Product Recall and Contamination – Trends and Marketplace Options
Contributed by Palmer & Cay
Expenses associated with recalling products from store shelves can be significant and are continuing to rise. Business owners and risk managers recognize the negative impact a loss could have on their balance sheets, so many middle market businesses procure some form of recall coverage. As a result, the product recall and contamination insurance market continues to grow in popularity and importance, and it is budgeting for a 5% rate increase in 2020.
Trends and Rate Movement
Despite the heightened awareness of recall claims due to the 24 hour news cycle and social media, the number of reported claims is at the lowest level in five years. In 2018 there were 7,424, recalls report to the US Food and Drug Administration, as compared to 9,175 in 2015. What has changed, thanks to a global economy, is that recall claims are often national/international and broader in scope.
With recalls down, the insurance market should be reducing premiums, but carriers have been unable to because reinsurance rates are up on their entire property and casualty portfolios. Other factors in the market include the withdrawal of Liberty International from the marketplace in 2017, creating capacity issues. More recently, in 2019 Lloyd’s went through some changes in underwriting that also impacted the market.
Marketplace Options – Coverage
Options for obtaining recall insurance include two main avenues: an endorsement to a package policy or stand-alone recall/contamination coverage. Many factors within an organization will determine which platform is better suited for your organization. To assess which combination(s) best meets your company’s needs, get insight from the quality control department, finance and risk team, ownership and insurance broker professional.
When considering an endorsement to a general liability policy for “limited product withdrawal expense,” the key words are “limited” and “expense.” The intent is to cover no more than the applicable expenses to recall the product, which are typically defined by: cost of notification, warehouse and transportation expenses, and cost of disposal (among others).
The endorsed liability policy makes available a small sublimit of coverage, routinely no higher than $500,000. The major limitations of this form will be clear when comparing broader stand-alone recall policies.
With a full recall policy, losses cover many more expenses, including recall costs, business interruption, product extortion costs, replacement costs, third party recall costs, destruction costs and consultant/advisor costs.
On the more reputable recall policies, a trigger for the product recall may be silent and not distinguish between insured, third-party (client) or governmental forced recall, whereas the endorsement on a liability policy may only pay if initiated by the insured.
Some additional value in a stand-alone policy is the self-assessment that is part of the underwriting process. Insurance companies want to understand the policies and procedures you have in place to prevent, mitigate and manage a recall event.
During this process you will become more aware of your vulnerabilities and, through careful review of the coverage options, see what areas are of greatest concern to your company. In purchasing a policy, not only will your organization obtain financial protection, you will gain a team of knowledgeable resources to help manage crisis and recovery situations.
As with all insurance products, engaging professionals that understand your industry and business needs is critical to formulating the best approach for your exposure. Do not wait for a major recall to negatively impact your company; partner with risk management and insurance experts to assess and protect your operations.