The difference between product recall and product guarantee insurance

February 03, 2020

Key takeaways

Product Recall Insurance is designed to cover the costs of recalling products where an accidental fault or contamination could cause bodily injury or property damage.
Cover can include investigation costs, third-party recall expenses and the cost of recovering affected products from distributors, suppliers or storage locations.
Product Liability Insurance may cover third-party injury or property damage caused by a defective product, but it does not usually cover the wider costs of recalling, replacing or recovering that product.
Product Guarantee Insurance can respond where a product fails to perform as intended, even where the fault does not create a danger to health or property.
Product Guarantee Insurance can sometimes be purchased separately, although it is more commonly added as an extension to a Product Recall Insurance policy.
Warranties, extended warranties and insurance-backed guarantees serve different purposes, so businesses should check which party is responsible for repair, replacement or compensation if a product fails.

Area of cover	Product Recall Insurance	Product Guarantee Insurance
Main purpose	Covers the costs of recalling products where an accidental fault or contamination could cause bodily injury or property damage.	Covers losses where a product fails to perform its intended function, even if it does not cause injury or property damage.
Trigger for cover	Usually triggered by a product defect or contamination that creates a safety risk.	Usually triggered by the product failing to meet its intended performance or specification.
Risk to people or property	Normally requires an actual or potential risk of bodily injury or property damage.	Can apply where there is no safety risk, but the product does not work as intended.
Recall costs	Can cover investigation, notification, transportation, recovery and disposal costs associated with a recall.	Not usually designed to cover the wider costs of managing a product recall.
Repair or replacement costs	May cover certain replacement or rehabilitation costs where included in the policy.	Can cover the cost of repairing, replacing or refunding a defective product, subject to the policy terms.
Third-party expenses	Can cover recall costs incurred by customers, distributors or other third parties.	Usually focused on the insured business’s financial loss arising from product failure.
Typical example	A food product is recalled because contamination could make customers ill.	A manufactured component fails to perform to its agreed specification but does not create a safety risk.
Relationship with Product Liability Insurance	Product Liability Insurance may cover resulting injury or property damage, but not the full cost of recalling the product.	Product Liability Insurance would not usually cover losses caused solely by poor product performance.
How it is arranged	Usually purchased as a standalone policy or specialist extension, depending on the business and insurer.	Often added as an extension to Product Recall Insurance, although standalone cover may sometimes be available.
Key consideration	Businesses should check which recall costs, territories, products and third-party expenses are included.	Businesses should check how product failure is defined and whether repair, replacement and financial loss are covered.

Product recall insurance

In order to make a claim there has to be an unintentional error that would result or has resulted in the insured product causing bodily injury or property damage if consumed or used as intended. Product recall insurance policies are designed to provide cover for the costs associated with a recall event, including third party recall costs and the expense of recovering products from the supply chain whether those products are held by distributors, suppliers, or in storage.

Policy cover does differ between providers, but the basic premise is there must be an accidental production fault or contamination that will result in recall costs. A product failing to meet its intended function safely is typically the trigger. The identifying, investigation and discovery of a fault can itself be a costly process, and managing a recall across a wide range of suppliers and distributors adds significant operational complexity.

Product liability insurance is likely to cover third party bodily injury claims but not the third party recall costs or consequential losses that follow. Product Guarantee Insurance differs from Product Liability Insurance, which covers third-party injury or property damage but does not extend to the costs of recalling or replacing faulty products. This is often where businesses find themselves underinsured protected against injury claims but exposed to the full cost of a recall event.

Product Guarantee Insurance

Product recall insurance only comes into effect if the product being manufactured or supply has a fault that is of danger to health, whereas product guarantee insurance will respond if there is a problem with the product, whether it is dangerous or not. Although product guarantee insurance can be purchased in isolation, this is not common. Some product recall policies can be extended to provide an element of product guarantee. For example, consider the cost implications if a food aimed at a specific religious belief having incorrect labelling.

A Warranty

A warranty is a guarantee to repair or replace a product if it is faulty. Some conditions are likely to apply.

An Extended Warranty

Is normally an insurance policy that is purchased to extend the warranty provided by the manufacturers. This is more common in respect of consumer sales. e.g. TV’s, domestic appliances etc.

An Insurance Back Guarantee

These are often used where the product is guaranteed by the installer for a certain period of time – double glazing and conservatories are prime examples. If the contractor ceases to trade and therefore cannot meet their obligations under their guarantee a backup insurance is in place to protect the purchaser.

There are also various types of products that are specific to the construction sector, these can include latent defect cover, performance bonds and home builders guarantees.