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Product Recall Guide

by CFC Underwriting


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.

When a safety issue is discovered, it kicks off a series of events leading up to and surrounding the recall itself. The manufacturer will have an obligation to notify their regulator immediately, and in most cases they will have to notify the general public, including their customers, their suppliers and other stakeholders.

Often, the most challenging and expensive part of a recall is keeping the business operational while facing intense public and regulatory scrutiny.

At the same time, the manufacturer will be responsible for identifying and quarantining the affected products, determining the cause of the safety issue and where it came from (was it a faulty component, or a defective or incorrect raw ingredient?), as well as establishing how long the issue has been present. This may require a site inspection or shutdown, and likely some form of independent testing by a regulator or third-party.

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.

Often, the most challenging and expensive part of a recall is keeping the business operational while facing intense public and regulatory scrutiny. For some businesses, a product recall can present a true business crisis. Managing a recall event carefully and quickly is critical to limiting the impact to consumers as well as the manufacturer’s own business.

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

  • Internal or third-party testing

  • Employing experts / consultants

  • Closing facilities or suspending production

  • Cleaning, fixing or replacing equipment

> Conducting the recall

  • 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

> Business continuity

  • Ongoing loss of sales or customers

  • Cancelled contracts

  • 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.

Small to medium-sized enterprise (SME) manufacturers are often less financially able to deal with the increased spending and restricted cash flow during a recall event. These businesses are usually selling products in a highly competitive market, where customers can easily find an alternative supplier. Similarly, those working on highly specialised products can see their fledgling sales destroyed by a product safety 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.

Recalls of any kind can impact cash flow, squeezing a company’s ability to pay staff, purchase raw materials or even continue production. While many companies have adequate protection from third-party lawsuits, they often do not have sufficient protection for their own costs.

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.