SA businesses to take precaution against product recalls

Simon Colman, Head of Commercial Liability Underwriting at SHA Specialist Underwriters

Product recall incidents occur almost on a daily basis across the globe, with two of the most recent cases being the recall of Mars chocolate bars in 55 countries and a manufacturer of child safety seats having to recall over 56,000 seats in Detroit.

Closer to home, here in SA, Kia Motors have initiated what appears to be a very well structured recall strategy involving 800 vehicles. The rising number of product recalls highlights the importance of comprehensive and proficient Product Recall and Guarantee Cover in place to allow businesses to mitigate the risk of severe financial loss or, in the worst case scenario, liquidation in the event of a product recall.

This is according to Simon Colman, Head of Commercial Liability Underwriting at SHA Specialist Underwriters who states that product recalls can prove to be extremely costly for any type of business.

“It has been reported that the Mars chocolate recall could cost the company tens of millions in dollars. Appropriate insurance cover is imperative for companies that manufacture goods in order to ensure business continuity following the significant financial setbacks that arise out of a product recall incident,” says Colman.

It appears that Evenflo, the manufacturer of the car seats mentioned above, had a proper recall strategy in place as they managed to take control of the issue before any injuries were reported, says Colman.

“This really underlines the importance of a ’belts and braces’ approach toward consumer safety. Firstly, a proper recall strategy is imperative and should be underpinned by a well-structured recall and guarantee insurance policy. Although the product manufacturer is ultimately accountable for initiating a recall, other members of the supply chain would be remiss to assume that they bear no responsibility,” adds Colman.

In addition, he says, the Consumer Protection Act (CPA) makes it possible for the National Consumer Commission (NCC) to initiate a recall on behalf of the business if they feel an unsafe product is on the market. “The business would then be expected to cover the costs of this exercise. The NCC has recently actively collaborated with suppliers to pursue various product recalls. Colman says that it is very positive to note that the NCC is increasing its efforts to ensure that potentially unsafe products are taken off South African shelves, but this also means that businesses need to ensure that they take all possible measures to protect against the financial implications of a possible recall event.

“A product recall can happen to any size business in any industry where the end users of the products are consumers, which means the food and beverage industry, household goods manufacturers and the automotive industry are particularly susceptible,” warns Colman.

“There have been claims in the food and beverage and the manufacturing sectors where the costs of the recall have exceeded R15m per incident, these amounts could have been much higher in the absence of an effective product recall plan,” he continues.

He explains that manufacturing companies need a combination of product recall and guarantee cover in place to protect them in such an event, whereas the food and beverage industry should further enhance its cover by taking advantage of what is referred to as contaminated products insurance.

Colman also says that the size of the company ­and the likelihood of a product recall are interdependent due to the volume of human resources and processes involved.

“For bigger companies with a multi-national footprint, the scale of the loss can be crippling, especially when exported products must be transported across borders for repair or destruction. In some cases, parts manufactured by one company may have been integrated into other products, this means that the insurance policy must be structured to cover the actual expense of removing or uninstalling the part,” explains Colman.

“There has also been an increase in product recalls among smaller companies, with regulations in the food and beverage industry tightening up as awareness of the CPA grows,” says Colman.

Colman said that Product liability policies do not cover the costs of recalling or replacing defective products although some broad form liability policies can be extended to cover such events. These extensions tend to cover the manufacturer (or even the retailer) for expenses they may incur in the event of a product having to be recalled as a result of it being deemed a safety hazard.

“Recall policies will usually cover the costs of notifying the public of the recall, removing the offending items, transporting the product and even the costs of destruction but generally not replacement. This is where the Product Guarantee cover rounds off the program. In the food sector a consolidated policy called Contaminated Products insurance is available which also covers the loss of income and brand rehabilitation costs.”

He adds that most specialist insurers that are involved with liability cover tend to offer access to crisis management expertise, which provides the business with additional resources when a recall event occurs.

 “Access to crises management expertise is invaluable as a poorly handled product recall can cause irreparable damage to the reputation of any business. With insurance expertise and financial support, the risks can be effectively mitigated.”

“Insurance limits of indemnity differ from company to company  although on average small companies tend to take out cover between R1m to R5m and cover for bigger companies  often ranges from R25m to R50m,” he says.

“It is important for businesses to be aware that most recall policies will only respond if the defective product presents some danger to third parties. A product that simply doesn’t live up to expectations is unlikely to be covered by a recall policy,” concludes Colman.