What Product Liability Insurance Is All About:
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 Is Product Liability Insurance?
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.
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
Still not sure what you need?
CoverWallet's Insurance Checklist , you'll find a list of insurance types needed for your specific business or industry.
What Does Product Liability Insurance Cover?
At a High Level...
As a business, you probably have General Liability Insurance and/or Errors and Omissions coverage. However, if your business manufactures products the most important coverage may be a standalone Products Liability policy or Products and Completed Operations coverage within your General Liability. Since recalls are usually unexpected, there is the stress of having to respond to a recall promptly. If you are not quick to respond, you could be doing tremendous harm to your customers and your business.
Any recall causes a company to suffer a drop in consumer confidence – confidence that takes months, even years, to recapture.
Getting Into the Details…
To understand the coverage of Product Liability Insurance, here is a brief summary of the details of this type of coverage:
| Type of Claim | Description | Example |
|---|---|---|
| Accidental Contamination | This happens when a product is accidentally tainted with a substance that is harmful to consumers. | 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 or insufficient information on the label | Improper labeling can cause a consumer to get sick after taking or using it. | 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 | 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 | In 2015, a man tried to extort 50 million pounds from a vegetable supplier by claiming he contaminated a few pumpkins and would destroy them only after being paid. The attempt led to a major drop in sales. |
| 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. | 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 | In Australia, a company was asked by local courts to remove its pain medicine within 3 months. The drug company erroneously claimed the higher-priced drug could provide rapid pain relief. It was a claim that proved to be wrong. |
| 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 | In 2015 the FDA recalled celery because of an E.Coli scare. The recall eventually expanded to 155,000 other items such as salad kits. |
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?
This insurance does not usually cover quality and performance issues. A consumer cannot cause a product to be recalled based on dissatisfaction alone.
In addition, this type of insurance does not cover:
- Warranties
- Intentional violation of industry best practices or governmental regulations
- Losses involving a competitor’s product
- May not accept third party liability
- May not always incorporate the costs of recall-related advertising or redesign costs
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.
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.