What is Product Recall Insurance?

We all know the dreaded product recall issues brands can face in CPG. Product Recall insurance helps your business pay for those expenses. While it can be expensive, understanding your options as your brand scales is essential to make the appropriate decisions around this coverage.

Whom does it protect?

Product recall insurance protects your business cash account. With an inflow of capital to help remove the product from shelves, a product recall can help keep your business moving forward when dealing with a difficult situation.

Product recall protection can also save hard-earned business relationships. If you have a large-scale recall that your brand cannot afford, the damage to retailer and customer relationships could be detrimental to success.

When do I need Product Recall for my business?

Given that Product Recall Insurance is on the pricier side, we suggest understanding these risks to your business and evaluating if this coverage is right for you. If you are liquid, you may decide to forego this coverage. However, if your capital is frequently allocated to cover daily operations, it is essential to review your options and determine what you should insure.

How bad could things get?

The risk of product recall has increased dramatically over the years. In the last eight years, the FDA has recalled over 8,000 products. This increase directly correlates with tightening government protocols. The expenses to pull your items off the shelf or in transit could lead to the closing of your business if you do not have the capital to support a recall.

Doesn’t my co-packer already have coverage for this?

Yes, your co-packer may already have this coverage, but they may not have the right amount of coverage. It’s essential to draw up a “supplier agreement” where you include adequate insurance requirements. Although your co-packer may take on most of the responsibility, it’s still your brand; therefore, product recall claims can fall back onto your business.

How could I calculate the total loss cost?

When calculating the total loss, consider the direct and indirect costs. Direct costs include the labor to remove, destroy the product, and clean up, as well as transportation, warehousing, and media announcements. Indirect costs include reduction in sales and profit, crisis response expenses, and brand rehabilitation. Take the amount of all the products you have and increase it by 40%, this should give you a reasonable calculation of your total loss cost.

What are the risks if I don’t have appropriate Product Recall coverage?

Most brands do not carry recall insurance until they reach significant revenue. However, newer brands could see a greater impact from a recall because they have less cash on hand to cover these expenses.

How often should I review my Product Recall?

Product Recall Insurance should be reviewed upon renewal of the policy every year. By checking every year, you may be able to adjust your coverage amounts, determine if your company growth warrants increasing your coverage amounts, or if increased capital reserves can allow you to decrease your coverage amount.

What are the most critical elements of a policy?

With the higher premiums associated with Product Recall Insurance, it is crucial to determine what your business is comfortable self-insuring and how much you want to shift the risk to an insurer. It is highly recommended to increase your deductible to lessen the premium outlay. Increasing the amount your business must pay for a recall before the insurer pays can significantly reduce premiums and make this coverage more manageable.
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