Product Recall Insurance: A Practical Guide

Manufacturing defects and chemical contamination can result in extremely costly product recalls, even if you have taken every precaution to ensure product safety and compliance. However, product recall insurance covering some of the costs can help you limit the impact of recalls.

In this guide, we explain what product recall insurance is and what you need to know about required documentation, covered expenses, and more.

What is product recall insurance?

Products that are found to be unsafe or non-compliant can be subject to recalls. In practice, a recall can require companies to withdraw products from the marketplace, inform consumers, and arrange for the return of sold items.

This can be extremely expensive and disrupt cash flow to the extent that it can threaten continued operations in some cases.

Unfortunately, even businesses that take product compliance seriously can face recalls caused by manufacturing defects or chemical contamination at some point.

Insurance can reduce the impact of such situations by covering product recall expenses.

Product recall cost example

Parameters

• Product type: Baby carrier
• Manufacturing cost: 30 USD
• Recalled quantity: 1000 pcs

Overview

Item	Cost
Product cost	30 USD x 1000 pcs = 30,000 USD
Disposal/destruction	2500 USD
Recall announcement	3500 USD
Transportation cost	1500 USD

What types of product recalls can be covered by insurance?

Product recall insurance may cover recalls caused by manufacturing defects and contamination.

A few years ago, I dealt with a situation where a toy company found that its product contained DEHP above the set limits. This turned out to be caused by a machine lubricant leaking into the plastic material during production. In other words, their product was found to be non-compliant despite their best efforts.

However, had the compliance issue been caused by their ignoring certain regulatory requirements, then it’s unlikely that they would have been covered by recall insurance.

What expenses can be covered by product recall insurance?

Here are some examples of expenses mentioned by various product recall insurance providers:

• Product replacement and repair cost
• Product destruction cost
• Advertising cost (to announce recalls to the public)
• Transportation costs

What product documents are needed for product recall insurance?

Product recall insurance providers must verify that your products are fully compliant with existing product regulations and standards. Here are some examples of documents and other files that may be requested:

1. Test reports

2. Substance documentation

3. Declaration or certificates

4. Label photocopies

5. Instructions photocopies

The exact documentation depends on the product and market.

Can we obtain a product recall insurance instead of ensuring compliance?

No, product recall insurance is not a substitute for ensuring compliance with applicable regulations, standards, and other requirements.

The purpose of product recall insurance is to help you reduce the risk of a disastrous recall occurring despite your best efforts to ensure product safety and compliance.

How much does product recall insurance cost?

Here are two examples:

C&F

Minimum premium starting from 5000 USD.

Aon

Minimum premium starting from 15,000 USD, with a minimum retention of 25,000 USD.

How does product recall insurance differ from product liability insurance?

Product recall insurance only covers specified costs related to carrying out a recall. Product liability insurance, on the other hand, can cover expenses related to claims caused by injuries or property damage caused by your product.

While there can be some overlap, product recall insurance is often separate from product liability insurance.

Examples of Product Recall Insurance Providers

Here are examples of product recall insurance companies covering the United States, European Union, UK and Asia Pacific (but not necessarily all four):

• AXA XL
• DUAL Insurance
• C&F
• Allied World
• AIG
• Howden Insurance
• Marsh LLC
• WTW
• Chubb Insurance
• Aon
• CFC Underwriting
• Beazley
• Wilson Re Group