Product Recall Coverage Helps Protect Against Injury Claims

If you make consumer items, you probably know what it means to toss and turn at night worrying about product safety--and if you don’t, you should.

The legal system makes it risky to make or sell things that endanger the consumer, for the very good reason that defective products can maim or kill the innocent.

And because a product recall can also cost you hundreds of thousands of dollars, it pays to track your design, production, distribution and retail processes to make sure no one comes to harm through your inattention or, worse, deliberate policy.

It also pays to plan ahead for the worst-case scenario--and to consider insuring the risk with product recall coverage. The insurance is neither cheap nor readily available, but it can spell the difference between ruin and survival should one of your products injure someone or even threaten to.

The coverage is especially important for manufacturers of component parts and finished goods. Importers of all stripes also need it, no matter what they bring into the country, since the courts can hold them liable for all costs associated with a product recall.

To understand how product recall insurance works, it helps to start with what it doesn’t do. For starters, the insurance does not cover the costs associated with recalling something that doesn’t work. For example, it doesn’t protect auto makers against the costs of recalling a batch of new cars to fix a balky window.

Product recall insurance also doesn’t pick up all expenses associated with a recall. Indeed, the coverage usually comes with a hefty deductible, and most policies cover less than all of the remaining costs.

As a rule, the insurance doesn’t kick in unless the product has caused property damage or bodily injury to one of your customers, or poses an imminent danger of doing so.

But product recall insurance does cover the costs of:

* Notifying your customers of the dangers of your product.

* Shipping the product back to your plant.

* Repairing and returning the items to your customers.

* Disposing of those items you can’t repair.

It also protects you against the cost of additional warehousing and staffing to carry out the recall.

Most important of all, it protects you against liability claims from customers who suffer personal injury or property damage caused by your product. Such claims are perhaps the gravest financial threat you can face in a product recall.

Most general liability policies don’t cover product recall claims, so you can’t cover the risk when you buy GL insurance.

You can, however, add product recall insurance to your GL package--buying it as “add-on” coverage, in insurance-speak. Doing so can cut your premiums, but it may also limit your coverage.

How? If you buy, say, $1 million in protection for both general liability and product recall, a single big claim against one can strip you of coverage for the other. In plain English, with add-on coverage, if $1 million is all you have for both general liability and product recall, and you ring up a $1-million general liability claim, you have nothing left for a product recall claim.

The better idea is to buy one policy to insure your general liability risk and another to insure the product recall risk. Insurers call this stand-alone coverage.

Your next decision is whether to insure only the liability risk and not the hard costs of a product recall--the costs of notifying your customers, shipping defective items back to your plant, repairing them and so on.

Manufacturers of component parts, as distinct from finished consumer goods, often buy only liability coverage, because the courts can hold them liable for damages to third parties but not for other costs of a recall.

Manufacturers of finished goods face both risks and buy both types of coverages.

Insurers such as AIG, Cigna, Evanston and Admiral sell product recall insurance. You can also get the coverage through Lloyd’s of London, from the big German insurer Allianz and from a number of other carriers in Europe.

Of the U.S. insurers, Cigna offers the lowest minimum premium--$1,000--and offers limits up to $50 million. Like other insurers in this market, however, it chooses its bets carefully, and only the very best risks get the lowest premiums.

Premiums for coverage offered through Lloyd’s start at $5,000 or $10,000, and other insurers go up from there. As is generally the rule with insurers, a big premium tells you the insurer doesn’t want small accounts.

Deductibles range from 5% to 10% and co-pays to 20%--meaning that if you get a $1-million claim, you pay the first $50,000 or $100,000, plus as much as 20% of the rest.

*

How to get financing will be one of the topics addressed at The Times’ Small Business Strategies Conference Oct. 17-18 at the Los Angeles Convention Center. Columnist Juan Hovey will be featured. He can be reached at (805) 492-7909 or via e-mail at jhovey@gte.net.