As the poem, To a Mouse, by Robert Burns goes; the best laid plans of mice and men often go awry. And when mice get involved in the supply chain or manufacturing process, it’s very rarely a good thing! There would be only one thing for it – issue a costly product recall and trigger your product recall insurance policy!
In September of this year (2020), according to the Trading Standards Institute website, there were 21 product recalls in the UK. These range from recalls on food stuffs, toys and child seats right through to pom pom socks and LED beauty masks! Food items feature frequently throughout the year. A total of 21 product recalls may not seem very many, but for any business involved in a product recall, the process can be extremely costly, not just financially but for the brand also. So if you are involved in the supply chain and manufacturing process of a particular product, what can you do to protect your interests in the event of a product recall and what role would product recall insurance play?
What is a product recall?
A product recall can represent a true business crisis. A product recall policy can be triggered as soon as a manufacturer becomes aware of a critical safety issue regarding their product. The product will then be removed from retailers shelves and consumers, who may have already purchased the defective product, would be requested to return it. Traditionally, triggers of product recalls have come from manufacturing faults in the automotive industry, or contaminated or mislabelled food stuffs in the food and beverage industry, but recent claims data suggests emerging triggers now include a number of cyber, social media and ethical reasons.
The issue resulting in a product recall could be real, threatened or alleged.
A common real issue is mislabelling of food stuffs, and this may well account for the higher numbers of food related recalls. A simple omission of an ingredient/allergen is reason enough for a product recall, especially when the health of an individual could be put at risk. A defective part in the supply chain or an improper manufacturing process may also result in a real issue resulting in a product recall.
A threatened issue could revolve around an attempt to extort money from an organisation as was recently experienced by Tesco’s when a farmer contaminated jars of baby food with metal shards. This attempted blackmail of the retailer resulted in the product recall of 42,000 jars. (Stop Press: Nigel Wright has recently been found guilty and jailed for 14 years for attempting to extort £1.4m after placing metal shards in baby food.)
Finally, a product recall could be triggered by an allegation of a safety issue, easily and anonymously made on social media for example. A decision may be made to issue a product recall in order to protect the reputation of the brand.
Who is at risk of a product recall?
Regardless of sector, a product recall can occur at any time for any distributor or manufacturer. High profile cases tend to occur in the food & beverage market, as well as the automotive and consumer goods market, (including medical devices), all three of which are highly regulated industries. Whilst large scale cases such as the Whirlpool incident in 2019 are rare, product recalls in general are becoming more common, largely due to an increase in the size and complexity of global supply chains, improved detection techniques and new and tighter regulations.
A chain is only as strong as it’s weakest link, and so it is that your product is only as good as the worst component contained within it. Accepting that no critical control point is ever really fail safe, human error, a faulty process or just plain bad luck could scupper the integrity of the entire supply chain, leading, ultimately, to the safety of your product being compromised.
Your own quality assurance program may be rock solid, but are you as confident in your supplier’s QA controls, and the controls of your supplier’s suppliers further down the chain!? The potential exposure can be massive. You can’t rely on third party indemnification and their ability to fund a product recall.
What are the costs of a product recall?
Ultimately, the cost could be the survival of your business.
The costs associated with a product recall can be significant and the process complex. Being able to manage the event carefully and quickly will serve to protect the interests of both the company and it’s consumers. The actual costs will of course depend on several factors including the removal, transportation and disposal of product from the shelves, the costs retailers may charge for playing their part, costs of communicating with consumers and arranging returns, costs relating to investigations into the cause of the recall and costs for fixing the issue where a redesign is required. All of these costs would of course be incurred while trying to continue to operate the business. It’s interesting to note that in the Whirlpool example cited earlier, an additional strain placed on their business from the product recall was that their website and phone system consistently crashed due to the volume of inbound enquiries generated, impacting the operational ability of the wider business.
In 2019, it is estimated that the average cost of a product recall claim is over £768,000. Whilst this figure is more than likely inflated by a small number of ‘big’ claims such as the Whirlpool case above and the likes of BMW having to recall 268,000 vehicles due to a potential fire risk, it remains true to say that for any sized manufacturer, the potential costs can be high. The nature of costs associated with a product recall can include:
- Pre event investigation costs
- Rectification costs
- Labour costs
- Loss of sales (Business Interruption)
- Redesign and redistribution costs
- Crisis communication
- Retailer costs
- Customer loses
- Advertisement and promotional costs
If you are a manufacturer, having a robust product recall process in place should form part of your business continuity plan, regardless of your size. A regulator is likely to want to know the answers to what happened, how it happened, how long it’s been going on and what the plan is to remedy the situation. Being able to answer these questions could result in resources having to be redirected and ultimately to a loss of income and damage to the brand reputation. A standalone Product Recall Insurance policy will help you answer those questions whilst protecting your cash flow and allowing you to continue trading.
How can Product Recall Insurance help?
If your business had to issue a product recall tomorrow, what would the cost be? Would you have the time, experience and the resources to deal with it? Would your suppliers and customers support you, and indemnify you if at fault? Would your brand be protected?
A standalone Product Recall Insurance policy may not be a viable option for all manufacturing businesses but it’s certainly worth some consideration, particular if you feel your exposures are large enough. Although some product liability policies can be extended to cover product recall costs, there is often an inner limit to the coverage and these policies are unlikely to cover the peripheral costs that can really add up and impact on the bottom line. Products Liability insurance is likely to cover third party bodily injury claims but not the recall costs. Also, Product Guarantee Insurance is available but would not be a replacement for a standalone Product Recall Insurance policy.
A stand alone Product Recall Insurance policy will:
- Provide cash flow protection and keep the business operational
- Cover the costs of the physical recall, including investigation costs, storage and logistics as well as the disposal of goods
- Safeguard against first and third party costs
- Help protect the brand reputation by employing a specialist media crisis management team
- Improve competitiveness in contractual negotiations when trying to win new business
We’re able to offer a quick, non binding indication of price for product recall insurance based on your company name, revenue and a product description.