RISKVUE ARCHIVE | FEATURE STORIES

Does Your Insurance Policy Protect You During a Product Recall?

By Meghan Elliott, Lindquist & Vennum PLLP

Product recalls can arise in almost any business and can involve industrial or consumer goods, pharmaceuticals, and foods. Most people remember the so-called “Tylenol murders” in 1982 that led Johnson & Johnson to issue a nationwide recall of its popular over-the-counter painkiller. In 1994, General Mills had to recall pesticide-contaminated grain cereal. And more recently, Firestone was forced to recall thousands of tires due to a manufacturing defect.

Does your company’s insurance adequately cover your company in the event its products are recalled because of tampering, manufacturing defect, contamination, or misbranding?

Although a product recall is usually a company’s last resort, they are not uncommon. The United States Consumer Product Safety Commission’s Web site reveals that in October 2004 alone, recalls encompassed a wide range of products such as gas grills, mattress pads, baby rattles, work boots, electric pictures and towel radiators. Similarly, the Food and Drug Administration lists a number of food and drug recalls for October 2004, both voluntary and involuntary, that range from pickled papaya to mislabeled black bean enchiladas.

Knowledge of the scope of your current insurance coverage is essential in defining the potential risks of a recall.

Traditional Coverage

The commercial general liability policy typically covers damages the policyholder becomes legally obligated to pay because of bodily injury or property damage, to which the insurance applies, caused by the policyholder’s product, subject to some exclusions and assuming the company has purchased the “products-completed operations” option offered by most CGL insurers. But courts differ regarding the scope of consequential damages covered under this insuring agreement, including the extent of coverage when some recalled products did not actually cause injury or damage.

In a product recall situation, a policyholder might incur a variety of expenses, including costs for examination, transportation, destruction, analysis, decontamination of plant sites, storage space and cancellation charges, additional storage capacities, notification to customers and end users, replacement, and advertising measures, as well as lost profits. Whether any of these sums are covered depends on the circumstances of the case and court interpretations of the CGL policy language.

In the Tylenol recall, Johnson & Johnson sued its excess insurers for reimbursement of expenses resulting from the recall of 31,000,000 bottles of Tylenol. In that case, a federal judge held that the excess insurers were not liable for any of the costs associated with the recall noting, “Johnson & Johnson, which at one time carried recall coverage, knew such coverage could be purchased, elected not to purchase it because the cost was prohibitive, and now claims that it enjoys recall coverage anyway.”1

Product Recall Coverage

Product recall insurance expressly provides coverage for those expenses that occur before the defectiveness of a product or food item has resulted in injury or damage to a third party. These are sometimes called the “logistical” costs of a recall. While companies are often concerned about the costs associated with defective product liability claims or lawsuits, the logistical expenses of a recall itself may be overlooked. Large product recalls can be enormously expensive. By some estimates it is five times more expensive to recall a product than it is to manufacture the product. And these estimates do not include other costs that may accompany a recall, such as damage to a company’s reputation and good will.

Product recall coverage tends to be industry and product specific. Policies insuring against recall costs have been available in the food and cosmetic industry for many years. In other markets, such as the automotive and original equipment manufacturing markets, coverage may be harder to find. In addition, product-recall coverage can be tailored to a company’s specific concerns, such as “malicious tampering” situations (the Tylenol case) or situations of “accidental contamination” (the General Mills case).

Be Prepared

Insuring against the effects of a product recall may not be a part of a company’s risk management plan. For a large company with a wide product base and large cash reserves, the risk of a recall may be manageable without insurance. But a small company with limited resources may not have the ability to finance a product recall without insurance. Similarly, for a company that relies solely on a single product, a product recall could be especially devastating.

Given the potentially disastrous effects of a product recall, it is important for a company to plan for and carefully manage its risks in the event such a recall becomes necessary. A thorough review of the company’s entire insurance coverage scheme, and consideration of additional insurance policies and endorsements to fill in potential coverage gaps, is necessary. Consultation with your insurance broker, trade organization, or legal counsel may be helpful in defining what is–and is not–covered.

Conclusion

Whether or not some form of product recall insurance is ultimately purchased, the process of evaluating this question will educate your company and leave it better prepared in the event a product recall is necessary.

Note
(1) See McNeilab v. North River Insurance, 645 F. Supp. 525, 528 (D.N.J. 1986).

ABOUT THE AUTHOR

Meghan Elliott is a member of Lindquist & Vennum’s Minneapolis Litigation and Insurance Coverage Practice Groups. She can be reached at 612-371-3952 or e-mail melliott@lindquist.com.

This article is only a general summary for informational purposes and does not constitute legal advice. Consult a qualified and experienced insurance advisor for your specific situation or particular questions.

riskVue | The webzine for risk management professionals
November 2004