On August 30, Restoration Hardware issued a product safety recall for about 5,700 cotton Turkish bathrobes following reports that the robes had ignited when being worn during gas stove use. Made in Turkey, the bathrobes sold from August 2018 to March in the both the U.S. and Canada.
That same day Restoration Hardware also recalled 3,380 red, vintage steel children’s play chairs and stools sold from October 2012 to May in the U.S. and Canada, after testing revealed their painted finish contained lead in excess of federal limits, posing a health hazard to children. Both recalls were initiated by Restoration Hardware voluntarily, in cooperation with the U.S. Consumer Product Safety Commission and Health Canada. The company offered full refunds to consumers who had purchased the products.
While cotton bathrobes and children’s furniture may seem unlikely to present hazards, the most innocuous-seeming products are recalled on a regular basis. For example, on September 3, distributor Dog Goods USA added all 30-packs of its “Berkeley & Jensen” pig ear dog treats sold at B & J’s Wholesale Clubs to a lengthy list of brands whose pig ears are potentially contaminated with Salmonella.
The Centers for Disease Control (CDC) warns that dogs who ingest tainted pig ears can become gravely ill, but humans can contract multidrug-resistant Salmonella simply by handling them. To date, 143 individuals in 35 states have tested positive for different strains of Salmonella contracted from pig ears sourced from multiple suppliers—33 have required hospitalization and 26 were under the age of five.
When it comes to product recalls, no business is immune. No matter the product, businesses should never underestimate the recall risks they face. It is important to create a plan to mitigate negative publicity and reputation damage that can result.
“Your brand is ‘gold’ and you never want it damaged by a recall event,” said Michael Muglia, Underwriting Manager, Professional and Executive Liability Center of Excellence, Burns & Wilcox, Detroit/Farmington Hills, Michigan. “If a recall does happen, the primary objectives for any company are to address the safety concern caused by the product, and protect the brand to make sure that the fallout from the event does not become systemic across the entire product line.”
Product recalls impact thousands of companies, consumers annually
The Consumer Product Safety Commission announced a recall of about 73,000 PolyCut Mowing Heads manufactured by the STIHL Corporation on September 5, citing danger from bolts holding the mowing heads and plastic blades together coming loose and injuring bystanders. There have been 28 related incidents reported, including two that resulted in injuries.
Every month, hundreds of product safety recalls are announced in the U.S. According to the U.S. Food and Drug Administration, there were 7,561 product recalls in fiscal year 2018. Nearly half—3,285—involved devices, while 1,958 concerned food or cosmetic products. Health Canada reports that in 2018, the U.S. ranked second worldwide in number of product recalls, behind China, which ranked at the top.
Companies involved in these product recalls face a costly and potentially damaging process. There are practical costs incurred from notifying consumers, shipping and receiving recalled goods, and refunding consumers. There are also costs that are significant, albeit less tangible, such as damage done to a company’s reputation, business interruption and loss of clientele and revenue.
A company faced with a product recall must also consider the effects on its overall supply chain. Disrupting dependent manufacturing and distribution processes can have a costly impact on the bottom line of every company in the chain. “If the product that you create is a component of another product, you could suffer a third-party financial loss,” Muglia pointed out. “Another product may not be manufactured because you had to recall your product.”
Minimizing the fallout from product recalls
Even the most conscientious and careful manufacturing, processing, storage or preparation practices cannot account for every eventuality or foresee every potential hazard. There are variables that can be controlled, such as properly training employees, implementing safe handling protocols and carefully maintaining equipment and facilities. Nevertheless, there are a complex array of potentially disruptive variables that cannot be controlled or anticipated.
Product Recall Insurance coverage can help mitigate policyholders’ expenses in the event of a recall—especially logistical costs, Muglia explained. While Products Liability Insurance covers any associated litigation costs, Product Recall Insurance can help with essential needs after a recall, such as transportation, hiring additional workers, manufacturing and distributing replacement product, cleaning or replacing machinery, consulting with a crisis management team and more.
According to Muglia, crisis consulting is one of the most helpful features of Product Recall Insurance coverage. Working with a crisis management team well-versed in crafting an effective response to a product recall benefits businesses of all sizes, he said. “Once those next steps are identified, the team moves quickly to mitigate brand damage, help with public relations, and making the business owner whole on their balance sheet,” he explained. “It is two-fold: how to properly respond to the crisis, and how to manage your brand and public image.”
Food recalls: an increasingly common concern for restaurants, others
According to a 2019 report from the Public Interest Research Group (PIRG), food recalls in the United States increased by 10 percent from 2013 to 2018. During that same time period, there has been an 83 percent rise in meat and poultry recalls involving contaminants that could cause serious health problems, like Salmonella and E. coli.
Food contamination has led to safety recalls of several products in recent months. In August, Canadian health agencies jointly addressed an outbreak of Listeria monocytogenes, traced to cooked poultry products from various U.S. brands and suppliers. One of those suppliers, Tip Top Poultry, announced a recall of 135,810 pounds of its products on August 20.
Restaurants are also impacted by food contamination issues, especially with foods classified as high-risk. In September, a Salmonella outbreak associated with steak tartare—a dish made from raw ground or minced beef—occurred at the Restore Public House in Wisconsin, sickening 17 customers.
According to Patricia Sheridan, Manager, Ontario Property and Casualty, Burns & Wilcox, Toronto, Ontario, Canada, investing in Restaurant Contamination Insurance, a type of Product Recall Insurance, is an effective way to address a restaurant’s full exposure in such an incident. Such coverage is particularly helpful in bearing the costs of business interruption, cleanup and reputation rehabilitation.
Sheridan explained that while it is standard for restaurants to have Commercial General Liability (CGL) and Commercial Property Insurance coverage, which can help defray costs such as customer claims, such policies may not help with costs incurred when food contamination issues force a restaurant to close down. As with product recalls, rehabilitating a restaurant’s reputation after a food poisoning or contamination event, especially in the age of online reviews and social media, can be a prolonged and costly effort.
“Restaurant Contamination Insurance coverage will help repair all damage related to a food contamination incident,” Sheridan confirmed. “There are a lot of advantages to having that coverage, including the Business Interruption coverage that you would not get with a General Liability or Property policy.”
Every business should examine its recall risks
Food contamination and product safety recalls can have a disastrous impact on a company’s revenue, reputation, and long-term survival. “Those are the nightmare scenarios for the small-to-medium business; they might be put out of business because they cannot survive the expense of a recall event,” Muglia stated. “Product Recall and Restaurant Contamination Insurance can provide valuable balance sheet protection.”
To customize the right coverages to address a company’s specific needs, Muglia contended that business owners should be forthcoming with their insurance brokers and agents. “Inform them of any ingredients or components of your product that you outsource or import from oversees, for which you might not have complete control over quality, or be able to exactly trace the origins.”
Muglia stressed, “Be honest, what is your nightmare scenario? What issues are you concerned with? Your broker needs to understand your exposure to make sure your fears are addressed appropriately by your policy.”