The critical difference between product recall and withdrawal insurance coverages
If you’re a manufacturer, product recalls or withdrawals are probably at the forefront of your mind on a pretty regular basis.
by Gina Wallisa
Commercial Insurance Account Executive Senior
No manufacturer ever wants to have a product recall or withdrawal. But, these situations are a reality of the manufacturing industry.
This was on my mind a lot recently, when one of my freezer staples was recalled. As an insurance professional, this was more for me than simply the irritation and concern about one of my favorite, go-to frozen foods. My mind quickly went down the path of insurance ramifications.
I knew that for the manufacturer of my favorite freezer items, there was a lot happening behind the scenes to activate this product recall. And, I knew this involved two insurance coverages that are often confused with one another - Product Recall and Limited Product Withdrawal Expense.
Before we get into the technical talk, consider that in just two weeks (I looked at the weeks of February 3 and February 10, 2016 as examples), the FDA recalled nearly 200 products. And it was not just food products. Dog food, software, chocolate, bandages, batteries and prescription drugs were all recalled just last year.
If you're a manufacturer, product recalls or withdrawals are probably at the forefront of your mind on a pretty regular basis. Recalls affect your bottom line, your supply chain, and your relationships with your customers.
Preparing for recalls is an important part of your risk management program. When it comes to insurance, there's actually a pretty significant difference between Product Recall and Limited Product Withdrawal Expense.
One big difference that is commonly misunderstood is that Product Recall/Withdrawal is third party coverage.
Quick insurance lesson: Someone who purchases insurance is considered to be the first party. The insurance company is the second party, and the third party is anyone who does not qualify as a first or second party. Third party examples for a manufacturer would include customers who purchase and/or utilize a product, distributors, retailers, and vendors who work with the manufacturer.
Product Recall/Withdrawal tends to cover expenses that are sustained by distributors, retailers, vendors, customers or another third party that resulted directly from the recall or withdrawal of the product. This would also tend to cover legal defense costs if the manufacturer is sued.
Conversely, Limited Product Withdrawal Expense is a first party coverage. It covers out-of-pocket expenses that occur to the insured.
For a manufacturer, a recall or withdrawal means a detailed list of steps to take to handle the situation properly and within laws and requirements. You need to notify customers, which might include direct communication or broader advertisements. You likely will have to pay overtime to non-salaried employees to deal with the recall. There's extra warehousing and storage, and possibly expenses related to disposing of the products. And who will move the recalled products from point A to point B? Most manufacturers will need to hire consultants to aid in the management of all of these logistics involved with a recall or withdrawal. Finally, there's the cost to repair or replace the faulty product.
As I started pulling my recalled products out of my freezer, I hoped the manufacturer had the right insurance coverage to keep this problem from turning into a nightmare for their business. Hopefully you do, too.
And in addition to the right insurance program, risk management is also about limiting your exposure in the first place. There's a lot a company can do to reduce the likelihood of a product recall and keep the expenses down if one does happen. Things like tracking products properly and keeping accurate and well organized data on production details. Staging mock recalls and withdrawals to test your plans is also a really good way to find out where you have gaps in your planning. Like anything else, the only way to get close to perfect is to practice.
Even with all the right processes, tests and plans in place, recalls and withdrawals can still happen at any time. Often, it's not the fault of the manufacturer. But the manufacturer is still the one that needs to be prepared.