Recent recalls in the automotive sector have emphasised the very real threat product recall poses to the longevity and even the very existence of some of the world’s best known companies.
The impact of a product recall on a business can be far-reaching, including criminal proceedings, falling sales and reputational damage. To worsen an already unfavourable situation, all of these impacts tend to play out in the public domain, creating a potentially long-lasting and seriously negative effect on a company’s bottom line.
Who Pays the Cost of a Recall?
It would be wrong to assume that large, multinational companies foot the bill for the costs of a recall alone. Although when things go wrong we often see the names of mega-brands flaunted in the press, it is highly likely that if causation can be proven the costs arising from recall will fall, in part or in total, on the supplier of the component part that actually caused the problem.
This means that it is the tier-one, two or even three suppliers to the front-end company that will receive formal legal notice that the company is looking to recoup the costs of recall from them.
“A Balance Sheet Catastrophe”
Component suppliers are potentially exposed to a balance sheet catastrophe if no suitable indemnity is in place to mitigate such losses.
Thankfully there are a range of possibilities for addressing recall exposures. Suppliers have a choice between more restricted product recall expense cover, which generally offers first- and third-party indemnity for the actual costs of recall, or significantly wider product guarantee/financial loss/product recall cover.
The latter coverage tends to offer the broadest indemnity generally available and provides first- and third-party cover for a range of costs and expenses arising out of the recall of defective products, including the removal, repair, reworking and replacement costs for products that have ‘failed to perform their intended function’.
It is also possible to include product liability and public liability under one policy, creating a broad spectrum indemnity against product risk.
Guest blogger George Beattie is an account executive in the Faber recall team in London. He joined Willis in 2011 on the Graduate Scheme following degrees in history and law at the University of Birmingham. He is also a fully qualified Associate member of the Chartered Insurance Institute (ACII).