Toole Guard: Product Recall

By November 19, 2012 Business Insurance, Toole Guard

You have been diligent to design, manufacture, and sell a safe and reliable product to your customers. Even with the highest level of attention, the possibility still exists that either a regulatory agency mandated or voluntary product recall could be needed:

* to avoid potential serious additional product liability claims or losses
* because of potential product tampering
* due to incidents, accidents or consumer complaints
* as a result of new information from additional research and product testing
* due to the product not measuring up to advertised claims for safety or effectiveness

Having to recall a product can result in significant expense to replace the product, reimburse the customer for resulting loss of profits, and unfavorable publicity that negatively impacts your sales and reputation. A crucial component to financially surviving a recall is an aggressive action plan combined with an insurance policy to transfer some of the related expenses to.

Regulatory Agencies

Consumer protection laws outline requirements relating to product recalls including:

  1. how much of the cost the manufacturer will have to bear
  2. situations in which a recall is compulsory (usually because the risk is big enough),
  3. penalties for failure to recall

The following U.S. regulatory agencies are responsible for overseeing product safety and implementing a mandatory recall:

Product Recall Overview

A product recall generally involves the following:

  • Manufacturer or dealer notifies the appropriate regulatory agency of their intention to recall a product (if not mandated).
  • Consumer hotlines or other communication channels are established.
  • The scope of the recall (serial numbers or batch numbers etc.) is specified.
  • Product recall announcements are released on the respective government agency’s website (if applicable), as well as in paid notices in daily newspapers. When a consumer group learns of a recall it will also notify the public by various means.
  • The consumer is advised to return the goods, regardless of condition, to the seller for a full refund or modification.
  • Avenues for possible consumer compensation will vary depending on the specific laws governing consumer trade protection and the cause of recall.

Recall Action Plan

If a product recall “could” happen in your business, the best time to plan for one, is now.
Investing the time to pre-plan will allow you to:

  • expedite decisions and initiate needed actions
  • reduce costs by minimizing duplication of efforts
  • help assure compliance with regulatory requirements
  • address potential problems of collection, storage, pickup, and/or disposal of recalled products

A “Recall Action Plan” is suggested to include:

  • identifying members of your recall team
  • analysis of the seriousness of the reported safety hazards and recommended appropriate action
  • notification of recall to the appropriate regulatory agency, if required
  • coordination of internal activities/procedures for all personnel who may be involved in the recall
  • training, duties and responsibilities in the event of a recall
  • liaison person(s) to work with dealers, distributors, wholesalers, and retailers
  • prearranged procedures and fees for collection, storage retrofit, and/or disposal of recalled items.
  • provision of publicity and damage control to customers and press
  • releases to the media so the situation is presented in a positive manner that will reduce negative perceptions.
  • notification of recall to the insurance company
  • monitoring and appropriate corrective actions
  • testing of recall plan

Since many parties will be involved in a recall–company departments, dealers, distributors, customers–the plan needs to be periodically reviewed to assure it remains effective and meeting all legal requirements.

Insurance Protection

Coupled with your “Recall Action Plan,” Product Recall Insurance can put your business in the most favorable position to handle a recall as you can share the expense with the insurance carrier and utilize the carrier’s expertise in handling recall situations.

Most product recall insurance programs include First Party Expenses and Third Party Liability.

  • First Party Expenses can include cost associated with notifying customers, shipping cost, extra warehouse and storage expense, cost to dispose of the products, and the cost of extra personnel required to conduct the recall.
  • Third Party Liability will cover your legal obligation to pay compensatory damages as well as 1) the recall expenses of any third party for recalling their product that incorporates your product including the cost to repair or replace such product; 2) business interruption losses of others resulting from the covered incident; 3) the cost to repair and rehabilitate brand reputation; and 4) the additional cost to purchase substitute goods to replace your products.

Depending on your needs, many carriers offer the following additional coverages for consideration:

  • Impaired Property Endorsement – Impaired property is a third party’s product that cannot be used or is less useful because it incorporates your component or ingredient that is known or thought to be deficient and can be restored by repair, replacement, adjustment or removal of your component or ingredient.
  • Cost to Refund, Repair or Replace Endorsement – Amends First Party Expenses to include your cost to refund, repair or replace your product or products.
  • Worldwide Coverage – Amends Coverage Territory to include all parts of the world, excluding any jurisdiction in which this policy may be prohibited by local laws, statute or regulation.

How We Can Help…

As your Trusted Advisor we are committed to providing you the guidance and assistance needed to mitigate your financial impact and interruption of your operations from a potential product recall. Please contact us if you wish to explore your recall risk in more depth. 800-95-TOOLE

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