In 2024, a total of 270 products were recalled in Australia and a further 199 products being recalled in 2025 as at mid-November. Recent statistics have shown that product recalls are significant, both in terms of cost and number, and have been on the rise over the last decade.
A business must understand the extent of their exposure in the event it is required to recall a product owing to health and safety concerns. Whilst internal and external quality assurance assists in mitigating these risks, appropriate insurance coverage will supplement sound risk management strategies.
What is Product Recall Insurance and why is it needed?
Product manufacturers in today’s global market are faced with high inherent risks. Factors influencing the risk environment include more stringent product quality requirements; diverse and geographically widespread supply chains; and varying manufacturing standards dependent on the location and local regulations.
These risks are closely linked to product recalls where products fail to meet the required health and safety standards. The consequences of a product recall should not be underestimated. Where insurance coverage is absent or insufficient, costs or losses related to product recall can lead to bankruptcy. As such, appropriate insurance coverage is required to mitigate risks and protect the business.
Product recall insurance covers actual bodily injury, property damage and imminent injury or damage in addition to financial and reputational costs associated with the product recall resulting from a defect, safety concern, or regulatory violation. More specifically, impacts arising from a recall event relating to health and safety concerns may include:
- Direct recall costs, including notification to the marketplace.
- Replacement costs covering removal, warehouse, transport, restocking, disposal/destruction of contaminated products.
- Loss of revenue or contracts due to product recalls.
- Consultancy costs, including expenses relating to containment or crisis management, media / communication, business continuity.
- Third party financial costs.
The scope of product recall insurance extends beyond a traditional product liability insurance policy to protect the business against recall related costs and also against third party losses.
While product recall and product liability insurance is designed to protect the policyholder against third party losses with respect to problems relating to a company’s product, there are major differences between these two coverages. Product recall insurance has the following key features:
- Seeks to indemnity the insured (business owner and policy holder) for first party losses.
- The ‘trigger’ for claims extends beyond ‘actual’ bodily injury and/or property damage (which may be accidental) to also cover ‘imminent’ injury and/or damage (which refers to events which are highly likely to occur in relation to the insured risk).
Who should consider Product Recall coverage?
Many industries involved with mass production can be exposed to the wide and varied risks associated with product recall. The sectors most heavily impacted by product recalls include:
- Automotive/industrial suppliers
- The food and beverage industry
- IT/communications; electronics
- Retail and manufacturing.
It should be noted that essentially that provides a product or service to consumers which is mass produced can be subject to a product recall. Primarily, the recalls occur due to health and safety concerns to consumers of the affected products. The main industries that have recently been impacted by product recalls are those involved in the manufacture of food and beverages. This is likely the result of the growing of the global supply chain and increasing technological improvements – such as advances in analytical testing and traceability – which have increased the frequency of detection of undeclared allergens and microbial contamination in food products.
What does Product Recall Insurance cover?
Product recall insurance policies cover first and third-party costs that arise from a product recall event. It can protect businesses from the potentially devastating impacts of events such as:
- Accidental product contamination
- Intentional impaired ingredients
- Government recalls
- Malicious product tampering
- Product extortion
- Adverse publicity
As part of the recovery process following a recall event, this insurance coverage can assist businesses as follows:
1. Rectification and rehabilitation
Costs related to cleaning or repairing equipment used to manufacture the products followed by the appropriate disposal/destruction of all contaminated products, as well as replacing and distributing recalled products.
2. Malicious tampering of products and extortion
Addresses cost related to recalls from malicious product tampering and extortion. In some cases, a recall results from an individual having nefariously tampered with a product, causing a safety issue. This policy can help cover costs associated with this scenario, including threats or demands of extortion, and cyber-based incidents.
3. Crisis management and reputation protection
Following a product recall event, businesses often face significant reputational damage and severe brand image concerns from consumers. Customers may boycott all brands and products associated with the business because of one product recall. Costs associated with crisis and media management during and after the event, including costs related to advertising and promotional material required to rebuild a business’s reputation and brand image are covered.
4. Business interruption and continuity
This insurance can offer to cover future loss of sales for a defined period when a product is not available for sale, helping ensure that business income is protected.
What doesn’t Product Recall Insurance cover?
Generally, costs for which the policyholder has assumed liability under contract are excluded. Therefore, it is critical to have contracts reviewed to ensure these contracts do not prejudice the business’s position with your insurer. In addition, careful consideration must be given to insurers’ product wordings to precisely determine what is covered and where coverage extensions would be required for additional exposures.
Key considerations include:
- Coverage: Are all ‘reasonable and necessary costs’ listed or are recall expenses limited to specific defined events?
- Policy trigger: Is the trigger based on ‘has resulted’ or ‘would result’ in bodily injury and/or property damage or trigger limited to only ‘has resulted’ in bodily injury and/or property damage?
- Situation: Products can be within or outside of the policyholder’s possession, or products must no longer be in the policyholder’s possession.
