Product recall insurance covers expenses associated with recalling a product from the market. Product recall insurance is typically purchased by manufacturers such as beverage, food, electronics and toy, companies to cover costs such as customer notification of the recall, shipping costs, and disposal costs. Coverage usually applies only to the firm itself, although additional coverage can be purchased to cover the exposures of related third parties.
Product recall insurance reimburses policyholders for financial losses incurred when a product is recalled. Product recalls can be involuntary (required by the government or a regulatory agency) or voluntary (the manufacturer notices a defect that has the potential of forcing an involuntary recall. Some product types are generally not covered under product recall insurance, such as automobiles and related products, explosives, and tobacco.
While arguably good for consumers, more stringent product quality requirements pose challenges and risks for manufacturers, and the risks are greater today than ever before, as supply chains are geographically spread and manufacturing protocols and standards differ among varying locales. The risk of a product recall has increased dramatically in recent years due to increasing numbers of global regulatory standards and frequent rollout of new product safety rules.
The coverage "trigger" under a product recall policy for a food and beverage company, for instance, would be the knowledge that an accidentally or maliciously contaminated product could cause bodily injury if consumed by the public. Even if the product results in a finding of no liability, the insured has expenses that are reimbursed for certain financial costs related to the incident.
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