UK: Product Recall Insurance – an "Airbag" to Soften the Impact

Last Updated: 10 March 2004
Article by Giles Kavanagh

Product recalls are not isolated events. Recalls range from lawnmowers; to bacteria infected fruit juices, to pharmaceutical products and to children's toys that can cause suffocation. Even the Reader's Digest was forced to recall 600,000 of its magazine because it published a dangerously faulty recipe! 

Of all the industries, however, the motor industry has been more prone to product recalls than any other. In the UK in 1999 the Department of Transport Vehicle Safety Section recorded 125 campaigns involving the recall of vehicles. This involved the recall of approximately 1 million vehicles. In November last year the Wall Street Journal reported that in Tokyo Mitsubishi Motors expected to book a charge of Japanese Yen 6.6 billion to recall 436,469 vehicles worldwide. At the same time it was reported that Honda Motor Company expected to book costs of Japanese Yen 860 million for its recall of 4 particular models sold in Japan. 

Although by far the largest product recalls tend to involve the motor industry, smaller manufacturing companies are not immune from the harm that can be caused by a recall. Product recalls can have devastating effects on an international brand as well as a small manufacturing concern because all companies have in common the desire to protect their goodwill, brand value and reputation in relation to their products. Thus, a defective product, apart from costing a company in terms of sales losses and potential claims, can cause a company's reputation to be tarnished and plummet overnight. 

A product recall, therefore, needs to deal not only with the actual or potential losses that can be caused by the product but also the publicity and remarketing of the product, particularly when there has been a widespread media coverage of a defect. For instance, there was widespread media coverage when the Mercedes A class failed the so-called "moose test" in Sweden – a road-holding performance indication measured by the ability to swerve in front of a "moose". 

Would Your Company Collide With A "Moose" If It Recalled A Product?

Nowadays a product recall could involve expense to cover: 

  • Cost of transporting or shipping the defective product 
  • The cost of storing and destroying the recalled product 
  • The overtime costs or costs to hire additional employees to deal with the recall 
  • The costs or refunds to customers and lost business if customers switch to another supplier. 
  • The cost of any product re-design arising from the recall. 
  • The costs of hiring public relations firms or advertising to inform the public about the recall and also the cost of additional marketing and promotions to enable "product rehabilitation" after the recall. 
  • Investigation costs, engineering tests, equipment tests, cost of correcting the problems such as automobile part re-installation or re-installation of a product in commercial buildings. 

Some large companies may not be affected by a product recall. For instance, despite the recall which Mitsubishi and Honda Motors are carrying out in Japan it is reported that the product recall costs won't affect their earning forecasts as they have sufficient reserves to cover them. However, the sad truth is that in other corporate entities and manufacturing concerns, a product recall can have devastating consequences and new companies simply cannot depend on their profit to cover the various facets and expenses involved in a product recall. 

Product Recall Expense Insurance:An "Airbag" For A "Collision" With A "Moose"? 

A product liability policy protects the insured against its legal liability to third parties who have sustained damage caused by the product. Such a policy would generally not cover the cost of recalling, repair or replacing the defective product or compensating third parties for indirect losses flowing from the use of the product. Product guarantee policies often provide a section where product recall cover is available. It is also possible to obtain product recall expense insurance in a stand alone policy. 

Trend Towards Product Recall Regulation 

Market reports have recorded an increased demand for recall-related coverage. In the United States this increase in demand has largely been ascribed to the growing power and influence of certain US regulatory authorities, most notably the US Traffic and Safety Agency. 

In addition, the US Consumer Safety Products Commission in 1998 issued 375 separate recalls, involving more than 85 million product units. In the same year the Food and Drug Administration recalled more than 3,000 products. 

The regulatory trend of product recalls in the United States appears to have crossed the Atlantic and the degree of authority invested in the Consumer Product Safety Commission, which has the authority to instruct a company to recall a product, suggests that a company should carefully review the adequacy of not only its product liability cover but also whether it is adequately insured for the costs of a product recall. Further regulation and accountability to Government regulatory bodies might also eventually arise in the United Kingdom consequent to the EU General Product Safety directive. A failure to heed the potential of incurring significant costs as a result of a product recall may cause a company to have no alternative but to execute a "handbrake turn" to avoid the "moose" of product recall expenses – but sadly with little reassurance that by so doing it won’t roll over and its wheels of production come to an abrupt halt. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. 

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