Could you benefit from product recall insurance?

By Matt McClellan

Although product recalls such as those by automaker Toyota recently have received a lot of media attention, recalls are nothing new.

“As far as consumer safety goes—whether it is consumer products or food products—there is certainly a much higher profile and increased number of recalls just because of the environment we’re in right now,” says Bernie Steves, managing director of Aon Risk Solutions Crisis Management Practice, part of Aon Corp., a global consultancy with headquarters in Chicago. “Clients are being faced with heightened risk and exposure. Fortunately, the insurance marketplace has learned over the years to respond in a more affordable fashion and with a broader scope of coverage than it has been able to in the past.”

Smart Business, a Cleveland, Ohio-based publisher of local management journals, spoke with Steves about how product recall insurance can help your company should you find yourself facing a recall.

How often are products recalled?
There have been many high-profile recalls—particularly in the automotive arena and specifically by Toyota—during the past 12 months.

In fact, there have been more than 390 million individual cars, trucks or buses recalled since the National Traffic and Motor Vehicle Safety Act was passed in 1966. There are a lot of recalled automotive products out there, whether they are vehicles or component parts. Generally, the products have safety-related defects or don’t meet federal safety standards.

(According to the U.S. Consumer Product Safety Commission website, www.cpsc.gov, there have been 11 recalls of mattresses or mattress covers/pads since 2000, including six since 2008 for violations of federal flammability standards.)

What’s new in product recall insurance?
In the past, product recall insurance was a highly specialized type of insurance. It continues to be specialized, but the insurance marketplace has gained considerable knowledge during the 10 years it’s been offering this type of coverage, identifying what the exposures are and refining how it’s underwritten.

Previously, minimum premiums and minimum retentions came with six-figure price tags. That limited the number of companies that could afford to purchase the coverage. Today, with minimum premiums as low as $25,000 and deductibles starting at $50,000, it’s accessible to a much larger range of businesses, including small and midsize companies.

How do these policies work?
The recall of a product triggers the policies.

Generally speaking, there does have to be potential for bodily injury or property damage to occur because of the product in question. One thing that has changed is the ability to include “impaired property” in your coverage.

“Impaired property” includes defective products that make the end-product less useful. In other words, if the window doesn’t go up and down on a vehicle, it’s not really a safety issue, but there certainly is an impairment issue.

How is a claim handled?
There are a few ways the issuers of these policies can respond. We generally look at either first- or third-party losses under these policies.

First-party losses are the losses that the insured themselves incur. For instance, consider a component part manufacturer that faces expenses to recall the product, such as notification, shipping and pulling stock back from its customers. Those expenses would be considered a first-party recall expense. They can be covered under the policy. The policy also can cover repairing, replacing or refunding those products.

Depending on the carrier, coverage can include third-party recall expenses, as well. For example, the insured is making widgets and sends them off to the customer, who comes back to the insured looking to be reimbursed for its own recall expenses.

With third-party coverage, the same types of expenses can be covered as for first-party coverage and the coverage can be extended to other elements of third-party financial loss, such as loss of profits.

Product recall insurance policies also can cover defense costs. If the insured doesn’t believe that it is at fault for the problem, the policy will defend it against its customer.

When considering product recall insurance, the No. 1 thing to do is make sure you’re working with a broker that is familiar with the marketplace. It is specialized coverage and a number of specialized carriers provide it. It’s important that companies are working with brokerage companies that have the expertise globally and have access to the various markets that can put these programs together.

Bernie Steves is managing director of Aon Risk Solutions Crisis Management Practice. Reach him at 312-381-4145 or [email protected]

Reprinted with permission from Smart Business Network. This article originally appeared in the November 2010 edition of Smart Business Detroit.

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