Protection against rising product recall claims

Manisha Chiman, Professional Indemnity and Liability Underwriting Head, SHA

There has been a significant uptick in the number of claims since 2018, made against the cost and legal implications of product recalls. The rising number of noteworthy incidents – such as the recall of 20 million canned vegetable products in 2021 – which cost the related company in excess of R700 million, highlights the need for broad form liability cover, designed specifically to help commercial entities mitigate the impact of the risks that emerge around product recalls.

Notable incidents – such as the canned vegetable recall and the listeriosis outbreak of 2018 – have shaped public discourse around the seriousness of injury or damage caused by products. As a result, there has been a rise in the number of claims being made against businesses. 

Despite this, and as the 2022 SHA Specialist Risk Review Report revealed, South African businesses still rank product recall relatively low on their threat radar, in the sixth position. This finding suggests the need for wider awareness and education around the importance of being prepared – and insured – for this risk.

Although product recalls are often associated with the food production sector, I have witnessed an upward trend in recalls amongst automotive and technology brands too. An example is the recent recall of over 13 000 cars by Mercedes-Benz South Africa, due to possible brake failure concerns.

A common mistake made by local companies is to dismiss the product recall threat as something that implicates only the retailer or manufacturer. However, South Africa’s Consumer Protection Act (CPA) makes it possible for third parties to hold any contributor, along the supply chain (from end-product manufacturers to individual component producers) responsible for damages. For example, larger retail chains do not hesitate to initiate product recalls, at the expense of manufacturers. 

In light of this, I encourage businesses to include a product recall section into their broad form liability cover as part of their risk management plans. This form of cover is designed to protect commercial entities against the legal liabilities that may arise should their product cause third-party injury or third-party property damage. 

Upon investigation, SHA has found that one of the reasons for the uptick in claims is as a result of South African businesses having changed suppliers over the past 24 months. The 2022 SHA Specialist Risk Review reveals that just under half of the South African businesses have changed suppliers over the past 24 months, with 30% of these businesses doing so due to cost and 25% were forced to make the switch due to a supplier closing down. This is a very clear indication of the impact of COVID-19 on suppliers.

A supplier switch is very closely aligned with quality – a correlation that was highly apparent in the fact that product liability claims over this period skyrocketed from R2.7 million to R8.8 million. For this reason, it is imperative for businesses to consider the upstream supplier’s ability to perform in the event of a product recall.

Product recall claims can be triggered by first parties, which are usually manufacturers, end-users or retailers. They can also be triggered by third parties or players along the supply chain. Lastly, as provided for under the CPA, the National Consumer Commissioner can trigger a product recall should a product be found to be a threat to public health according to several legislative requirements.

For this reason, SHA has adapted its policies around the requirements for clients who have broadform liability cover to necessitate product recall plans as part of their client’s ongoing risk management processes. A product recall plan should provide a clear indication of the protocols and processes that are in place should a product recall be triggered. 

In conclusion, I believe annual risk reviews should be commonplace for South African businesses because as research indicates, a successful product recall will have a direct impact on the severity of the loss incurred. Companies are therefore encouraged to work with their legal teams to fine-tune their risk management protocols. Sound strategies and preparation can save companies billions of rands in the long run.