Is Your Manufacturing Business Recall-Ready?
If you visit the website of the United States Consumer Product Safety Commission you’ll find a recall list that includes nightlights, plastic toys, fleece sweaters and furniture. Even products as innocuous as pillows and chocolate have been included on the recall list.
No manufacturer, large or small, is immune from product recalls and the business disruption and considerable expense that may result. History’s most famous product recall cases feature well-known brands such as Tylenol, Vioxx, Toyota, Boeing, Dell and Mattel, and involved hundreds of millions of dollars in associated costs.
However, one third of product recalls are from companies with five or fewer employees. And, the average cost of a recall is approximately $550,000. For a small manufacturer, such a loss could spell financial ruin.
the good news for manufacturers is that independent agents like McSweeney & Ricci are in a great position to help protect manufacturing clients from the stress and potential financial impacts of a product recall.
Whether required by law or voluntary, a product recall is typically in a business’ best interest. it can protect their customers, their reputation and their business.
A recall means expenses for a company including the cost to remove defective or dangerous products from the market, and dispose of them safely. Companies often have to pay for product testing to see if in fact, a recall is necessary. They also can be left responsible for the cost to notify customers and users of the product, costs for transporting, storing, and disposing of the defective product, and the inevitable extra expenses including overtime, contractor’s costs, computer time, etc.
The list could go on. Most manufacturers know a recall can place them at financial risk. As risk advisers to manufacturing clients, McSweeney & Ricci understands the benefits that product recall insurance can provide. The right insurance protection can offer peace of mind and help protect a business for years to come. We can offer a more comprehensive approach to product recall with coverage that goes above and beyond baseline protection. Product recall insurance isn’t usually included with general liability coverage, and must be added as an endorsement.
With the considerable risk for manufacturers, we can recommend the following optional coverages:
Repair, replacement or repurchasing costs
This covers costs incurred to repair a defective product, replace a product with a similar one, and repurchase a product or reimburse customers for payments. It can also cover costs to redistribute and install replacement products or parts sold to customers.
Customer’s lost profit
This coverage protects manufacturers when a product recall affects customer’s abilities to deliver their goods. For example, a customer may lose profits from the sale of a manufacturer’s products when they are returned, or due to the additional costs of processing the recall.
Good faith advertising
After a product recall, there may be costs incurred to help repair the manufacturer’s damaged reputation in the marketplace. Often, paid advertising, social media and public relations services are covered for a period of time after a recall.
Covering legal costs of a recall
Agents with knowledge of product recall say that companies that have not been through the experience are often stunned by its far-reaching impact. And because a quick response can help to minimize damages to finances and a company’s reputation, agents often recommend product recall liability insurance as another highly-desirable optional endorsement.
Different from general liability insurance, product recall liability coverage addresses lawsuits brought by a customer over costs associated with a recall. If a manufacturer and a customer can’t agree on the amount to be paid, the customer may sue the manufacturer for recovery. In this case, the recall liability coverage may cover the manufacturer’s defense costs and any sums they are found liable to pay their customer. This also may provide coverage for damages the insured may be legally obligated to pay to a third party as the result of a covered recall.
Beyond Financial Implications
A product recall can cause serious damage to a company’s reputation. However, when a detailed plan is promptly put into action, a product recall will demonstrate a commitment to customer safety, and may ultimately enhance reputation and customer loyalty.
We can serve as a risk manager for manufacturing clients. Inquiring about a client’s product recall plan can help ensure there is an action plan ready to go in the event of a recall. There are three keys to an effective product recall plan:
- have a written plan in place. Operating under the stress and time constraints of product recall is not the time to ask, “how are we going to handle this?”
- designate a team of employees who will be charged with coordinating all aspects of the product recall team. Think of them as a rapid response team, who will help the company get out in front of a potentially very disruptive situation.
- have a strategy in place for dealing with media: both outgoing news releases and incoming media inquiries.
The best way to protect against the costs and broad impact of a product recall is to avoid it in the first place. For this reason, it’s wise to deal with an insurance agent that provides robust risk solution services; that works closely with their clients to identify potential risks, and helps implement focused solutions and best practices to reduce the likelihood of a product recall. These value-add services can make a major difference in the success of a manufacturer.
If your business experiences a product recall, our dedicated claims team stands at the ready. Partnering with McSweeney & Ricci can help provide peace of mind for manufacturers.
Property Casualty 360-“Is your manufacturing client recall-ready?” by Scott Grieco 12/2017