Blog-11-09-Product Recall

The nightmare for consumer product and food manufacturers

September 2011

Background

Product recalls are rare, certainly those that hit the headlines, but when they do happen they present a real threat to everyone in the supply chain, particularly to the manufacturer or ‘own brand’ retailers:  loss of turnover and gross profit, damage to customer confidence, reduction of hard-won retail shelf space, and potential loss of supply contracts.

Consumer goods recalls are on the rise usually as a result of injury, harm from excessive levels of a restricted substance, risk of fire or electrical shock and parts detaching causing choking hazards.

Instances of accidental food contamination occur in the UK regularly, arising from introduction of bacteria, viruses, chemicals and foreign objects, or as a result of formulation errors and mislabelling.

Cosmetics and medicines, whether applied or sprayed onto the skin, inhaled, injected or swallowed, are also susceptible to contamination and potentially fatal errors.

Malicious contamination is also on the rise, either as a result of disgruntled employees or as an attempt at organised extortion.

The manufacturer’s own quality control procedures often do not pick-up issues and the first news tends to come from the end consumer, usually and regrettably after some injury or damage has occurred.

A product recall is a huge step for any business and it’s not one to jump into alone. It’ll damage customers’ relationships, current and future revenues, and business reputations. You also can’t afford to delay, firms must act instantly and external crisis consultants help should be on hand from the beginning.

Insurance

Firms often believe their Products Liability insurance covers them for recall situations – it doesn’t. Products liability only covers the insured against any injury or damage to property claims, not recall costs, gross profit, legal or necessary PR costs. It’s often too late and after the event when many firms realise this.

Today many major buyers, and particularly the supermarkets, demand the cover from their suppliers as a pre-requisite of dealing with them. Holding the cover and advertising the fact can place a firm in a very strong position with potential customers too.

Product Recall and Contamination Insurance is generally available for manufacturers of goods. However importers or even suppliers of goods may wish to take out the cover if they know the manufacturer (or sub-component suppliers) don’t hold the cover themselves, often the case where products are imported particularly from the Far East and China (although this can be difficult to insure due to lack of hands-on quality control).

Cover is generally triggered by the recall of a product (including government / public authority forced recalls) caused by a deficiency of the product, actual or alleged malicious product tampering, product extortion threats, political activism or even grudges – all strictly subject to the proviso the use of the product has the potential to cause bodily injury or damage to property.

Cover includes the policyholder’s recall costs plus third party recall and replacement costs; the cost of replacing the defective product; loss of current and future gross profit; product extortion costs; and legal defence costs should an authority investigate and decide to prosecute.

If a recall attracts publicity the damage can be multiplied so the skilful handling of a product recall can minimise damage demonstrating reliability and professionalism. Cover can extend to include crisis consultants who will arrange for collection of samples, arrange testing, liaise with the authorities and regulators, and provide media communication and PR skills to help limit damage and rebuild the brand and reputation of the product and business. Pre-recall incident reviews can also be arranged.

With such potential liabilities and potential for costs, few firms, even the largest, can afford to self-insure and firms tend not to budget for such situations, preferring to transfer the risk to insurance.

Premiums and Competition

Claims can be significant and as a result premiums generally start at £10,000 with deductibles of say £10,000 to £25,000. Every proposal to insurers is different and this is where interested firms must differentiate themselves demonstrating they have a full grasp on risk management and quality control. Insurers will be keen to take this into consideration.

There are several insurers keen to write this business - speak to Rowlands & Hames for further information.

For further information and quotations speak to John Isles 01253 598953 or john@rowlands-hames.co.uk

Visit our dedicated website page

Follow @rowlands_hames