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Product contamination and product recall risks are becoming prevalent for many industries. In 2008 there were 351 FDA Class I recalls. Over the next 24 months, the number of Class I recalls had jumped to 1,499. The FDA defines a Class I recall as a situation in which there is a reasonable probability that use or exposure to a product will cause serious adverse health conditions or possibly death.
Companies involved in the commerce chain, including processors, distributors and retailers, can be affected by product contamination or recall. Whether your organization is a first-party or a third-party participant, the effects of a recall can be both lengthy and expensive.
Product Recall expenses are excluded from all standard general liability policies and that gap in coverage can only be addressed via endorsement or by purchasing a stand-alone policy. Surprisingly many companies either do not buy product recall coverage or rely on an endorsement to their General Liability policy providing “Limited Product Withdrawal Expense”. While the cost for adding this endorsement varies, typical cost is $2,500 for $250,000 in limit. It is critical to know that the Limited Product Withdrawal Coverage will only respond to basic recall expenses such as disposal of the product, packaging and shipping, costs to notify, costs of temporary employees, and overtime to non-salary employees.
“Limited Product Withdrawal Expense” is a one-size-fits-all approach to buying back the recall exclusion. A comprehensive stand- alone policy is a customized and strategic solution to the same problem. Insurance carriers who specialize in stand alone recall policies are able to put up $5 million to $10 million in coverage limits. Stand-alone policies are designed to cover not only withdrawal expense, but also profit, redesign, repair and rework, crisis management, legal defense and most importantly third-party damages.
The most significant reason businesses purchase insurance is to prevent a catastrophic situation from causing them to close their doors forever. Purchasing a comprehensive product recall policy is just one way to mitigate a quality breach from becoming a company killer. At The ALS Group we encourage our clients to take a more three-dimensional approach to risk, by addressing their organizations’ Total Cost of Risk (TCoR). This will provide the firm’s leadership with the transparency they need to take a more proactive rather than reactive approach to risk mitigation.
If you would like to get more information on this product as well as other ways to mitigate this risk, please feel free to contact Albert L. Sica, at 732.395-4251 or at asica@thealsgroup.com.