Errors and Omissions (E&O) Insurance for Product Recall Coverage
Consider the following scenario: one of your customers asks your company to create a specific piece for them. This is an essential piece that will be incorporated in their final product which needs to be shipped out in a month to fulfill a large contract order. Your company creates the required piece, but an unexpected error occurs during production and you must issue a recall for the faulty part. Ultimately, the customer is unable to complete their contract order on time and suffers a significant loss of income. Or worse, the recall was issued after the final product has been delivered and now the customer needs to recall their own products to address the error in your piece. They are understandably unhappy and are looking to you to cover the financial loss.
Instances like these are increasing in frequency around the globe for a number of reasons. A recent Insurance Business Magazine article indicates those reasons may include “stricter regulations and penalties, greater consumer awareness around safety issues, supply chain complexity, the impact of economic pressures and even the growth of social media.” The same article goes on to say that “the average cost of a significant product recall incident is more than $12 million according to Allianz Global Corporate & Specialty (AGCS) but costs of the most severe events can far exceed that figure.” The most notable severe product recall is the ongoing Takata airbag recall which led to a $1 billion settlement that drove the company to bankruptcy in 2017.
Unfortunately, your Commercial General Liability (CGL) policy will not cover product recall expenses. Most CGL policies only cover instances where there is bodily injury or property damage, not financial damage. This is a perfect example of the importance of Errors & Omissions (E&O) insurance with product recall expense, or even a specialized product recall insurance, to transfer that risk for commercial entities. A manufacturer’s product recall coverage helps to cover any manufacturing mistakes or product recalls that leaves a third-party with a financial loss.
Manufacturers and many other companies that provide a product to their clients have an obvious E&O exposure but within these policies product recall coverage is often overlooked or undervalued. Even with increased automation, more effective employee training and more comprehensive risk control policies, mistakes will happen. Faulty products can cause harm to consumers. As a responsible corporate citizen, you must be prepared to address these errors, expeditiously and effectively. Ensuring the proper product recall coverage in your policy can help you address these errors, make them right, and get back to production with as little financial and reputational damage as possible.
Every policy and company need is different, so please reach out to a trusted RCM&D advisor to identify any gaps in the existing coverage of your manufacturing/production insurance program.