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Does Your Business Need Product Recall Insurance?

By George Khoury, Esq. | Last updated on

If your business manufacturers a product, you may need to consider purchasing product recall insurance. Just like it sounds, product recall insurance protects your company if a recall is issued for one of your products. Policies are available for both first-party and third-party coverage.

While nearly all manufacturers know that product liability insurance is essential, product recall insurance is often overlooked. Product liability insurance will cover losses sustained as a result of injuries or damages caused by a recalled product, but what about when a product is recalled without having caused injuries or damages? Also, what about the losses sustained by the company because of the recall, including shipping costs, costs to remediate, and the costs for public and media relations?

What Does First Party Coverage Provide?

Each insurer will have varying terms to their policies, but generally, first-party coverage will take care of your business's expenses in conducting a recall. This may include the shipping costs and costs to fix, store, or dispose of the products received from customers, as well as the costs of notifying customers.

Depending on the specific terms of your coverage, which vary from carrier to carrier, first party coverage may also include the costs of hiring additional staff including public or media relations consultants, business interruption losses, as well as the costs to rehabilitate your brand image. If you already have this coverage, checking with your agent about the specific terms is a good idea if you are unsure what your coverage actually provides.

What Is Third Party Coverage For?

If you manufacturer a product that is a component or ingredient in another manufacturer's product, you will want to seriously consider including third party coverage to any product recall policy. Third party coverage will take care of the losses that your business customer sustains as a result of your product's recall. Additionally, this coverage may be able to provide the third party with money to find a temporary replacement until the issues with your product can be fixed.

While getting insurance to cover a third party may sound like a waste of your money, taking a look at your customer contracts might change your opinion. Oftentimes, when one manufacturer creates a component part for another manufacturer, the component part maker must indemnify their customer (the manufacturer of the product the component is used in) from losses caused by their product.

If your business does manufacturer component parts for other manufacturers, and you have an indemnification clause in your agreements with those other manufacturers, purchasing both first and third party product recall insurance coverage might be smartest decision you ever make.

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