Working of Product Recall Liability Policy & What Does It Cover?

Product recall liability policy is generally purchased by manufacturers dealing with toys, electronics, beverages, food, etc. Product recall refers to the recalling of products from the market and consumer, which may harm an individual due to unforeseeable defects. It is typically a request by the manufacturer to return the products upon discovering a safety issue.

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Product Recall Liability Policy

The product recall liability insurance covers the expenses related to the recalling of goods or products that have been launched by the company or manufacturer. A company may incur severe losses due to the recalling of products from the market. The manufacturers may lose their goodwill and may face litigation from the endorser or consumer of the products.

Due to error or omission, a company may discover the defect after releasing products in the market. Therefore, to avoid the risk posed to public safety, the companies take some bold steps and ask the public to return the goods. However, in return, the company offers compensation to the public who purchased the products and are willing to return them to the company.

Product Recall Coverage

The product recalls liability policy covers the losses suffered by the manufacturer. It provides the appropriate compensation to the manufacturer of the goods. In addition, the manufacturer may purchase additional benefits and obtain more coverage. For example, liability to a third party may also arise due to the recalling of products. The court may pass a decree in favor of the third party and compel the manufacturer to pay for appropriate damage caused to the third party. Hence, to avoid these circumstances, the manufacturer may opt for additional coverage.

Parts of Coverage

The product recall liability policy provides coverage in two parts. Let us understand what it covers in these two parts.

  1. First Part

    In the first part, it covers the following expenses:

    • In order to recall products from the market, the company or manufacturers are required to notify the consumer and seller of the goods. Therefore, the insurance policy covers the cost of notification.
    • In order to recall the goods to the manufacturer, the company is required to incur a heavy shipping cost. The insurance policy covers those expenses.
    • In addition, the company needs to store the recalled goods in a warehouse. The insurer provides coverage for the warehouse and storage expenses.
    • The company must dispose of the products returned from the consumer. It may accomplish so by approaching the insurer.
    • The company needs to deploy extra personnel to conduct and complete the process of recall. The product recalls liability policy covers these expenses.
  2. Second Part

    In the second part, it covers the following expenses of product recalls liability policy:

    • Expenses incurred to the third party due to recalling of goods. The third party or consumer may demand the repair cost he incurred on the product along with the replacement cost.
    • Interruption of business to the third party may also take place. For example, if a company dealing in laptops notifies the consumer to return the electronic item. As a result, the third party may incur a loss to his business.
    • The goodwill of a consumer may also compromise due to the recalling of products.

Conclusion

Product recalls liability policy covers the expenses related to the recalling of goods from the consumer and the market. A manufacturer must buy this insurance in order to cover the losses he may incur in the future due to the recalling of goods.

Written By: PolicyBazaar - Updated: 02 February 2024
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