Product recall insurance increasingly relevant as threat grows

In the latest in a long line of product recalls, Dutch electronics giant Philips is facing costs of £341m ($400m) after recalling sleep apnoea machines due to health concerns.

The past six months alone have seen High Street names and blue chip companies forced into a series of major product recalls. Fragrances, food stuffs, laxative supplements, medicines, mug heaters and personal massagers have all had to be recalled due to safety concerns.

The risk of product recall is growing as global regulatory standards have increased in number and become stricter, while product safety rules are constantly evolving.

Companies also have to manage geographically widespread supply chains with hugely differing standards.

The risk of a product recall is substantial and can be financially devastating for companies.

Stephen Turner, legal director at DAC Beachcroft, said: “There is the regulatory risk, certainly in the UK, if an insured company has placed potentially unsafe goods on the market.

“The General Product Safety Regulations focus on producers, distributors and retailers. Since Brexit, the risk profile has changed – now the UK regulations apply not only to manufacturers, but to distributors, of EU goods and they have more onerous obligations than previously.”

In the UK, punishments for firms can include fines of up to £20,000, 12 months in prison in severe cases, or the forfeiture of unsafe goods.

Turner continued: “Often, the biggest concern for business is the reputational loss. If you have a well-handled product issue then that can actually end up enhancing the brand. It shows you’re on the ball, that you’re a responsible business, you’re clued up and you know your supply chain.

“Poorly handled recalls can destroy reputations and also lead to long-term loss of business with financial consequences.”

Insurance to the rescue

Product recall insurance, along with contaminated products insurance, helps protect many industries. Without it, some companies have been forced into bankruptcy.

Jonathan Kelly, head of product recall for the UK & Lloyd’s and global underwriting practice leader at Axa XL, said: “Product contamination and product recall insurance policies can protect the buyer against first-party and third-party losses incurred as a result of defects or contamination of the insured product, which present a risk of bodily injury, sickness or third-party property damage.

“Cover is commonly provided for costs such as crisis response, product replacement and transportation and disposal fees. Extensions for loss of profits, third-party costs and product rehabilitation costs can also be available.”

Companies that undergo a recall event will see a negative impact on consumer confidence in the brand. The company can suffer a loss of sales or it can have its contract cancelled by their customer. However, product recall cover includes a suite of pre and post-incident support.

Eddie Kurshumlija, director for product recall at Gallagher, said: “The third-party consultants appointed with each policy are invaluable. They can help pre-incident and post-incident. Pre-incident wise, insurers will make a risk bursary available for the client to work with the appointed consultant on pre-incident mitigation work.

“They will look at their quality control procedures and processes and advise on improving them. They can help advise on a recall plan and can look through the contracts with suppliers and customers to ensure that they’re best protected there.

“They can also design a supplier approval process to ensure that the suppliers a provider chooses to work with are the right ones, have the right accreditations and can be trusted.”

Vital communication

Insureds, however, should only take the decision to recall a product after notifying their insurer and gaining its agreement.

This allows the insurer to provide access to expert advice, which could include claims protocols such as a 24-hour response service and access to back-up facilities to wrap around companies’ own crisis response systems.

The growing number of product recalls is, of course, mirrored in an increasing volume of claims for insurers to settle. This has been driven by a number of factors, including consumer awareness, which has been exacerbated dramatically by the advent of social media.

Turner said: “Traditionally, businesses would have had distributors and sales agents controlling the marketing much more.

”Nowadays, there are influencers and others on social media discussing the products. Claims could be made that the business doesn’t agree with and that may affect how the product is viewed.

“It makes it more open-ended and it underlines the importance of a business being very clear about what’s the product for and the instructions and marketing material in the public domain.

“Businesses also need to be very alive to any discussion on social media that reports on issues with the product or making claims about the product that may not be valid and dealing with that properly.”

The food and beverage sector is statistically the most frequent impacted by recalls. Although the automotive sector has less frequency, recalls here are higher severity, with claims potentially reaching hundreds of millions of dollars.

Kurshumlija said: “[The recall insurance sector] hasn’t been without its fair share of casualties over the years – there have been markets that have been exited and [insurers that] haven’t been able to cope with the number of losses.

“There’s been a shift over the past five years or so, [however], and the books are a lot more diversified now. [The market] has also brought the average line size down and that has been key.

”There’s a lot more quota-share or coinsurance in the market. That, coupled with new entrants, has kept the market pretty stable with none of the drastic rate increases we’ve seen in other lines of business.”