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Your cell phones keep exploding. Your cars have been cheating emissions tests. There's E. coli in your burritos. Whatever the reason, your company needs to recall its products -- and that can cost quite a bit.
Sure, general liability insurance will probably cover you if your product results in injuries before being recalled, but you might need special insurance to deal with the additional damages, like lost profits, reputation damage, and significant disruption to your business, that a product recall can cause.
Product recall insurance can help cover gaps in typical general liability coverage. "Most companies don't have the resources to address the impact of a widespread product recall. They just can't absorb the financial loss and frequently fail as a result," according to Karl Henley, vice president at SeibertKeck Insurance Agency.
Many large companies are willing to pay a premium for recall insurance, but mid-sized and smaller companies often skip coverage, hoping that they can simply avoid any potential recall. Unfortunately, many of those companies are unable to survive the loss when such a recall does happen.
If you're considering spending money on recall insurance, you'll want to make sure that the policy is tailored to your company's needs. Most policies offer first party coverage, for example, which reimburses you for the cost of recalling a product, notifying customers, etc. But third party coverage is also available, which can help protect you from expenses you owe to another party, which can be particularly high if you're supplying a part or ingredient that is recalled.
Knowing when your policy is triggered is also essential. In some industries, such as the food and beverage, consumer product, and auto component industries, companies regularly require manufacturers to buy specialized recall insurance. As a result, recall insurance policies generally fall into one of three categories: consumable products, consumer goods, or component parts, each with a different trigger for coverage. For example, in consumable products coverage, knowledge that the consumption of the product will cause bodily injury or property damage is typically enough to trigger coverage. For component parts, coverage can be triggered when the product posts an actual or imminent danger.
In-house counsel should also pay close attention to the laws, regulations, and contract provisions that may drive a recall and impose specific obligations and financial responsibilities. You'll want to make sure that any policy you consider fits the risks and responsibilities of your business.
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