You hear it on the news — A product is being recalled due to contamination, a manufacturing defect or a safety hazard. How would your business protect itself from the financial losses and reputational damage of such an event?

No business is immune to the risk of a product recall. Even companies with outstanding safety records and strict operational controls are at risk, due in part to stronger consumer protection regulations and the globalization of supply chains and manufacturing.

The recall of a product sets in motion a series of events that can involve significant expenses. In many cases, products must be removed, destroyed, disposed of and replaced.

Recalls can also negatively impact your brand’s reputation long term. In a 2016 Harris poll, about 66% of respondents felt a product recall or contamination was either very or extremely damaging to a brand’s reputation.

Product recall insurance can cover the costs associated with recalls. If your company designs, manufactures, distributes or sells a physical product, you should consider product recall insurance. Physical products can be anything from furniture to toys to cellphones to peanut butter.

Expenses covered

Product recall insurance will help your business cover a broad range of expenses, 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

Recent recalls

In 2023, the bike company Shimano recalled 760,000 cranksets in Canada and the U.S., reports CTV News. The recall came after several consumers were injured due to faulty devices that caused them to crash.

In 2024, Health Canada recalled five Insignia-brand air fryers because of a fire hazard. The recall came after reports of overheating, melting handles and broken glass.

Also in 2024, Health Canada recalled 36 types of Quaker granola bars due to possible contamination with salmonella.

Canada has seen many more recalls in recent years, and the costs are staggering. According to a report in Canadian Underwriter, it isn’t unusual for companies to pay millions of dollars to manage a recall. That’s why having the right insurance is critical.

Product liability coverage

While product recall insurance covers specific recall scenarios, product liability insurance protects your business financially if your product causes property damage or personal injury or kills someone. You can add product liability coverage to your general liability insurance policy or purchase it as a stand-alone policy. You can tailor it to the specific types of risk your business is exposed to.

Product liability covers product-related defects for manufacturers, distributors and retailers. It is for “completed products hazards,” which means it pays for the financial losses a product causes to a third party, such as a client, customer or bystander.

Product liability insurance covers two types of legal actions:

Bodily injury: When your product wrongfully injures someone, product liability insurance covers the cost of care, lost wages, restitution for death and legal fees if you’re taken to court.

Property damage: If your product damages someone’s property, product liability insurance covers physical damage, repairs, lost profit due to damages and legal fees if you’re taken to court.

It’s important to carefully consider the ways your business could be found at fault for damages resulting from the use of your product. Product liability lawsuits from personal injury or property damage often result in large legal monetary judgments. This can put businesses of all sizes at risk of bankruptcy or complete dissolution.

Contamination insurance

If your product could be accidentally or maliciously contaminated, you may need contamination coverage in addition to recall and product liability insurance. This may be the case with products like cosmetics, food or pharmaceuticals.

Whether the result of criminal activity or simple human error, contamination occurs with alarming frequency in Canada and around the world, according to the Insurance Information Institute. Companies that fall victim to these incidents often incur enormous costs in damage control, restoration of profits and brand reputation. When a contamination incident occurs, it can attract media attention and have a disastrous impact on the public’s confidence in your product or brand.

Product contamination insurance generally covers 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 operating costs
• Extortion costs

You can add coverage for adverse publicity and government recalls to a contamination policy as an extension.

To summarize, product liability insurance is normally included in general liability coverage. It covers lawsuits over injuries your product causes, However, it does not cover the costs to recall the product. Product recall and contamination insurance can help you cover the cost of removing the product from the marketplace.

Talk with your insurance broker and consider whether comprehensive product recall insurance is right for your business.

Customer Success
insure@sterlingibl.com

Sterling Insurance Brokers Ltd.
1939 Ironoak Way
Suite 205
Oakville, ON L6H 3V8
www.sterlingibl.com/

Until you receive a confirmation by receipt of e-mail to confirm your request has been processed, coverage has NOT been bound.

This content is for informational purposes only and not for the purpose of providing, financial, medical or legal advice. You should contact your attorney, doctor, broker or advisor to obtain advice with respect to any particular issue or problem.