Product refusal of coverage: Are your clients covered?
In most instances, damages caused by another company’s recall isn’t covered by product recall insurance policies.
In a voluntary recall situation, most product recall insurance policies pay only for specific expenses and losses incurred when a company’s own product is being recalled — not for damages when the same type of product being recalled is grown, produced or shipped by another company.
For example, a variety of apples from a particular grower have tested positive for a pathogen, and the grower has voluntarily recalled its product. If your client also grows this type of apple and now, because of the recall, vendors refuse to buy this variety from anyone, your client could be sitting on inventory with no market.
In most instances, this type of collateral damage loss isn’t covered by product recall insurance policies and can financially blindside a business for damages caused by another company’s recall, as well as more significant recall costs.
Product refusal of coverage endorsement
Collateral coverage for a product recall isn’t found in most recall policies. It’s important to find ways of filling this coverage gap by way of the product refusal of coverage endorsement, which doesn’t require that the recall be triggered by the policyholder’s product.
The endorsement helps businesses recover some of their recall costs for expenses if a similar product from the insured’s competitor(s) is recalled, including extra expenses to remove the product from shelves and destroy, ship or replace it with a different product. Typically, refusal must occur within 90 days following the initial recall event.
Product refusal of coverage provides financial protection for recalls caused by a similar product from another company. It pays for a company’s recall costs if buyers refuse to accept the product or ask that it be removed from the marketplace due to contamination concerns, and includes more significant recall expenses such as:
- Costs to remove the product from stores and destroy it.
- Costs to replace the recalled product with a replacement product.
- Cost of marketing/advertising to protect and recover the reputation of the retailer and the grower.
- Cost of consultants to evaluate how to handle the recall.
- Extra expenses to hire additional staff to field phone calls and record recall issues.
- Costs to dispose of products. that can’t be sold
Did you know …
- Most product recall policies offer limited coverage for very specific situations and pay only for certain costs incurred when a company’s own product/commodity is recalled.
- The top FDA food categories based on recalls were prepared foods, produce, baked goods and dairy.
- The average food and beverage recall claim is approximately $9.2 million.
- 17.2% of FDA food recalls were products that had been distributed nationwide.
The product refusal fallout effect
During the recent romaine lettuce incident, product refusal coverage in policies was not triggered due to policy language. It is critical to understand what can and cannot be covered by various product refusal endorsements.
Incident one: Romaine lettuce voluntary recall
In 2018, an E. coli outbreak related to romaine lettuce caused 32 people in 11 states to become ill. Because the source of the pathogen could not be traced to a common grower, supplier, distributor or brand, the U.S. Centers for Disease Control and Prevention urged Americans to avoid eating any romaine lettuce. Although the recall was voluntary, the FDA urged all retailers in all states to immediately remove the product from shelves.
Incident two: Melon voluntary recall
Also in 2018, a melon recall was issued in eight states as traces of salmonella led to at least 60 illnesses and 31 hospitalizations. Although illnesses were traced to sales involving just three types of pre-cut melons in eight states, growers and suppliers nationwide were urged to pull all types of melons off the shelves, as well as products containing fresh mixed fruits.
Studies show that product refusal can have a significant financial and reputational impact on a business, taking 12 months or longer for the demand of a product to return after an incident occurs. With the increased frequency of recalls over the past few years — particularly with the farm-to-table trend — product refusal coverage is fast becoming more of a need than a want. It is important for brokers and insured’s to fully understand how product refusal endorsements will or will not respond to certain situations.
Lori Hunter (lhunter@wwfi.com) is an executive vice president at Worldwide Facilities, a national wholesale insurance broker, managing general agent and program underwriter.
This article first appeared on Worldwide Facilities’ website and is republished here with the author’s consent.
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