The safety issue could be real – in that it has already, or could likely, cause the consumer bodily harm - or the issue could be threatened or alleged by a member of the public.
Often, the most challenging and expensive part of a recall is keeping the business operational while facing intense public and regulatory scrutiny.
Logistically, executing the recall itself can be costly and complex in addition to addressing the underlying issues. In some cases, recalling the defective item may suffice, but in most cases the business will need to invest time and money into replacing ingredients or repairing parts, identifying new suppliers or even bringing in temporary contractors.
There are many costs involved when a product safety issue is discovered. Along with the costs of withdrawing the product from consumers, there are also costs associated with identifying what went wrong and remediating it, as well as keeping the business afloat. Below are the most common costs associated with a product recall:
Internal or third-party testing
Employing experts / consultants
Closing facilities or suspending production
Cleaning, fixing or replacing equipment
Issuing notices to consumers
Transporting, storing, destroying or disposing of affected products
Replacing ingredients, materials or products
Retailer per store fees
Overtime for employees
Crisis communications & PR
Ongoing loss of sales or customers
Replacing suppliers or hiring contract manufacturers
Prolonged interruption of production
Stalled R&D, M&A or other investments
Impact of brand & reputational damage
A recall can hit any manufacturer or distributor regardless of the sector. Recalls of food & beverage products and certain consumer packaged goods (CPG) tend to garner mainstream attention depending on the severity of the issue.
Product recall insurance helps safeguard a business from the financial impact of a recall, specifically the first and third-party costs associated with identifying and addressing the issue, conducting the recall and keeping the business operational.
A good recall policy should protect a business against a multitude of exposures, both internal and external.
Originally posted by CFC Underwriting
This guide is for information purposes and based on sources we believe are reliable, the general risk management and insurance information is not intended to be taken as advice with respect to any individual circumstance and cannot be relied upon as such.