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.