How will surge in product recalls impact small businesses?

Recall-weary consumers ignoring recall notices increases liability risks

In 2011, there an average of 6.5 recalls a day.  This is a 42.5 percent increase in recalls from 2007.

U.S. regulators, manufacturers, distributors and product liability insurance carriers are concerned the recall-weary public are tuning them out.  Ignoring product recalls raises the risks of more consumers being endangered, which results in more product liability claims. This in turn results in Product Liability premium increases for manufacturers and distributors.

A business’s reputation is easily tarnished if there isn’t an effective product recall plan in place that quickly notifies the customers who purchased the defective products.

Passing on the burden to suppliers

In addition to increased premiums, there’s an increase in the number of businesses requiring suppliers to carry Product Recall Insurance.   Product Recall Insurance typically covers the direct cost of

• notifying customers that purchased the defective product;
• shipping;
• extra warehouse and storage;
• disposal of the products; and
• additional personnel required to conduct the recall.

However, many businesses go a step further, asking suppliers to ensure their product recall policy includes third-party coverage.  This covers damages sustained due to a product recall and includes but is not limited to

• the direct cost (see above) sustained by businesses as a result of recalling a product;
• business interruption losses (the purpose of this insurance is to put the business in the same financial condition it would have been had no loss occurred);
• the cost to repair and rehabilitate brand reputation; and
• additional cost to purchase substitute goods to replace the recalled products.

The effect on start-up and small businesses

The increase in the number of recalls is now starting to overwhelm even the most prepared retailers, wholesale distributors and manufacturers.  By requiring that their suppliers carry Product Recall Insurance with third-party coverage, businesses can respond more quickly and decisively to a product recall without fear of being damaged financially.

My concern is whether the cost of doing business will be too high for many start-ups to place their products in the market.  It’s not uncommon for manufacturers, retailers and wholesale distributors to test market or make small initial purchases to determine a product’s success.  As a result, start-up and small businesses may not make enough income in the first year to offset the additional cost of the product recall premiums. They may not survive long enough to properly introduce their products to a broader market.