This post is a continuation of our introduction to product recall insurance for food manufacturers found here: https://thecoylegroup.com/product-recall-insurance-food-manufacturers-part-1/
Is the cost of a product recall covered by my products liability insurance (general liability insurance)?
No, it’s not, it’s actually excluded under your liability policy. Your products liability coverage contained in your general liability policy will only pay for claims which result in bodily injury or property damage and you’re legally obligated to settle those claims. It does not cover the costs to recall a potentially dangerous product from the marketplace, even if bodily injury or property damage has occurred.
Now for clarification, some insurers will automatically include a basic limit of product recall insurance in package policies sold to manufacturers and some distributors. Generally, those endorsements are limited in both scope of coverage and in scope of limits commonly at $50,000 or a $100,000.
These endorsements are not sufficient to protect a food products manufacturer from potential recall claims. A full product recall policy should be considered the standard.
What’s covered under a product recall policy?
That depends too.
The core coverage feature in most policies is the cost to physically get products off the shelves in stores, warehouses, and distribution centers and from consumers. Then have the product trucked back to a central location for destruction, or destroy it on site. The policy also covers the costs of disposal including added labor costs, cost of advertising and communications to inform the public of the recall and to notifying regulatory authorities.
Many experts agree that these direct costs end up being the smallest part of a recall, so the basic policy should be supplement with the following options:
- Replacement Costs – To cover the cost of refunds, costs to repair or replace the product, redistribution costs.
- Business Interruption/Loss of Profits – To cover the loss of revenue and profits caused by the decrease in sales which usually follows a recall. It’s also common that operations are suspended to sanitize plants in food operations. There are examples of recalls where it took months to clean, sanitize operations and find the source of a contaminant (i.e. Blue Bell Ice Cream listeria recall event). During this time employees are laid off, plants closed, and revenue stops, further demonstrating the needs for business interruption coverage. By the way, your business income coverage in your property policy will not be trigged for this exposure which is why it needs to be purchased in your recall policy.
- Extra Expenses – To cover the costs to continue operations, minimize the suspension of the business, costs to maintain employees.
- Brand Rehab Expenses – To cover the expenses associated with rehabbing your brand following a recall event and getting back to pre-event sales levels.
- Extortion Costs – Some recalls are triggered by the threat of extortion where a blackmail demand is made that you pay a “ransom”, or the demanding party will contaminate your product. This coverage part can pay for the costs associated with an extortion demand.
- Consequential Damages – Sometimes known as third party costs where you must pay compensatory damages for the costs your customers (retailers/distributors) incurred during a recall.
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