Who pays for a product recall?

Product recalls are financial and PR nightmares for businesses. Potentially costing billions of dollars, product recalls can be one of the biggest financial losses a company faces. But who pays for a product recall? Many parties are involved, such as the company, insurance, 3rd party distribution, etc. Here’s what you need to know about the cause, as well as who pays for a product recall.

What is a product recall?

According to Investopedia, a product recall is “the process of retrieving and replacing defective goods for consumers.” A product recall may take place for several reasons. With products and technology, a piece may wear out or fail prematurely, causing the item to break or overheat, which may result in injury.

Once a defective product has been detected, the company is held liable to retrieve and replace that product for consumers. As you can imagine, the cost of this is astronomical. 

What causes a product recall?

Faulty equipment, food-borne illnesses, and harmful drugs are all common causes of product recalls. Unfortunately, this can cause a lot of damage to the company’s reputation and result in lawsuits from affected consumers. 

While products go through rigorous testing before they are released on the market, defects often go undetected as they only appear later. Furthermore, just because a product design passes the quality check doesn’t mean that something can’t happen during the manufacturing process, often resulting in only one or two “batches” needing to be recalled.

One of the most common types of product recalls relates to those in the food industry. As foods are shipped from around the world, it’s possible for them to become contaminated unknowingly. Common reasons for a food recall, according to Food Safety News, include:

  • Contamination with a pathogen such as E. coli, Listeria monocytogenes, or Salmonella
  • Foreign object contamination such as plastic, glass, or metal fragments
  • Nutrient imbalance (often seen in pet food recalls)
  • Undeclared allergens include peanut, tree nut, milk, egg, soy, shellfish, etc.
  • Undeclared sulfites
  • Uneviscerated fish

Recalls can further be categorized into three classes. 

Class 1 recalls – There is a reasonable chance that consuming the food would result in health problems or death. 

Class 2 recalls – There is a remote chance that consuming the food would result in adverse health reactions.

Class 3 recalls – Carry very little chance that you would experience any adverse health reactions from consuming the food. 

Who pays for a product recall?

Consumer protection laws enforced by the FDA require manufacturers and suppliers to cover the cost of any, and all product recalls. While a certain level of transparency is required from companies in the event of a product recall, companies often try to clean up the mess as quickly as possible to avoid bad PR and additional costs from lawsuits. 

While insurance covers a portion of the recall, many companies don’t expect disaster on this scale and fail to prepare. It’s imperative that you have good insurance for your company in the event of an error in manufacturing. Being unprepared for a recall could cripple your business financially. Be ready for the worst-case scenario by securing business insurance.

Need business insurance? We’ve got you covered!

At Coughlin Insurance Services, we believe that our customers should be valued and taken care of. We aim to provide quality service and meet the needs of our clients by providing businesses, including those in the food industry, with the insurance they need to protect their assets. If you’re a business looking for insurance, don’t hesitate to reach out for a free insurance quote today!

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