What is product recall insurance? Deep dive with Neha Yardi

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Remember when Maggi had to recall their products from all over the country?


Ever wondered the kind of cost such an activity will add to the business expenses?


They suffered an overall loss of ₹ 451.6 cr along with long term damage to overall sales.


How can a business offset such a risk? By using insurance, of course.


Joining us today is someone who has worked with various insurance brokers like Marsh, JLT independent, etc and is currently the Executive vice president of the Liability & Specialty Risks Team at Howden India- Neha Yardi. 


Neha focuses on the manufacturing segment and has also spent time with a reputed law firm as a lawyer. This gives her an edge as she has experience working as a broker and has handled claims as a lawyer.


So, what is a Product recall insurance policy?


First, let us understand the two types of insurance policies –


1) Loss policy or crisis insurance policy

This is the financial loss that you as a company have sustained as a result of a covered incident under the policy.

For example – Crime insurance is often designed by liability insurance specialists, but it is actually a loss policy because it covers a company for its direct financial loss caused as a result of an infidelity situation or a third person committing a fraudulent act against a company.

Similarly, a kidnap and ransom insurance policy is nothing but the financial loss sustained by the insured company due to the ransom that the company may have to pay because of a kidnapping event.


2) Liability policy


This is essentially the financial loss that the insured company may have to pay as damages to a  third party due to an error or an omission in the work performed by the insured company or due to a fault in the products manufactured by the insured company or just emanating out of the various business operations of an insured company such as transportation, premises, etc. 

It covers what the insured company owes or the amount  the insured company is obligated to pay to a third party,  by way of compensation as a result of loss caused to the third party of their loss as result of your product, premises, general business operations or service.

Product recall insurance too is a loss policy. It covers the insured company for the financial loss that they may suffer as a result of the expenses that they may have to incur for recalling a batch (es) of the product(s) manufactured or sold by them from the commercial marketplace/stream of commerce back to the place of dispatch or destruction:

  • either because the product is defective
  • or has the potential of being defective
  • and has the potential to cause bodily injury or property damage to the end-user
  • Or has already caused a bodily injury or property damage to the end-user due to which the other batches of the same product have to be recalled.

For example – If a pharmaceutical company discovered that a batch of their drugs had impurities that could cause serious bodily injury to the end-user consuming it, they would immediately and voluntarily want to recall all batches of that product from the marketplace. There are also instances where the regulator may ask the pharmaceutical company to recall a batch of products from the marketplace because they believe the same to be contaminated or defective and likely to cause harm to the consumer.

 If recalls are not conducted on time, there is a risk that the person consuming the defective product could file a product liability claim for compensation and that can bring a huge financial loss and damage to the reputation of the company.


What do these recall expenses include?


Typically recall costs would include but would not be limited to:

– Shipping costs

– Warehousing costs

– Storage spaces

– Cost of response consultants

– Cost of hiring additional manpower

– PR and advertising costs etc.

An analysis of definitions in the policy needs to be done to understand the full scope of covered costs.

Response consultants play a very critical role in recall policies. They guide the company on how the recall needs to be conducted. Most insurance companies who offer recall insurance also offer the services of a response consultant that are attached to the policy and built into the policy premiums.


However, what happens when a person has suffered a bodily injury and wants to file a case against the company?


In such situations, product liability insurance comes into play.

There are several differences between product liability and product recall insurance, both of them are different products to protect against different risks, however, they are connected.

 Like mentioned earlier, if a consumer has suffered a bodily injury due to a product and they seek compensation for the injury from the manufacturer, the cost of defending such a claim and damages if awarded by the court or settled between parties are covered under product liability.

However, the product recall insurance becomes a very essential tool to mitigate or prevent a large product claim from happening.

If you recall on time, then the defective batches are back under your care, control and custody. Then there is no threat of those products causing any more harm to anyone. However, if you let them be in the stream of commerce and they cause more bodily injury to customers, then there is a likelihood of a product liability claim happening against the insured company.

Therefore, most companies should understand that if they want to avert or eliminate the threat of a product liability claim happening against them, it is important to conduct the product recall in time. For doing that the recall insurance policy is the best tool.

Both of them are complementary. Much like the public offering of securities insurance and a D&O insurance policy. They go hand in hand.


The different types of product recall policies


Recall insurance as a term is used in the broader sense. Most people believe that the normal recall policy is good for everyone. However, there are two different policies for different businesses:


1) Contaminated products insurance policies


This is taken by companies that manufacture products that are ingestible. Which are going inside your body or are applied to your body. For example – Pharmaceuticals products, food and beverage, cosmetics, etc do not buy an average recall policy. What they buy is a contaminated insurance policy (CPI policy).


