Product Liability Insurance

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Companies have been experiencing product recalls for generations. Even the best companies have had issues with their products, which has forced them to go through a recall.

Products get recalled because of contamination, tampering, or a design flaw. Not only does this mean financial loss for a company, it can lead to damaged corporate and professional reputations, a management overhaul, and even a total rejection of company and product.

Let us introduce you to Product Recall Insurance. The insurance that can save your business should you need to recall one of your products.

Read on to understand if this insurance type is right for your business.

What Product Liability Insurance Is All About:

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What Is Product Liability Insurance Coverage?

Product Recall Insurance is a first party, specialty policy that covers tampering, contamination, crisis management expenses and recall costs for the negative publicity that may ensue after a product is recalled. This coverage can supplement general liability or be purchased as a stand-alone policy.

This type of insurance will help you manage the negative fallout from a recall and provide you with a safety net as you work to repair your business reputation and regain the public’s trust and patronage. It’s important to keep in mind that a recall can happen through no fault of the company.

There are two types of this specialty Insurance: Voluntary and Involuntary. Many companies are opting for voluntary recall which means they don’t have to wait for the government to announce a mandatory recall. This minimizes the adverse effects that happen when the government steps in.

With a voluntary recall, the company is admitting its error. With involuntary recall, you take the risk of being negatively perceived by the public for not practicing due diligence, or worse, hiding the truth.

What Does Product Liability Insurance Cover?

Getting into details...

Accidental Contamination

This happens when a product is accidentally tainted with a substance that is harmful to consumers. Example: A food product that is contaminated while in the production line because an ingredient was accidentally added causing consumers to get sick.

Mistake in labeling

Improper labeling can cause a consumer to get sick after taking or using it. Example: People with allergies need to see all the ingredients used in making a product. Labeling is crucial to the wellbeing of the customer.

Accidental Product Defect

This is caused by poor design or insufficient testing. Example: Some products that have been recalled because of design flaws in hoses, overheating lights or appliances.

Extortion

This happens when a product is deliberately sabotaged so that using it becomes dangerous to life or limb.

Malicious Tampering

This usually happens on a small scale by disgruntled employees who have access to the product before it is released to the market. Example: A person urinating on the production line of a Kellogg’s factory which caused severe damages to the company’s reputation and sales.

Flawed Marketing

Often, this kind of product recall is caused by misleading marketing to push the sale of a product.

Government Recall

This happens when the government steps in and orders the involuntary or mandatory recall of a product because it is deemed to be unsafe for consumers.

What Are the “Limits” on a Product Liability Insurance Policy?

The limits on Product Liability Insurance can vary but often are a part of the limits on a General Liability policy. The most common range from $500,000 - $5,000,000. The exact amount will depend on whether you decide to get basic coverage or opt for advanced coverage.

Do I Need Product Liability Insurance?

This type of insurance comes in handy if your business:

  • Relies heavily on human workforce
  • Will suffer greatly from a recall
  • Does not have sufficient funds to cover the cost of a recall
  • Cannot monitor the distribution and sale of your product
  • Cannot provide tamper-proof packaging

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You’ll Know It’s the Right Policy If It:

  • Protects your business from bankruptcy
  • Includes shipping, advertising, promotional expenses
  • Includes the cost of disposing of the defective products
  • Will protect you financially from the cost of replacing the defective, tampered product
  • Pays any fees to wholesalers, retailers, and agents
  • Incorporates the cost of business disruption or interruption
  • Helps your company repair and rehabilitate its reputation and cover management costs

What Does Product Liability Insurance Not Cover?

  • Quality and performance issues

  • Intentional violation

  • Losses

  • Third party liability

  • Redesign costs

How Much Does Product Liability Insurance Cost?

The cost of this insurance will depend on several factors such as:

  • Size of your business
  • Number of products
  • Extent of protection desired or mandated by state required limits
  • Risk factors such as media costs, shipping, extent of recall costs for both customers and your business, need for lab testing, storage, legal fees, lost gross profit, and refunds
  • Third party indemnity
  • Need for professional crisis consultant

All companies that manufacture, package or distribute products for wholesale or retail must have a Product Recall Plan. It will minimize the financial liabilities if any of your products have to be recalled. Think of this type of insurance as your first line of defense should something go wrong with one of your products.

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