The product recall realm of liabilities

Jacques Stahl, Bryte’s Product Specialist Underwriter

Businesses are increasingly placing liability risks high on their list of concerns – and with good reason.

Looking specifically at product recalls – which “in broad commercial terms”, Camargue Underwriting Managers explains as occurring “where a product, which has already permeated the market, shows potential to cause harm to consumers and potentially lead to legal consequences for the supplier of the product” – these are becoming more prevalent and the scale, substantially larger.

Just a single recall has the capacity to negatively affect millions of consumers1 and multiple businesses/brands on a global level. **US-based Food Safety Magazine refers to recalls as the “food industry’s biggest threat to profitability” and when you consider the potential for third-party liability, together with the shifts that have prompted a more litigious society, it comes as no surprise. But, concerningly, a number of businesses are not applying the required risk management measures to prevent possible exposure.

Let’s face facts…

The demand to produce products more cost effectively, to scale, and even quicker than ever before, sometimes comes at a very high cost. One of the greater challenges faced is the quality controls and underwhelming regulatory requirements across markets that are providing cheaper inputs/manufacturing services. The consequence is compromised quality and/or safety standards with more frequent product issues and subsequently, a growing number of larger-scale recalls.

If we consider just a few developments making headlines this year:

• Almost one million vehicles recalled due to concerns around possible faults with airbag inflators
• A renowned beverage brand withdrawing its apple-based beverage due to concerns around “higher levels of a natural toxic substance” in the apple concentrate supplied
• A leading FMCG company removing more than 20 million canned vegetable products from the market over safety concerns arising from potentially defective cans. In terms of volume, this number is equivalent to 9% of the company’s annual production, with the final impact estimated around R650 million. That’s the equivalent of paying more than 340,000 old-age pensions.

Counting the cost

Many of these recalls are done proactively – even though there may not be any cases (or a low probability) of illness and injury. A failure to act can be even more devastating, to not just the bottom line, but also the reputation of the business and essentially, its resilience or even survival. While local data is a little sketchy, a study by the US-based Food Marketing Institute and the Grocery Manufacturers Association, found that food recalls cost companies an average of R150 million.

This is just with respect to direct costs which tends to include the recall-related investigations, announcement to stakeholders, expenses involved in facilitating product retrieval, loss of profits from products, etc. But, in effect, the real cost can be multiples more – as illustrated by the Tiger Brands example. The costs of product recalls, related expenses/liabilities and the value of the intangible effects, can be significant.

For example, third-party liability claims/lawsuits can have a devastating financial and reputational impact. Some reports suggest that the 2018 listeriosis outbreak, for which a class action law suit is ongoing, has come at a cost upwards of R1.5 billion. While this is a business that has been able to absorb the financial and reputational shocks, this is not something all businesses are equipped to achieve.

Fool proof – a fallacy

Even though the strictest safety and preventative measures are adhered to, no process is truly foolproof. Businesses may find themselves in a predicament despite their diligent efforts. So, it’s vitally important that the right types and levels of insurance covers (e.g. product recalls, product liability, general liability, cyber liability, business interruption, etc.) are in place, and regularly reviewed. Such covers have the potential to safeguard companies from bankruptcy. But, it can also extend access to a much-needed legal, reputation management, and medical expertise, among others – access that can make the greatest difference in supporting business and brand recovery.

With liability exposures broadening and becoming more complex, effective risk management takes a multi-faceted and consistent approach. Businesses that don’t effectively factor these realities into their risk resilience strategies would be remiss in doing so.

Enhancing the insurance industry’s role for businesses

From an insurance industry perspective, understanding the depth and diversity of continually evolving risks, and effectively guiding customers on their journey of risk readiness, takes advisors and insurers with deep insight as well as foresight. 

Intermediaries and insurers must be in a position to effectively educate customers on the risk realities associated with product recalls (and other emerging risks), the various forms of associated liabilities, and the practical measures that can be implemented to help businesses de-risk and approach risk with purpose.

Sources:1 https://www.oecd.org/about/impact/global-recalls-portal.htm