- Cover type: First party cover with an extension to cover third party recall costs or first party cover being offered under a third-party policy.
- Limits of indemnity: Are higher limit options provided or sub-limited as part of, and not in addition, to the aggregate liability policy limit?
- Geographical and territorial scope: where products are sold internationally or within USA/Canada, consider geographical limitations and implications of coverage, as some jurisdictions have different regulatory and legal implications for bringing a claim in certain regions or parts of the world.
How does Product Recall Insurance differ from product liability insurance?
Product liability insurance covers a business for claims arising against them due to third party losses associated with the business’s product. Typically, it can cover:
- Third party claims for personal injury or property damage caused by the policyholder’s actions and products.
- Legal costs and expenses required in defending the policyholder and the business.
- Investigation costs arising from the examination of claims.
- Compensation payments, including medical costs arising from a claim.
- Customer property losses or damage whilst in the policyholder’s care, custody, or control.
For further details see our article on Product Liability Insurance here.
What risk transfer strategy should ‘dovetail’ with this coverage?
Product recall insurance coverage should be aligned and integrated with a business’s internal risk management strategy in order to effectively mitigate product recall exposures. An effective and current risk management strategy for product recalls is critical for recall events to protect a business’s financial and reputational objectives. An integrated approach closely aligned with a product recall insurance policy should include the following strategies:
- Business continuity management
Robust and efficient operations supported by a current product recall plan which is regularly updated against a dynamic risk environment. - Enterprise risk management and risk qualification
Covering financial impact modelling of recalls and detailed supply chain analysis. Specific aspects relating to mitigation should cover due diligence analysis, a methodology for supplier selection and traceability of products to source, effectiveness of contract reviews, and residual risk allocation. Such mitigation processes would give increased assurance that risk exposures have been correctly identified and qualified. - Crisis management
Covering adequate plans for identifying, containing and resolving a crisis, including a product recall event. The plan must always be current to reflect the present business risk environment and formally endorsed by management.
Critical features required for effective crisis management plans also include:
- Identifying key roles and responsibilities
- Updated training programs for staff
- Clearly defined response plans to a crisis
- Adequate formal procedures
- Strategies and actions for specific recall scenarios, including where insurers require involvement or notification.
Product Recall Insurance claims scenarios
Accidental product contamination
A manufacturer and wholesaler of health supplements produced a vitamin range which received consumer reports relating to side effects and safety complaints. It was identified through further product testing that a batch of vitamins was contaminated and contained harmful metal fibers caused by an accidental manufacturing error. Ingestion of the vitamins could be dangerous and result in severe health issues for consumers including causing injury to digestive systems. A voluntary press release issued by the manufacturer advised that consumers and distributors cease using the vitamins. Consumers who purchased the affected products were directed to return the vitamins for disposal and obtain a refund. The manufacturer who had an active product recall insurance policy, informed their risk advisor who then notified the insurer of the product manufacturing issue and its intention to voluntarily recall the products. Coverage under the policy was triggered due to the manufacturers’ legal liability arising from the contaminated products which caused bodily injury to third parties. The policy paid expenses covering the recall, collection, and disposal of contaminated products including crisis and public relations management expenses incurred.
Malicious product tamper
Thousands of popular chocolate bars were withdrawn from supermarket shelves after over 100 reports of contamination were received across the nation. It was identified that the chocolate bars contained a noxious substance. The food safety health authority released a notice urging consumers to dispose of the affected chocolate bars or return them to the place of purchase for a refund. The chocolate manufacturer announced that they would stop creating the product, resulting in a 10 per cent loss of revenue for the business. The manufacturer engaged a crisis consultant and investigator who identified that a disgruntled employee of the business had tampered with the product during the manufacturing process. The manufacturer lodged a claim under their product recall insurance policy. The policy paid expenses covering costs and expenses of the recall, consultant fees, including crisis and public relations management expenses incurred to address adverse publicity where the product was named in the media.
Information required to obtain quotations
Information required to procure appropriate coverage and accurate quotations include:
- The businesses’ internal and external risk environment, including the adequacy of existing risk mitigation strategies for product recalls.
- The sector in which the business operates, whether locally, nationally or internationally; that is, manufacturing, contract manufacture, distribution, private label product owners, retailers or importers.
- The nature of products which may be subject to recall, that is, food, beverage, manufactured goods such as vehicles, shoes, clothing, information technology, communications, and electronics.
- The size or annual revenue of the business, as large businesses can be perceived as ‘deep pocket’ targets and can be subject to both actual and malicious product tampering (extortion) for financial gain. For larger multinational businesses, the risk can be widespread.
- Claims history and recall product history within the industry the business is operating in and the likelihood of a recall for the organisation or product.
- Existing insurance policies held by the business to determine their adequacy and whether ‘gaps’ exist in addressing all adverse events resulting from a product recall.
Bellrock’s Team of risk advisors can assist in arranging appropriate Product Recall Insurance tailored to your needs. Please contact a Bellrock Advisor to discuss your requirements.
