Protect your business from the impact of a product recall

For any manufacturing business, dealing with a product recall notice can be a financial and reputational disaster - it’s a traumatic experience that can leave affected firms struggling to survive.

Food and beverage manufacturers, packers, and distributors for example, are exposed to the risk of their product being contaminated. Whether accidental or deliberate through malicious product tampering.

One of the key causes of a recall is mislabelling, sometimes this will be human error but on other occasions it could be due to faulty machinery.

For instance, in 2019, Nottinghamshire-based popcorn maker, Thomas Tucker, was left with no choice to recall several popcorn brands over an allergen mis-labelling error. Within a month, facing spiralling costs to recall, destroy and replace affected products, the firm entered administration.¹

Product recalls becoming more common

Expenditure can be incurred in the recalling, replacing and/or destroying of a contaminated product, with business interruption losses often being the predominant cost within a product recall.

It would be all too easy to think these are isolated incidents and ‘it won’t happen to us’, but product recalls are more common than many might think, and are becoming more so in sectors such as food production thanks to stronger safety regulations and enforcement.²

Food product recalls rose by 13% across Europe in 2020, but this is an issue for all manufacturers, and their customers, as recent history has demonstrated – and the cost of a recall can be truly eye-watering. For instance, when Peloton had to recall 125,000 Tread+ treadmills in 2021, costs were expected to reach £125m and the firm’s share price fell by 14%.³  

There have been plenty of famous examples too. Back in 2011, Toyota was forced to recall millions of vehicles at a cost of more than £750m. Samsung’s Galaxy Note recall eventually set the business back up to £12bn. While Volkswagen suffered from their now infamous deployment of a ‘defeat device’ to swerve emissions regulations.⁴

But product recalls are not just a risk for bigger businesses. A glance at Trading Standards’ list of product recalls in the UK makes it clear that smaller businesses are just as likely to be affected – and these firms may suffer a greater impact because they lack the financial muscle that larger rivals can draw on to weather the storm.⁵

Product recall impacts: financial and reputational

As we have seen, the financial impact of a product recall can be significant – but the recall itself may represent a fraction of the total cost.⁶

On top of recall logistics, it is also important to consider rectification – which might include retooling, cleaning down production equipment, and resupplying customers – lost income from disruption to normal operations during the process, as well as the ongoing cost of reputational damage and efforts to rehabilitate the brand.⁶

For some smaller firms, like Thomas Tucker, the impact is simply unsurmountable.

How to defend against the impact of a product recall

The first step in reducing the risk your business will be affected by a product recall is to understand the potential causes and ensure that quality controls address them.

However, given that many product recalls have their roots in simple human error⁷ even the strictest quality controls can never completely remove the risk - just ask the Subaru employee who ‘caused’ a product recall by repeatedly tightening a single nut incorrectly.⁸

It is also dangerous to assume that existing insurance programmes will defend against a product recall. For instance, while products liability insurance will step in if a product causes injury or property damage to a third party, it won’t cover a product recall. Equally, even if a liability policy covers product recall, it may well be limited to recall costs only, leaving you to foot the bill for rectification, business interruption losses and brand rehabilitation – the lion’s share of the costs in most cases.

The last line of defence: product recall insurance

The truth is that every manufacturer has product recall exposure, and regulatory scrutiny has increased over the last five years. It is no longer enough to believe that a product recall event could never happen to you - manufacturing or human error could strike at any time, so it is worth taking a closer look at product recall insurance as part of your manufacturing business insurance cover.

Designed to provide peace of mind in a crisis, product recall insurance is there to provide the support you might need in dealing with a product recall – helping to keep your business afloat by covering the cost of recalling affected products, investigating the cause, lost sales, crisis management support and brand rehabilitation.

Is product recall insurance right for your business?

If your business manufactures products or uses another company to manufacture products for you, then product recall insurance is a cover to consider to protect your company’s balance sheet against the disastrous financial impact of a major recall incident.

Equally, if you don’t have full oversight of businesses in your supply chain, for instance those manufacturing components for your products, then you may be at heightened risk of a product recall – and if your firm is to survive a product recall, relying on indemnity from a third-party supplier is unlikely to be enough.

At the same time, many customers and retailers are now requiring manufacturers to have product recall insurance in place – but, even where they do not, taking out cover can set your business apart by demonstrating a commitment to risk management and customer protection.

Finally, the right product recall insurance will do more than simply cover costs. For instance, access to a 24/7 expert helpline can help ensure you minimise the damage by responding quickly and surefootedly from start to finish – and may be particularly helpful for smaller firms without specialist crisis management teams.⁶

Help is at hand

For further information, you can read about our manufacturing business insurance, which includes product recall cover, or contact a local Marsh Commercial manufacturing specialist for help and advice.

Sources

1) just-food.com/news/product-recall-weighs-on-thomas-tucker-as-uk-popcorn-maker-goes-into-administration/

2) foodnavigator.com/Article/2021/11/12/Food-recalls-are-on-the-rise-What-can-reverse-this-worrying-trend

3) bbc.co.uk/news/business-56993894

4) watchmojo.com/video/id/40436

5) investopedia.com/articles/investing/010815/how-do-recalls-affect-company.asp

6) CFC Underwriting - Product recall client conversation starters

7) swipeguide.com/insights/ensure-highest-product-quality-avoiding-human-error

8) forbes.com/sites/forbestechcouncil/2021/07/16/want-to-reduce-human-error-heres-how/?sh=2af921cb2d3b