A product recall happens when a manufacturer becomes aware of a safety issue in their product and requests it to be returned from the consumer or removed from shelves.
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:
> Identifying the issue
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Internal or third-party testing
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Employing experts / consultants
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Closing facilities or suspending production
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Cleaning, fixing or replacing equipment
> Conducting the recall
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Issuing notices to consumers
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Transporting, storing, destroying or disposing of affected products
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Replacing ingredients, materials or products
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Retailer per store fees
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Overtime for employees
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Crisis communications & PR
> Business continuity
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Ongoing loss of sales or customers
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Cancelled contracts
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Replacing suppliers or hiring contract manufacturers
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Prolonged interruption of production
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Stalled R&D, M&A or other investments
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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.