Product Safety Recalls Generating Greater Insurance Risks

By Bernie Steves and Alan Schoem | September 9, 2013

Consumer product safety recalls in the United States have escalated significantly in recent years, up 61 percent since 2007, according to the U.S. Consumer Product Safety Commission (CPSC).

Financial disaster can result for manufacturers that confront litigation through regulatory penalties, costs of implementing a recall, third party costs, attorney fees and damaged reputations. In addition, the CPSC is now authorized to obtain civil penalties of up to $15 million for failure to report safety hazards and for violations of mandatory safety standards and banning regulations.

Manufacturers should apply procedures to minimize potentials for a recall in the first instance and understand the extent of recall insurance they may need, including options available and type of recall insurance required. Not all manufacturers and distributors are aware of their coverage depth or lack thereof, or types of coverage they may require.

Today’s recall rate has increased the number of companies providing recall insurance and the number of coverage options available. Among many options are policies or riders that cover announcing a recall; shipping and warehousing recalled products; product disposal; legal costs; third party brand name recalls; and additional types of coverage options including so-called “reputation rehabilitation expenses.”

The spiraling recall rate also has fueled product safety management programs to help firms in almost every industry, including the pioneering program noted here.

Recall Insurance Policies

Product recall policies for non-food products are triggered by recall or market withdrawal of the product. Policies do require that a potential for bodily injury or property damage be evident. Some carriers are able to extend bodily injury requirements to include “impaired property” (the component part making the end product less useful). However, this only applies to component parts and third party elements of coverage.

Losses resulting from a recall generally are classified by insurers as either first party losses or third party losses. First party losses are those that may be directly incurred or suffered by the insured. Third party losses are those suffered by customers of the insured and for which the insured may be legally obligated to reimburse. Third party “recall” liability losses should not be confused with general liability or product liability exposures of bodily injury and/or property damage.

Covered losses under these policies are generally separated into first and third parties. For manufacturers of finished goods under their own labels and importers of consumer, commercial or industrial products, the initial first party financial exposures lie in the logistics of the recall itself and the notification expenses incurred in notifying the public of a safety issue and recall. First party coverage can also be extended to include repair, replacement or refund expenses and business interruption losses associated with the recall.

Pioneering Program

In 2009 — for the first time at a U.S. university — a product safety management certificate curriculum was launched at the Center for Supply Chain Management Studies at Saint Louis University (SLU) in Missouri. It has since expanded to four courses in risk assessment, product safety program development and product safety management, and today includes an Advanced Product Safety Management Program. Topics cover all aspects of managing product safety within companies.

Instructors visit from corporations and product safety enterprises across the United States, and include SLU faculty. This program is attended by product safety specialists, attorneys, insurers and supply chain managers, including Microsoft and other major enterprises.

Recall insurance should always be part of a manufacturing company’s policy portfolio, as should participating in a consumer product safety management program.

Inez Tenenbaum, CPSC Chairman, says: “Creating quality assurance and product safety systems in manufacturing is the optimum way to prevent unsafe products from reaching consumers. Knowing how to set up product safety systems, recognizing product hazards, managing supply chains, analyzing data and tracking all raw products that go into a finished product is essential for the development of safe products.”

Those perspectives may be a good lesson for all of us.

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Insurance Journal West September 9, 2013
September 9, 2013
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