July 22, 2020 by Lucie Dean, CFC Underwriting
Brokers should ensure they are providing standalone product recall insurance options to their clients.
Product recalls are a regular occurrence. Without adequate coverage when one takes place, your commercial clients have a large risk exposure on their hands.
One recent example in the news is Nissan. The automaker recalled hundreds of thousands of vehicles in Canada and the U.S. in June to resolve a latch problem that potentially allowed the hood to fly open while one of its vehicles is moving. The announcement came on top of three previous recalls for the same issue, as well as numerous others, including one in 2019 to fix a brake fluid leak that could cause vehicles to catch fire.
This is just one example of product recalls that happen in the manufacturing industry globally on a daily basis. Manufacturers that underestimate the impact can suffer potentially devastating consequences.
No manufacturer can afford to ignore their product recall exposure; this is particularly true in the small business space, where competition is high, profit margins are squeezed, and customers can easily find an alternative supplier.
It is important for brokers to present product recall options as part of a full risk transfer proposal. When thinking about a manufacturing client’s exposure to a product recall event, the main thing to consider is the true cost of a product withdrawal.
Many expenses add up when a product safety issue is discovered — for example, the costs to remove a product from circulation, to notify stakeholders, and to store and destroy that product if necessary.
But that’s just the beginning. When a recall incident does occur, it sets off a chain of events and the true cost goes much further than many manufacturers think.
For example, a a significant amount of rectification may need to be done. The manufacturing location may need a complete clean down to be fit for use, and machinery may need to be repaired. The product may need to be remade and potentially redesigned. Staff may need to work overtime. All of this comes at a cost.
Then there’s the business interruption. Production lines may have been stopped, interrupting sales. Credits may have been issued to key customers. Contracts may have to be cancelled.
While the first-party costs of a product recall often go ignored and uninsured, the most underestimated cost is the impact that a recall can have on the reputation of the business. The most challenging and expensive part of a recall is often keeping the business operational while facing intense public scrutiny.
A recall incident can stick in the mind of a consumer, potentially driving them to competitor products regardless of any concerns about quality. When competition is fierce and profit margins are tight, the impact of a product rcall could go to the very survival of the business, particularly in the small business manufacturing space.
The business may be protected from third-party costs, but first party costs are generally not covered or cover is extremely limited.
Manufacturing clients may believe a recall event will be covered by their more traditional insurance policies, such as general liability or products liability, so it’s really important that brokers review what cover, if any, these types of policies may offer.
Some may appear to include an element of recall insurance, but you need to read through the fine print. For example, the business may be protected from third-party costs, but first party costs are generally not covered, or cover is extremely limited. Recall sub-limits are usually small and can often leave companies underinsured. Triggering these sub-limits can also be difficult as the wordings are narrow.
Only standalone product recall insurance provides the necessary first-party indemnification to protect cash flow should the worst happen and allow a business to continue trading.
Presenting this as part of a full-risk transfer proposal is an important part of the conversation that brokers should be having with all their manufacturing clients. Without this cover in place, these businesses could find themselves with mounting costs as they deal with the fallout of a product withdrawal, with declining sales and public perception stacking the odds against them.
Lucie Dean is a product recall underwriter with CFC Underwriting.
Feature image by iStock.com/Christian Horz