Expert Column: Offsetting Financial Losses When Products are Recalled

Supermarkets are continuously faced with exposures that can financially impact the bottom line of a store. One of the most overwhelming financial losses can be from a product being recalled. 

Product recall coverage is insurance coverage for the cost of getting a defective product back under the control of the manufacturer or merchandiser that would be responsible for possible bodily injury or property damage from its continued use or existence. Although product recall coverage is a primary insurance coverage for a manufacturer, the exposure must be recognized and protected by grocery and supermarket stores alike. Stores with an “it will never happen to me” mindset are putting their brand and reputation at risk.  In fact, a single large recall, like the Westland/Hallmark beef recall in 2008 or the Peanut Corporation of America recall in 2009, can be devastating to a retailer. It's the retailer who is hit with the initial cost burden of the recall costs, including getting food off the shelves, loss of revenue from decreased sales and repairing public relations.

Product recalls must be differentiated from product liability insurance. Product liability protects a company against costs of judgments, settlements and legal fees arising from damages or alleged damages caused by a defective product. This coverage is typically found within the general liability policy or can be a part of a more robust product recall policy, “if” this coverage is carried. It’s important to note that a standard product liability policy does not cover this exposure due to the “sistership liability exclusion.” 

Although many retail companies regard product recalls as an issue for their manufacturers and distributors, this view is misinformed. It's important for owners to manage the exposures and transfer risk to manufacturers and distributers possessing hold harmless agreements, constant contract review and tracking of insurance certificates. Also, stores need to have a written loss control plan for managing product recalls that includes removing goods from the sales floor into a secure area and tracing products back to their suppliers and ultimate users. In addition, meticulous records of all deliveries and shipments should be kept to ensure that all products affected by a recall can be properly managed. 

Retailers must also understand they can be held responsible for a recall if they carry prepared foods, private label goods or products manufactured abroad in countries by companies under disparate regulatory guidelines. In these cases, it would be prudent for the retailer to obtain a primary product recall policy through an insurance agent or consultant with experience in the food industry - specifically in product recall.  In general, owners should obtain coverage from carriers given at least an “A” credit rating by Moody’s or Standard & Poor’s financial rating services.

Product recall insurance should be specifically tailored to the exposures of each individual retail operation. Essential components of a strong policy include endorsements for replacement costs, governmental recalls, adverse publicity, extortion costs, and extra expenses associated with the logistics of the recall.

Steps to protect from product recall and product liability losses:

• Make sure your general liability policy covers product liability.
• Understand your specific operation’s exposures and select a consulting firm with experience in product recall, if not provided by your insurance carrier.
• Create a “vendor approval program” including hold-harmless agreements and a certificate of insurance tracking system that transfers risk from the retail store to the manufacturer and/ or distributor.
• For primary policies, select carriers with product recall experience and financial strength of “A” or better.
• Select the proper endorsements that specifically meet your needs.
• Prepare a written loss control plan that involves members of top management.