Key Coverages of this are:

– Accidental contamination

Let’s say you are a wine manufacturer and your wine got contaminated due to improper storage. If this wine, hits the consumer shelves it will have the potential to cause bodily injury to the person who consumes it.

That is when the policy will cover your expenses.

 

– Malicious tampering

This means that someone intentionally and maliciously tampered with the product to make it unfit for consumption. If someone has done that and you have recalled it the policy will pay for those expenses.

 

– Policy extortion

This basically means if someone says that if you don’t pay me this sum of amount, I will contaminate the entire batch.

The expense for these three will be the same as above –

– Shipping costs

– Warehousing costs

– Storage spaces

– The fees of response consultants

– Advertising or publicity

Apart from these, what also gets covered are business interruption loss and rehabilitation costs. The former covers loss of profit due to a recall situation and the latter covers expenses incurred to “rehabilitate” the product to the same market share as it was before the recall.


2) Recall product policy


Whereas companies that do not create products that are ingestible, purchase the standard policy. Manufacturers for example – Auto, engineering, toymakers, furniture, etc.


Key coverages:

 

 – Recall expenses

 

 – Product guarantee

This one is a rarely given cover, all insurance companies do not give it – while some do. This is for when your product has failed to perform as per its intended purpose. You have to recall it because of that, this can get covered under the product guarantee.

 

– Financial loss


 If you have done a product recall because of which a customer has suffered a financial loss and he claims against you so that financial loss liability which the customer has put against you is covered under it.

Both the policies have a first party and third party recall extension. This means that if the manufacturer is conducting the recall, on their own then it is a first-party recall. If someone else has conducted the recall on the manufacturer’s behalf ( for example the dealer or the distributor) even that gets covered. They can do the recall and then claim it from the manufacturer.

 Pro tip – Pay attention to the policy conditions and exclusions, while the coverage covers several things it is important to pay attention to those. The recall policy also has a lot of exclusions.

 

What are the underwriting considerations for the product recall policy?


A variety of factors are considered for the policy including:

  • The product type
  • Turnover of the insured and geographical split of the same
  • Numbers of production plants and lines
  • Loss history
  • Quality control and recall plans
  • Regulatory records
  • Batch information

 

So, who is the policy for?


Traditionally people started buying this policy because it was a contractual requirement. What used to happen was, say if a BMW company has given contracts to an Indian auto part manufacturer, to supply certain car parts, they will usually add a requirement to have the policy as a part of their contract. That is how it traditionally started.


However, with time manufacturers have started understanding the significance of the policy not just in terms of the policy covering the expenses and losses but also from a reputational perspective.


Tomorrow, if we conduct the recall in time it can save the manufacturer a great deal of reputational loss or loss of customers. A lot of times, what happens is that they do these voluntary recalls and say that we are concerned about the customer’s safety and therefore are conducting this recall.


It also builds an image as to the quality standard of the company. Today, the supply chain has become more complex than ever before, the vendors are going more global. The overall exposure has gone up. To manage that supply chain effectively, to manage brand image and of course, to manage your balance sheet – product recall insurance becomes a very critical policy in your portfolio.

I think it is an important product for any manufacturer, who is exporting, especially if you are exporting to USA and Europe because the awareness over there in regards to the customer’s rights is very high.


This is a big exposure to risk. Plus, there may be a contractual liability, your distributor sitting in Europe will ask you to buy these policies under contract.

 

Trends in this space


I’ve been seeing recall policies for the last 15 years, I started doing recall policies for auto manufacturers in Delhi and Chennai. They definitely, need to buy this policy. So, it is here to stay. It is also a policy that compliments product liability. It is going to one day become an inherent part of the product portfolio for most companies.


Trends wise what we are seeing is that a lot of manufacturers other than the ones from the common industries are also buying the policy. All owing to the contracts that they sign due to their customers. For example, we can see meat exporting or meat processing companies, medical device companies etc, frozen food companies etc buying these covers.

We are seeing a lot of smaller companies buying this policy either because they are obliged to or because they are more aware. It is not limited to the size of the company anymore.


The policy will also have certain exclusions and it is important that the buyer analyses the policy wording and has a discussion about these exclusions with the broker in order to understand their scope and impact.


Conclusion


Congratulations, now you know all about a product recall insurance policy, from a liability expert herself. Thank you, Neha for taking the time to share your insights and knowledge with us. If you found this interesting, go ahead and follow Neha

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