Product Recall: How Will You Handle It When It Happens?

It's only a matter of time until your company is making headlines for a product recall. According to Consumer Affairs, there are already more recalls than number of days passed in 2020. 

Whether you're a manufacturer or a vital link in the supply chain, it’s quite likely that at some point you will need to address a product recall situation—which can be a major threat to your bottom line. Consider these financial ramifications of a recall: 

• Wasted product
• Recalled product disposition, as well as replacement product expenses including employee time
• Expenses and fines due to regulatory agencies
• Company reputation and public relations costs
• Liability lawsuits related to the faulty product

When you consider the possible causes of a recall, the array of potential risks is stunning. 

1. Human error in the process or a foreign object making its way onto the line can create batches of defective product.
2. Mislabeling or contamination of a part or product (accidental or malicious) can result in breakage or injury to end-users and manufacturing partners.
3. Faulty parts from suppliers might create an unacceptably low-quality end product.
4. Over time, government regulations capable of triggering product recalls have been getting stricter.
5. Viral claims from social media (whether true or not) and the ever-present threat of lawsuits from private individuals, groups, or other companies can lead a business to preemptively issue a recall.
6. Differences in regulatory and quality standards between countries can create problems in the supply chain that aren't detected until end products have gone out the door.

As NU PropertyCasualty360 puts it:

Product safety problems can be caused by manufacturing overseas in countries that do not have the same standards and enforcement as the European Union (EU) and U.S., which explains in part why product recall events are growing. Other factors include the globalization of supply chains and stricter product safety rules and regulations. 

Don't Kid Yourself (Or Your Board)

No company or product is immune to recalls. If any of these statements have crossed your mind or your boardroom table, your organization may not be as prepared for or protected against recalls as you might think:

• "Our quality control is strong."
• "We have multiple process checkpoints in place."
• "We screen our suppliers."
• “Our suppliers follow our specific contractual guidelines to fit our quality standards and regulations.”
• "Our general liability policy will cover it."
• "It's never happened to us before."

Surviving a Product Recall

Fortunately, there are insurance and risk management tools available to help you manage the situation both financially and logistically. How protected are you against the possibility of a recall? Do you have a recall policy that needs to be reviewed? Woodruff Sawyer will lead you through these and other next steps.

Assess Your Risk

Analyze your supply chain contracts and their attention to regulations. Are there any points in the chain dependent on a single supplier? How long does it take them to make their parts? What are the product quality and safety regulations like in any foreign countries you work with? Woodruff Sawyer can help conduct contract reviews, supply chain analyses, and locate backup options if needed.

Design Your Optimal Program

An experienced broker will work with you to understand your risk, explore the cost-benefit to risk transfer versus self-insure, design an optimal insurance program that will account for your cost and coverage needs, ensuring maximum recovery in the event of a loss. Most importantly, your broker can help you develop and implement a response plan––a proactive process that not only ensures you’re effective management of a recall, but by doing so you control the impact of the loss on your business.

Develop and Practice a Plan

Just as we recommend creating a cyber breach response plan, Woodruff Sawyer specialists can help your executive team draft and practice a response plan for the inevitable recall. These proactive plans can shorten your recovery time in the event of a recall and give more peace of mind to those involved.

For the food and beverage industry specifically, Woodruff Sawyer offers specialized training sessions for finance teams, whether current client or not, to help groups understand their coverage, mitigate the risk of a recall, and have a process in place that will drastically reduce their average claim payout time. Read more.

What does a recall response plan entail? Using a consumer products company as an example, a recall response plan would include:

• Determining which regulatory bodies you will need to be in coordination with/notify
• Locating the contaminated product and batch
• Identifying where it was distributed
• Designating response teams:
  • Internal response team often includes CEO, CFO, GC, COO, CMO
  • Critical external partners involved may include insurance broker, claims adjuster, forensic accountant, outside legal, PR
• Coordinating with internal leadership to determine which elements of which response teams will be in charge of:
  • Responding to press and social media
  • Organizing the recall process
  • Notifying the broker and insurer
  • Negotiating contracts related to the recall
• Bringing the product back in house for further testing, repair, or disposal
• Replacing the recalled product
• Communicating to consumers and companies whose components or products were involved, including retailers, wholesalers, and resellers

The process of getting the right insurance coverage and planning for a potential recall may seem daunting, but it pales in comparison to the potentially crippling cost of an actual recall.  Preparedness is indispensable if you're going to survive as a business; get in touch with Woodruff Sawyer to start your risk assessment.