Product Recall Insurance: All you need to know

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Recently several incidents have been reported where companies’ voluntary recalled batches of their products because their use or consumption could have posed danger to the consumer resulting in a bodily injury. For example, Maruti Suzuki India Limited on September 6 announced a vehicle recall for a possible defect in 181,754 units of Ciaz, Ertiga, Vitara Brezza, S-Cross and XL6 manufactured between May 4, 2018 and October 27, 2020. Similarly, drug makers Dr Reddy’s Laboratories and Zydus Pharma are recalling bottles in the US market, which is used in the treatment of the symptoms of muscle stiffness related to cerebral palsy or other neurological disorders.

With the increase in the frequency of these incidents, insurance companies have started getting more enquiries about product recall insurance.  The cover is used to mitigate companies risks against bigger liabilities that might arise in future.

What is Product Recall Insurance?

Recall of a product can be caused by various factors ranging from accidental omission, introduction or substitution of a component or a substance during manufacturing, mixing, packaging, labelling, error by the insured in the manufacturing blending or storage. The Product Recall Insurance is generally offered as a part of Product Liability Policy policy and is meant to cover such incidents. The cover is generally sought by auto manufacturers, auto components manufacturers, and pharmaceutical companies and the premium is charged at 0.65 to 0.75% of the sum insured.

Types of Cover: There are two types of covers that are offered under product recall cover – First Party Recall and Third Party Recall. First party recall covers the direct expenses of the insured while the third party recall covers the financial loss incurred by third parties caused by the recall.

Coverage: The product recall insurance covers costs to inspect, withdraw or destroy the product including communication, shipping from the purchaser, storage costs, costs of disposal, redistribution, independent security, recall consultant’s costs, crisis management consultants or public relations expenses, costs of examination and replacement or reworking of recalled products.

Product recalls can lead to huge financial losses for corporates. In order to mitigate risks that lead to financial losses, product recall insurance is emerging as one of the popular options.