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Product Liability & Recall

Product recall insurance covers damage incurred from expenses relating to product recalls and liability to pay compensation.

What Is Recall Insurance?

The enactment of laws intended to promote consumer protection has advanced globally in recent years, and as product safety standards are raised year-by-year, product life cycles are becoming shorter as a result of the diversification of consumer preferences, the frequency of product improvements is increasing due to technological innovations, and companies are reinforcing protection of their brand image, resulting in a rising frequency of product recalls. For example, the increased use of shared modules typical in the automobile industry has caused the number of models subject to a single recall to rise, resulting in high total recall related costs.

In the case where a safety-related problem regarding a product supplied to the market is discovered and a recall is implemented, companies must bear a variety of expenses and they can incur substantial economic losses. Recall insurance provides balance sheet protection against these economic losses. One of the incidental services that Marsh provides with recall insurance is the provision of expert advice to minimize damage to brand image during risky circumstances, supporting companies that implement recalls.

The final decision-maker concerning whether to implement a recall is the manufacturer/supplier of the end product. However, in the case where the cause of the recall is a defect in a component supplied by a manufacturer/supplier that is a third party to the manufacturer/supplier of the end product, the parts manufacturer/supplier may be subject to a demand from the manufacturer/supplier of the end product to pay part or all of the recall expenses. With regard to recall insurance, an insurance policy that covers expenses incurred for a recall by the manufacturer/supplier of the end product is referred to as first party recall, and an insurance policy that indemnifies a component manufacturer/supplier for recall-related damage paid to the manufacturer/supplier of the end product is third party recall, and these two policies are handled separately for insurance underwriting purposes.

The methods of underwriting recall insurance vary depending on the insurer. There are two types of recall insurance. The first is the case where an independent insurance policy is underwritten as recall (expense) insurance. The second is the case where a rider (additional option) to product liability insurance is underwritten because of the close relationship with product liability risks.

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Product liability and recall insurance helps protect your business from the financial fallout of claims that one or more of your products caused injury or other damages to a third party (generally, a consumer or group of consumers).

Someone could be harmed by a product in a variety of ways, from the way it was manufactured or designed to how they were instructed to use it. Companies also are often sued for injuries sustained when a product was misused.

With the possibility of settlements running to multi-millions of dollars, even a single injury claim or recall could cause significant harm to a company’s balance sheet.

Product liability and recall insurance has the potential to cover a wide range of issues related to a liability claim or recall involving your product. In general, it helps protect your company from damages when it is claimed that a product made by your organization allegedly caused bodily injury or led to property damage. The settlements and costs of litigation can be significant, particularly if more than one party is involved in the claim. Insurance policies can cover everything from a claimant’s medical bills to fees for your legal representation, as well as any judgments or settlements made against your company.

Any company engaged in the manufacture, distribution, or supply of consumer products should consider obtaining product liability and recall insurance, no matter where the company is located or if regulations are lax in certain areas of business practice. Your product or products may have an established track record of safety and reliability; however, this does not prevent claims from arising unexpectedly. Whenever potential litigation or settlements are involved, the situation will likely prove costly for your company.

Marsh, as your trusted advisor, can support the development of a product liability and recall risk management strategy, so should you experience a product liability loss or recall event, you have more than just an insurance policy. You have a strategy backed by specialists that can help you resolve any claims that may emerge.

Although it may seem like general liability insurance would also extend to cover product liability claims, that is not always the case. Product liability claims and necessary recalls are highly specific, and tend to be more expensive than a general liability insurance policy will allow.

Indeed, most general liability policies have a per-occurrence payout maximum of US$1 million. The average damages for a single product recall exceed US$1.5 million. Multiply that by several products that might, for example, share a contaminated assembly line, and the uninsured cost could bankrupt a company. The cost of adding an additional layer of insurance is worth it in the long run.

Product recalls can be costly to a company, and often exceed the limit of traditional general liability policies. The industry-specific, high-payout structure of product liability insurance can help protect your company against recall costs that threaten your bottom line.

By considering product liability and recall coverage together, you protect your business from first party (for example, lost income) and third party (for example, injury claims) losses, all arising from the same event.