businesses often undergo greater scrutiny over their manufacturing methods and the quality of their products. This is due, in part, to the introduction and implementation of new laws, regulations and requirements and the increasing frequency of lawsuits and other legal disputes with consumers. The Consumer Product Safety Improvement Act of 2008 and the Food Modernization Act of 2011 are two examples of laws created to regulate product safety.In today’s world, businesses, both large and small, face a series of challenges that companies in previous decades did not. One of these challenges relates to the fact that now,
When a product has been found to be harmful or otherwise defective due to manufacturing errors, the company that sells it will typically issue a recall, either voluntarily or involuntarily. As a business owner, one of the most effective forms of protection in these situations is a product recall insurance policy.
Product Recall Insurance Coverages
Product recall insurance covers many different types of incidents and losses. However, we will focus on five of these coverages.
Product Recall Expenses
Product recall expenses include costs relating to all stages of the product recall process, such as product disposal, replacement, transport and advertising. The total sum of these expenses may vary depending on the type and complexity of the products involved. For example, the costs involved in manufacturing a small toy or a bathing suit are vastly different from the total costs to produce a high-tech electronic device (e.g. iPhone X).
When the federal government, or a state or local municipality, orders a company to recall one or several of its products, this is known as an “involuntary recall.” The United States Consumer Product Safety Commission (CPSC) is an independent federal regulatory agency with jurisdiction over more than 15,000 types of products from a wide variety of industries including clothing, appliances, lighting and sports and exercise equipment. According to Statista, approximately 25 of the 100 recalled children’s products in 2018 were nursery products. Statista also reported that the CPSC issued 410 product recalls in 2015.
Certain types of products such as food, pharmaceuticals and cosmetics, among others can become particularly harmful if they are contaminated with toxins, bacteria, chemicals or pesticides. When this occurs, a brand can sustain severe damage to its reputation, become engulfed in a public relations crisis and lose large numbers of customers who fall ill. For this reason, it’s important to acquire product recall insurance coverage.
Business Interruption Costs
Following a recall, a company must interrupt a portion of its business operations for a designated period of time which can be several weeks or months. Product recall insurance provides assistance to cover costs associated with this interruption. According to the Insurance Information Institute, the standard policy for business interruption insurance is 30 days, although this length of coverage can be extended in certain cases via an endorsement.
Loss Of Profits & Revenue
When business is temporarily suspended due to a product recall, the company in question will undoubtedly lose a sizable amount of sales revenue and witness lower profit margins. For example, Toyota’s series of gas pedal recalls (due to “unintended acceleration”) in 2009 resulted in losses of approximately $2 billion, a figure that was revised from $1.1 billion.
In the case of publicly traded companies, an organization’s stock price may also be negatively impacted. This may require unexpected and immediate resources to maintain shareholder confidence. In cases like these, product recall insurance can have especially significant value.
Reach Out To A Professional Business Insurance Agency
Speak to the experts at Pro Insurance Group in Elgin, Illinois for more information on the benefits of product recall insurance coverage. Our agents always act as one-on-one advocates for each of our clients. At Pro Insurance Group, we are committed to helping clients find solutions that meet both their unique concerns and their budget.
We know that the demand for strict product quality standards and safety guidelines has increased in recent years, which is part of the reason why product recalls have occurred more frequently and across several different industries over the last decade. We recommend that every business acquire a product recall insurance policy, although three industries can especially benefit from this form of protection: food and beverage, toys and electronics manufacturers. We DO NOT cover businesses in the arms, automotive and tobacco industries.