:
Say you're a coffee roaster that specializes in small-batch gourmet java. A problem in your packaging results in a shipment of tainted coffee beans. Customers get sick with a foodborne illness. You have to recall the product – and you're facing a lawsuit.
A customer is suing you over stomach illness, claiming your bad coffee caused them a week of distress, dehydration, and other pain and suffering. The customer is claiming $20,000 in damages.
In a case like this, your product liability insurance may cover your legal bills. While it won't pay for the direct costs of a recall (like collection and disposal), it protects your business from potential lawsuit bills.
Product recall insurance and product liability insurance can cover direct and indirect costs for a recall – but you can't rely on insurance alone.
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.
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