INSURANCE

PRODUCT RECALL INSURANCE -

YOUR BUSINESS’S INVALUABLE LIFELINE

Product recall costs and reputational damage can spiral out of control and drain the pockets of a business if not managed properly, advises VERNON SUBBAN

2021 has been a year when South African consumers were exposed to one of the largest product recalls in the food industry. When a product’s safety is in question, timing is everything, decisions need to be made. There is no room for ill-judged ones. Product recall costs can spiral out of control and drain the pockets of a business if not managed properly and reputational damage hits a business the hardest when social media goes viral. Product recall insurance will be any business’s “handmaiden of commerce” to cover the costs incurred to recall that defective or unsafe product from the market.

PRODUCT RECALL INSURANCE EXPLAINED

When a product poses a hazard to consumers, there are two parties that can initiate a product recall. The first being the product manufacturer, making the recall a voluntary one. The second being the National Consumer Commission (NCC) under the auspices of the Consumer Protection Act 68 of 2008 (CPA), initiating a recall that is involuntary or compulsory. However, in both instances the affected business has to cover the huge costs. The product manufacturer may be ultimately accountable for initiating a voluntary product recall, however other role players in the supply chain would be opportunistic to think they would be

absolved of any responsibility, as legislated in the CPA. Product recall insurance covers costs incurred in recalling the products that are likely to cause harm to consumers or their property for which the affected business may become legally liable. It is not a liability insurance, but covers costs that will prevent future liability claims against the business – this is covered by the product liability aspect of the portfolio. Product recall insurance will not cover the costs of repairing and replacing the product, as this is covered by the product guarantee policy. All in all, product recall insurance becomes an essential part of an allencompassing liability insurance portfolio for both large and small commercial businesses.

Cover includes: - cost of withdrawing and recovering defective products from the shelves - transport costs - staff overtime and cost of extra personnel - warehouse and storage costs - loss of profi ts - crisis communication – to inform consumers about the recall - to ensure brand integrity is kept in check as a poorly handled product recall can lead to irreparable reputational damage - may include third party recall expenses.

The trigger for product recall insurance policies to respond, would be that the defective product must pose a danger to consumers or their property. If a product merely does not live up to its expectations, it will not be covered under this policy.

WHO NEEDS PRODUCT RECALL INSURANCE?

Businesses in any industry, large or small can be affected by a product recall if its end users are consumers. Susceptible industries would be automotive, household goods manufacturers, food/beverage sectors and electronics. Although product recall insurance is part of large multinational and commercial businesses, most small and medium-sized businesses have yet to keep pace with the need for this all-important cover. Every business in the supply chain must take due care to ensure that products they supply are safe for consumption. In the food industry, this would mean the farmers, processors, transporters, wholesalers, distributors and retailers can all be held accountable during a product recall as legislated by the CPA. So, it cannot be overestimated that all businesses in the supply chain from small to large need to assess their risk profi le for a potential product recall and get appropriate insurance cover.

WHY IS PRODUCT RECALL INSURANCE A MUST HAVE?

Concerns grow over a business’s capabilities when a product is recalled for any of the three Rs: replacement, refund or repair. In some instances, the product may be banned altogether. The costs associated with any recall irrespective of whichever ‘R’ being the reason, remain staggering. Whether it is a voluntary or compulsory recall, the chain of events that follow include: - loss of consumer confi dence - surrendering hard-won retail shelf space - a drop in sales - loss of valuable supply contracts.

Product recall risks for businesses have escalated in recent years, shaped by the dominance of social media, tougher and more onerous consumer regulations – both global and local. Add to that an increasing complexity of supply chains in all industries. There is really no place to hide for businesses during a product recall with social media being open and available to all and regulation allowing the product recall to be made more public. Product recall insurance becomes invaluable in preserving a business’s reputation, brand and bottom line.

RISK MANAGEMENT AND PRODUCT RECALL INSURANCE

The major causes for recall claims would be defective products and product contamination. Emerging causes for a recall would include advances in product testing, which will make it easier to trace contaminated products and hold liable businesses accountable with ease. Cyber recalls may soon become more prevalent, where hackers contaminate or change a product by taking control of automated product plants, particularly in the automotive industry. Product recalls for ethical reasons like the use of child labour or mislabelling of vegan foods are becoming more apparent. The National Consumer Commission has also initiated various product recalls with active collaboration with affected businesses, to rid South African shelves of potentially harmful products. In light of the above, businesses are likely to be faced with an increased number of product recalls and need a more effective risk management programme rather than yearning for 20/20 hindsight after facing a costly product recall. One that incorporates resilient safety systems and crisis management as part of its DNA cannot be overestimated. Businesses need to have a comprehensive product recall plan with appropriate product recall insurance cover in place.

CONCLUSION

The cost of product recall insurance is dwarfed by the potential catastrophic consequences a business has to face in the event of that fated product recall that threatens human life or limb.

VERNON SUBBAN

INSURANCE BROKER SUBBAN AND SUBBAN RISK MANAGERS