Businesses Use Special Insurance to Survive Recalls

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Last week we wrote about product recalls from the consumer side. This week, we look at how businesses deal with emergency recalls.

Product recalls and companies in crisis have dominated the news and the blogosphere lately. The number of recalls has increased, thanks in part to tightened safety regulations and stricter recall protocols from the 2008 Consumer Product Safety Improvement Act. Most of the companies affected are large corporations, but even smaller businesses could learn from their example about protecting against liability.

Big companies protect their bottom line by buying recall insurance. This insurance can help cover the cost of hiring crisis public relations firms (whose services can cost an average of $60,000), as well as the cost of shipping, storing and studying defective products. There are companies out there, like ExpertRECALL, that specialize in storing recalled products and tracking data.

Businesses should be aware of exactly what their insurance policy covers before a crisis hits. General liability insurance policies typically cover compensation payments to individuals harmed by a product, but they don’t cover the cost of recalling the product itself. It may be a good idea to hire insurance overwriters to help your company develop an emergency strategy that includes:

• who in your company will control the recall, along with contact information
• what situations call for a recall (consumer inconvenience vs. harm)
• how you plan on handling the products (quarantine, removing from retail)
• how you plan on publishing news and supporting inquiries from consumers and employees alike.
• how you plan on compensating any injured persons
• how you plan on studying recalled products.
• which PR firms you’d be interested in hiring to manage media
• information about your industry’s legal regulatory requirements

All of this information should be put in your company’s emergency recall manual.

Dirk Gibson suggests practicing mock recalls periodically, to make sure you are financially and organizationally prepared to handle such an event. This way, you can quickly and effectively assess the scope of the safety hazard, find the root problem, and institute a voluntary recall—with the help of the appropriate regulator— within days of discovering the defect. Planning can greatly reduce your risk of litigation: “There are situations where companies are held liable because of an improperly conducted recall,” says Dave Wix of the Wix Law Group.

Companies should be prepared to balance the costs of an expensive recall with the potentially greater expenses of product-liability claims and government fines. The risk to your business is not just the year’s net gain: how your company handles a defective product may impact your credibility as well as consumer confidence. Your business’s reputation may be much harder to recover than money lost through the recall.

Visit Rocketlawyer.com to find out more about how you can protect your small business with documents like a General Liability Release of Claims, or even Find a Lawyer to help.