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.
What is 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.
Product recall vs. product liability insurance
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:
- Isn't included with general liability
- Covers the cost to recall products
- Doesn't cover product lawsuits
Product liability insurance:
- Is typically included with general liability
- Doesn't cover recall costs
- Covers product lawsuits
4 questions about product recalls
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.
What does a product recall look like?
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
- Pay to collect the defective products and replace them
- Dispose of the defective products
- Inform consumer protection groups
- Track all products customers send back to you
- 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.
Which small business insurance covers product recalls?
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:
- 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
How does product liability insurance help your recall strategy?
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.
What additional strategies do you need to protect your company?
Product recall insurance and product liability insurance can cover direct and indirect costs for a recall – but you can't rely on insurance alone.
- 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.
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