Product recalls have grown more and more prevalent. And not just for large, multi-national corporations either. Although 2020 showed less product recalls, the occurrences grew in severity and losses when they transpire.
Middle market companies, particularly those doing business with larger companies, can be caught in situations where products fail to work or create potential or actual dangers for users. Tougher regulatory scrutiny causes governments to become stricter. Product safety regulations for food preparation and packaging, automotive and consumer goods have increasingly higher standards.
The rise of complex, global supply chains, growing consumer awareness, potential malicious product tampering (including possible extortions threats), and the pervasiveness of social media all contribute to the increase.
Defective product problems have generated insurance losses in excess of $2 billion in the last five years. And, although the frequency fluctuates, there has been a steady increase over time for both voluntary and mandated recalls at an average of 30 per week in the US.
Recalls aren’t limited to product defects
Undeclared allergens are causing the need for more food recalls. Toxins in consumer products and incidents of environmental contamination are also on the rise. Automated manufacturing plants have increase efficiency but also the risk for cyber security vulnerabilities. Nanotechnology and 3D printing, both nascent innovations, could result in additional, unforeseen recall exposure. Any product recall exposure in today’s environment is accompanied with growing angst by consumers which magnifies loss activity, big and small, and catapults it into the public eye with even more scrutiny.
Product recalls are getting bigger
With the advent of more global business, companies are now selling products to millions of people in hundreds of countries. But manufacturing companies are also using fewer suppliers, which has caused increased risk because now a single recall can cause incalculable damage to entire industries.
Global supply chains are extremely difficult to manage and pose more and more challenges. Recalls are costing more, affecting more people, and causing significant problems for more businesses.
Businesses often underestimate the impact of a recall
To begin with, many smaller or middle market businesses don’t believe product recalls are a major concern. Product recalls haven’t been a problem for them in the past. They assume that they are protected, either because their product is embedded in a larger company’s product or they assume they are covered by their General Liability policy. Neither is true.
General Liability will pay for one incident, but will not cover class action lawsuits or the issues resulting from mandated recalls.
For example, Starbucks recalled 263,000 coffee presses, made in partnership with Bodum, after receiving reports of the product breaking and causing deep cuts to consumers. One consumer problem is terrible but can be dealt with fairly easily; more than a quarter-million problems is quite another story.
Social media can be antisocial
Using social media can often be a fast, effective way to communicate with customers, but it can also exacerbate recall risk. A false or misleading post can impact the size of the recall and cause serious reputational damage. Social media can even have a bottom line impact on companies not even responsible for the recall. The ease and availability of social media allows consumers to spread and share information before companies can decide on a strategy.
There can be anywhere from a dozen to a hundred recalls in one day – from small parts breaking in a manufacturing plant to spoiled medicine accidentally making it on the shelves at stores. Despite how common recalls are, companies address them through social media slowly and sometimes awkwardly.
The right insurance at the wrong time
A specialized product recall policy not only covers the financial losses from a product recall, it also helps with brand rehabilitation. Insurance can cover the costs of getting the product off the shelves, shipping the damaged product and addressing the fundamental problem.
It also provides access to crisis management services to help companies prepare for recalls by putting plans in place and organizing simulations to test procedures, highlighting areas of improvement.
Talk with your MMA representative about how we can help you prepare and plan for the possibility of a recall event. It can have a huge impact on any financial and reputational damage your company might experience. And, as the final piece of the puzzle, talk with us about specialized product recall insurance that can help your businesses recover faster.