Let’s just cut through the b.s. and say what most business owners are thinking: Getting insurance coverage for your business feels like a con job in which insurance agents are forcing a bunch of insurance policies on you that you don’t need.
While we recognize this can happen (and are equally disheartened by such unscrupulous tactics), you need to understand something: insurance brokers and agents don’t write the policies and the way these policies are written, each one has very specific limitations and a finite scope of service.
For example, if you purchase inventory insurance for your company, that kind of policy is only recognized in very specific circumstances. So, when an insurance agent mentions cargo or inland marine insurance, it isn’t necessarily an attempt to make you pay for unnecessary coverage; it’s because inventory insurance doesn’t cover your products when they are in transit.
The reason we bring this up is because there are certain insurance policies that eCommerce sellers often find superfluous. So, sellers simply don’t purchase them – either because they believe them to be unnecessary or think their company is impervious to calamities. They later kick themselves for not having such coverage when you-know-what hits the fan.
Recall insurance is a great example. While recall insurance may not seem as paramount as policies like liability insurance or inventory insurance, product recalls are not exactly uncommon and recovering from one can be costly, if not impossible.
In this blog, we’ll discuss the realities of product recalls, how they can negatively impact businesses, and how recall insurance can save your company time and money.
Product Recalls are More Common and Impactful Than You Might Think
In the United States alone, recalls have been on the rise with disastrous effects on businesses such as financial ruin, lawsuits, and even business closure. According to the latest report from the Consumer Product Safety Commission, product recalls in the US increased by 33% in 2022. Furthermore,
- Incident reports show that recalled products are frequently connected to serious incidents, yet it takes too long for the company and government to announce a recall.
- Re-announcements of certain recalls show that injuries often continue to occur long after the first recall. For example, Generac Power Systems of Wisconsin in November renewed its recall on 321,160 portable generators after people continued to report finger amputations 16 months after the initial recall.
- Among last year’s 292 recalls, 65 of them – or 22% – involved injuries or deaths.
Situations like the ones listed above often lead to lawsuits, which means that your company may have to cover way more than just shipping costs, warehouse costs, disposal costs, restocking costs, and PR costs; you may also have to pay for legal costs.
In other words, in a vacuum product recalls can be expensive to recover from. But when you also have to cover the costs associated with a lawsuit, recovering from a recall may not be doable.
Real World Examples of Product Recalls (and Their Associated Costs)
Don’t just take our word on how expensive recalls can be. Here are some real world examples of the financial damage product retractions can cause.
One of the most prominent cases of a recall negatively impacting a business involved a Japanese automotive parts company called Takata Corporation. In 2016, it was found that Takata was manufacturing defective airbags. As a result, Takata was forced to pay millions of dollars in legal fees and settlements, leading to the eventual bankruptcy of the company.
Another example is Fisher-Price. The company had to discontinue its Rock n’ Play product after reports of over 30 infant deaths, costing Fisher Price $3.1 million in damages. While that price tag may barely be a blip on Fisher-Price’s radar, most small businesses couldn’t recover from a 3.1-million-dollar deficit.
In 2017, a small kitchenware retailer in Colorado recalled a faulty garlic press. The product injured several customers, leading to a lawsuit that caused significant financial losses and the eventual closure of their store.
And, while it’s easy to look at these particular cases and think to yourself, “Well, those products are high risk. The products my company sells wouldn’t cause injury”, think again.
Even “Safe Products” Can Lead to Lawsuits and Recalls
In 2013, the beloved athleisure wear company, Lululemon, had to pull 17 percent of its clothing line from the shelves due to a “quality issue,” which resulted in a $67 million loss.
What was that quality issue? The drawstrings in their hoodies and jackets were causing eye and facial injuries. Who would have guessed athletic tops could be so dangerous?
Another example is a product called Aqua Dots that was a popular arts-and-crafts bead among kids in the early 2000’s. That was, until 2007, when the Consumer Product Safety Commission discovered that the beads were coated in a chemical that, when ingested, metabolized into gamma hydroxy-buturate. This is the same composite notoriously used for drugging and attacking dates.
Children who ingested the beads experienced symptoms of nausea, vomiting, and loss of consciousness. As a result, Aqua Dots’ manufacturer recalled their products.
Point being, any retail company is at risk of having their inventory discontinued and being subject to a lawsuit. Even if you deem your products innocuous, that doesn’t mean they are – even if they have been on the market for years without incident. Just look at Nestle. In the summer of 2022, everyone’s favorite baked goods company had to recall their Toll House chocolate chip cookie dough due to a few batches that were contaminated with foreign matter. While there were no claims of injury, recovery from the fiasco was expensive.
