Coverage to Guard Against Lost Profit, Injury Claims

If you make consumer items and you buy product recall insurance, you have part of your risk covered--maybe only the lesser part. You can cover the rest with product tampering and product liability insurance, and it pays to know how these coverages work.

As recently outlined in this column, product recall insurance protects you against the “hard” costs of:

* Notifying your customers about a recall of your product;

* Collecting and shipping the product back to your plant;

* Repairing and returning the items to your customers; and

* Disposing of those items you can’t repair.

It also protects you against the costs of extra warehousing and extra staffing to carry out the recall.

It does not, however, protect you against lost profit caused by a product recall, or against liability claims from people injured by your product. Product tampering insurance protects you against the first risk, product liability insurance against the second--and if you make consumer products of any kind, you should consider both coverages.

Like product recall insurance, product tampering insurance pays the costs of recalling and fixing a product posing some hazard to the consumer. Unlike product recall insurance, it protects you against lost profit caused by a product recall. Product tampering insurance is broader coverage than product recall insurance.

On the other hand, product liability insurance is narrow coverage. It offers no protection against the hard costs of a recall, and none against lost profit. It protects you only against claims alleging personal injury or property damage from people who buy your product.

Who needs these coverages?

“Anyone who makes a brand-name consumer product needs product recall, product tampering and product liability insurance,” says Dennis O’Hara, area president for the big insurance brokerage Arthur J. Gallagher & Co., with offices in Irvine.

“If you make Tylenol--a brand that people recognize--the media will gravitate toward it if someone tampers with your product on the shelves of a retailer.

“If that happens, you definitely need not just product recall insurance but product tampering and product liability insurance.”

In plain English, any product with a brand name invites the glare of publicity, as in the famous Tylenol case in 1982, O’Hara says. The publicity, in turn, invites high-profile lawsuits from people claiming injury or property damage caused by your product.

You may also need product tampering and product liability coverage if you make a product sold or repackaged by others--for example, generic aspirin sold under the private label of a drugstore chain.

Distributors and wholesalers need product liability insurance, particularly if they modify a product on its way to the consumer--for example, by assembling a toy.

“Product liability coverage is readily available, and product recall insurance often comes in a package with other special coverages important to manufacturers, distributors and retailers--and this practice serves the needs of about 95% of the business insurance market,” O’Hara says.

Of particular importance, he adds, are the limits of coverage.

Typically, an insurer may cover you to $1 million for general liability and to $1 million for product liability, with an aggregate limit of $1 million.

This means that the insurer will pay no more than $1 million in claims in any one year--so that if you get a claim for $1 million under your general liability coverage, you strip yourself of product liability coverage for the rest of the year.

Put another way, since your insurer pays claims only to the aggregate limit in any one year, a big claim under your general liability coverage can leave you without product liability coverage for the rest of the year.

The solution? O’Hara counsels his clients to buy coverage to reflect the real risks posed by their business activities, with an aggregate limit big enough to cushion themselves against real disaster.

Thus, if you need $1 million in general liability and $1 million in product liability, make sure your policy carries an aggregate of $2 million, O’Hara says.

The extra coverage costs very little, he says, and can make the difference in the event of a single big claim.

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Columnist Juan Hovey may be reached at (805) 492-7909 or via e-mail at jhovey@gte.net.