Product liability, recall and contamination insurance

Product liability

If your company designs, manufactures, distributes or sells a physical product—anything from toys to building supplies to macaroni and cheese—you’ll want to strongly consider purchasing product liability coverage. This coverage helps provide financial protection in the event that the use of your product results in property damage, personal injury or death. Product liability coverage can be added to your general liability insurance policy or purchased as a stand-alone policy and can be tailored to the types of risks to which your business may be exposed.

What could go wrong?

As you weigh the option of purchasing product liability coverage, it’s worth considering the ways in which your company could be found at fault for damages resulting from the use of your product. You might think that your product—or your role in a product’s “stream of commerce”—is at little risk of causing damage, but you may be exposed to a range of less visible risks. Consider these factors:

• Product design, manufacturing, assembly and packaging — Although your company’s role in the life of a product may be limited, you may still be liable in a product lawsuit. For instance, you might provide a single small part of a larger product; or your design might be safe, but a contract manufacturer produces a flawed product; or your company simply repackages and distributes products manufactured elsewhere. In all of these instances, your company could be liable—or at least will have to pay to legally defend itself—in the event of a product lawsuit.
• Directions, warnings and flawed marketing — How you communicate about your product can result in product liability risk. For instance, if instructions, warnings or promotions lead to misuse of your product resulting in property damage or injury, your company could be found liable.
• Partner, investor and affiliate relations — Partner or affiliate companies may also require that you have product liability insurance. For instance, a retailer may not sell your product unless you have product liability coverage. Financial backers might also require this coverage before making an investment. Ultimately, failure to carry product liability insurance can result in missed business opportunities.

Covering the costs of a product recall

Product recalls can be costly and logistically complex, as well as damaging to your company’s reputation so you may want to include—or purchase separately—product recall coverage. Product recall insurance can help defray the operational costs of a recall as well as the costs of re-establishing your company’s brand.

While product recalls may be relatively rare, their frequency is on the rise, driven in part by stronger consumer protection regulations. Product safety problems can also be caused by the globalization of supply chains and manufacturing overseas in countries that do not have the same standards and enforcement policies as the European Union or the United States. Product recalls can be financially devastating and can even put a company out of business. No organization is immune to the risk of a product recall—even those with the best safety records, operational controls and manufacturing oversight.

Product recall insurance will help you cover a wide range of costs, including:

• Advertising and promotional costs to launch the recall.
• Shipping costs to collect recalled products.
• Product destruction and disposal costs.
• Product replacement, repair and distribution costs.
• Fees to wholesalers, distributors and retailers.
• Business interruption costs.
• Reputation repair and management costs.

Contamination insurance

If your product might be accidentally or maliciously contaminated—for instance food, cosmetics or pharmaceuticals—you may also want to consider adding contamination coverage along with product liability and recall insurance.

Contamination, whether the result of criminal activity or simple human error, is occurring with alarming frequency in the U.S. and around the world. Companies that fall victim to these incidents often incur staggering costs in damage control and in the restoration of profits and brand reputation. When a contamination incident occurs, it can attract media attention that has a disastrous impact on the public’s confidence in the affected product or brand.

Product contamination insurance will generally provide coverage for the following:

• Recall costs, including laboratory analysis and product transportation.
• Announcement costs, such as radio, television and Internet placements.
• Third-party recall expenses.
• Loss of gross profits, typically up to 18 months.
• Rehabilitation expenses.
• The value of contaminated products.
• Crisis response and consulting expenses, including public relations and recall consultants.
• Increased cost of operations.
• Extortion costs.

Coverage for adverse publicity and government recall may be included or added to a contamination policy as an extension.

Your insurance professional can help you identify your product liability risks and weigh your coverage options.