Product Recall Insurance - Pre-Recall Costs

After wading through the insuring agreement and the definition of insured events, it's time to get into the real meat of a good product recall insurance policy.  I am sure if you are like everyone else, you were wondering when we were going to talk about the money.  Isn't that why we buy insurance?  To pay claims?  What types of claims are paid by a product recall insurance policy.  We covered it at a very high level in the insuring agreement and I promised to address it in a subsequent post(s).  The good new is that it's time.  Because of the number of line-item costs that a recall policy should address, I felt like it would be best served to go ahead and separate the costs into two hubs.  This hub will address pre-recall costs while the next hub will address the recall costs themselves.  There will be a third post on the loss of gross income because it also deserves separate treatment.  However, for now, let's dive into pre-recall costs.  

It is interesting when you read these policies because everything is defined as "reasonable and necessary". All costs are "reasonable and necessary". What does that mean? In the case of pre-recall costs, it means:

• Costs and fees of experts and advisors other than Retained Consultants with the prior agreement of Underwriters.
• Costs incurred by or on behalf of the Insured to ascertain, identify or examine Accidental Product Contamination and Malicious Product Tampering and its, or their, effect.

It is worth noting that the reason Retained Consultants is excluded in this section is because they are dealt with in the actual cost of the recall. However, there will be a host of people that will be "reasonable and necessary" to hire to get through the stages before a recall. Certainly the insurance company would rather have expert advice on the front end of a recall to reduce the total out of pocket paid on a recall related claim. In some cases, the use of these experts may help them to determine that no recall is necessary, or worse, for the insured, no coverage applies.

If you recall from the Insuring Agreement, they will pay any cost associated with an Insured Event which includes Accidental Product Contamination, Malicious Product Tampering, and Product Extortion Demands. What happens if you bring an expert into the mix for a pre-recall situation and they determine that there was "none of the above". It is worth noting that they specifically address the pre-recall costs separately in the policy, but they remain silent on whether they will cover the costs of those experts in the event it is determined that there is no Insured Event. If you carry a large retention on your policy, this is a very good question to ask up front as you may be the one footing the bill for the experts.  It is also worth noting that you have receive the prior agreement of underwriters.  As with anything else, it is best to have this agreement in writing up front so that there are not questions later.  Further, will you be required to pick from a list, or can you select someone with specific industry experience and then gain their approval.  Either way, you need to manage the situation as if the recall will happen and your policy will respond while being judicious with the amount of money you are spending within the retention layer.

David R. Carothers, CIC, CRM is a Risk Management Consultant and Licensed Insurance Agent with Praxiom based in Tampa, FL. To contact David Directly, please email him at drc@praxiom-rm.com.