Assuming that your product won’t injure your customers can be a costly mistake. Recall insurance can provide the safety net and peace of mind you need to continue running your business with confidence.
What is Recall Insurance?
Recall insurance covers the costs associated with product recalls and warranty claims. This type of coverage offers financial compensation for locating the defective inventory, pulling it from shelves and warehouses, notifying customers, PR damage control, and customer refunds. It can even help with costs associated with replacements.
Trust us when we say that you do not want to shoulder the financial burden associated with product recalls.
What You Need to Know About Recalls if You Sell on Amazon
Just last year, the US Consumer Protection Safety Commission issued an emergency recall of male-to-male extension cords, specifically citing Amazon as the culprit of selling these products. Amazon responded by immediately removing the products from its platform, which consequently shut down any seller accounts that sold male-to-male electric cords.
In this article by Cynthia Stine, she explains what is to be expected after an Amazon recall, but we’ll provide the takeaway.
If you’re an Amazon seller and one of your products is recalled:
- Your listing will be suspended and it cannot be reinstated.
- Amazon has the right to destroy your products.
- Amazon will not reimburse you for this inventory removal.
- You cannot modify or update your product. Once a recall occurs, it is illegal to sell that product anywhere else. You would need to manufacture a brand-new product.
- If consumers choose to sue Amazon over claims of injury, you will shoulder the responsibility. (This is why Amazon requires its sellers to have liability insurance.)
- Amazon will cover zero costs associated with the recall process
Due to these facts, it’s crucial that Amazon and online sellers consider adding recall insurance to their insurance plan.
One final thing to consider is that the inventory of online businesses is generally exposed to a much larger number of customers (than, say, brick-and-mortar shops). This means not only is their more likelihood that people have an adverse interaction with your product, it also means that tracking down inventory, discarding of that inventory, and refunding customers is a very expensive endeavor. And with product reviews of online listings weighing more heavily on the decision-buying process of consumers (again, as opposed to physical stores), eCommerce companies have a lot more to lose.
Aside from obtaining product recall insurance, another precaution you may want to take is continually checking that your items comply with the most updated health and safety regulations.
With so many different insurance types available to Amazon business owners, it’s understandable that one may feel bamboozled by insurance offers they simply don’t need. One of the things we pride ourselves on at Ashlin Hadden Insurance is that we cater our insurance recommendations to the actual needs of your business – not to make more money on our end.
As such, there are a lot of insurance policies we don’t recommend, based on your finances, your business set-up, the products you sell, and your risk assessment. However, recall insurance is the type of coverage we always advocate for with our clients. Here’s why:
- In the United States alone, recalls have been on the rise with disastrous effects on businesses which include financial ruin, lawsuits, and even the closure of a business. According to the latest report from the Consumer Product Safety Commission, product recalls in the US increased by 33% in 2022 and were often the result of injury or death.
- Product recalls can financially ruin a company. Take for example a small Colorado-based kitchenware retailer whose garlic press injured several customers which led to a product recall and lawsuits. This monetary burden eventually forced the kitchenware merchandizer to close its doors. Recall insurance would have likely circumvented their fate.
- Don’t make the mistake of assuming your product is safe and won’t harm your customers. In 2013, Lululemon had to pull 17 percent of its clothing line from the shelves because the drawstrings of their hoodies and jackets were causing eye and face injuries. This cost the company $67 million in losses.
- Recall insurance covers the costs associated with product recalls and warranty claims. It provides financial compensation for tracking down units, pulling them from shelves and warehouses, notifying customers, PR damage control, and customer refunds.
- If you are an Amazon seller, it’s extra important to have recall insurance because Amazon doesn’t reimburse you for the inventory they pull and destroy, nor do they reimburse your customers for your products they purchased. As a side note, this is also why Amazon requires that you carry liability insurance; in the event Amazon is sued over a product defect, they can put the legal and financial responsibility on you.
The bottom line: Product recalls are much more common than you might think. It’s completely irrelevant if you think your product is too safe to require recall insurance – plenty of seemingly harmless products have been discontinued and sued over. Product recalls can be quite expensive, so having insurance in place to cushion any financial blows is a smart business move.
For more information about Product Recall Insurance, contact us at Ashlin Hadden Insurance at email@example.com or go ahead and fill out a form here. We look forward to helping you protect your business and assets.