Why Businesses Need Product Liability, Recall and Contamination Insurance

Companies that design or sell tangible items should consider product liability insurance. Anything from foam slippers to boxed macaroni can be manufactured incorrectly enough to result in lawsuits.

Some food products become contaminated and make people sick. Other items may be designed poorly and cause physical harm to customers or their personal property. Product liability insurance is an add-on coverage for a general liability policy.

Purchasing considerations

When buying product liability coverage, it is important to think about what could go wrong with products. If the item is known to be a danger, more coverage may be necessary. People who sell packaged food products should always purchase a generous product liability policy. These are some factors to consider when assessing items:

• Packaging, assembly parts and accessories that may be part of a larger product.
• Warnings, directions and possibly misleading wording.
• Investor, partner and affiliate relationships that may be affected.

Preparing for a recall

Recalls are costly and confusing. Also, they can cause further financial loss if they hurt the company’s reputation. Recall coverage can be purchased separately from product liability insurance. It can be beneficial for any type or size of product. This insurance covers everything from refunds to re-establishment of a brand.

Although recalls are rare for some types of businesses, the frequency of these events is increasing. Since consumers and government agencies demand higher standards every year, more companies are at risk.

If a recall is widespread enough or is focused on a company’s main or only product, it can be financially devastating enough to end the business forever. These are some coverage benefits of product recall insurance:

• Shipping costs for returned products.
• Reimbursement of costs related to business interruption.
• Costs related to destroying unusable inventory and returned goods.
• Communication costs of spreading information about the recall.
• Replacement of faulty or unusable products.
• Reputation management or repair costs.
• Retailer, wholesaler and distributor fees that were lost.

Contamination insurance

Pharmaceuticals, cosmetics and foods may be inadvertently or purposely contaminated. Companies that sell any of these types of product should purchase contamination insurance in addition to product liability and recall coverage.

Contamination rates are increasing across the United States, and many instances of contamination are due to criminal activity. Damage control and reputation repair are the two biggest costs associated with contamination. This valuable add-on insurance covers the following:

• Product transportation and laboratory analysis for establishing a recall.
• Costs of advertising about the recall through multiple media outlets.
• Loss of profits for up to 18 months.
• Recall expenses for related third parties.
• Rehabilitative expenses for the company.
• Consulting, public relations and crisis response costs.
• The value of all contaminated products sold and remaining inventory.
• Increased operative costs related to the recall.

Some policies may also include government recall and adverse publicity. If the policy does not specifically cover these items, they may be added on for an extra cost. Most policies cover extortion costs when applicable.

Find out more about all these important types of coverage from your insurance agent.