Article August 11, 2021

Popular product recall insurance myths debunked

Manufacturers may not be aware of the value of product recall insurance or its role in risk transfer. Here are some of the most common myths surrounding product recall insurance that we've seen, and how to address them.

  1. We’ve never had a recall

    It is understandable that companies who have never experienced the huge stress and financial impact of a product recall are reluctant to buy standalone recall insurance. The important thing to bear in mind is that recalls happen all the time. Many first-time buyers are seeking recall insurance because they have recently experienced an uninsured product recall for the first time – the fact that they are now buying the insurance suggests they needed it all along and they appreciate the value of it.

  2. Our quality assurance processes are top-notch, we are unlikely to have a recall

    Put simply, it could be human error or unfortunate luck that results in your product being defective. No critical control point in manufacturing or testing is fool proof.

    All manufacturers have suppliers, perhaps hundreds, and each of their suppliers will also have its own supply chain. Exposures in a supply chain are vast – each company must rely on its suppliers' quality assurance and the end product will only be as good as its worst supplied component. It is very common to see the supply chain causing product issues, even where the company’s controls and processes are best practice.

  3. Our suppliers will pick up the costs of any recalls

    This is not a credible argument for any company, even distribution companies or those who rely on a contract manufacturer. No company should put faith in a third-party’s ability to fund a recall.

    Common scenarios where it is difficult to recover costs from a supplier:
    - The supplier may refuse to pay some or all of the costs incurred (for example, they may refuse to pay for loss of sales, brand rehabilitation and third-party costs).
    - The supplier may not have enough money to pay these costs.
    - In some locations, a supplier contaminating your product is thought of as a purely economic loss, and recovery of these costs against the supplier is barred by the economic loss doctrine.
    - Often the supplier will dispute that they are responsible for the recall.
    - Liability may have been waived or limited in the supply contract.

  4. My liability insurance will cover these costs

    This is not usually the case – and this is a mistake which could cost clients heavily. Liability policies tend to either exclude product recall entirely or provide very narrow coverage for a small limit. Generally, the coverage provided under any other policy for recall or contamination events is negligible. A standalone policy will offer comprehensive first-and-third-party costs.