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Peloton Recalls 54,000 Bike Pedals after Breakage, Injury Reports

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Peloton recently announced that it is recalling the pedals on 27,000 indoor stationary bikes after receiving reports of 16 injuries and 120 pedal breakages. A statement from the high-end spin bike maker said the recall applies to PR70P pedals placed on bikes sold between July 2013 and May 2016 and recommends discontinuing use of affected bikes until new pedals are installed. The recall includes original, out-of-warranty pedals, which Peloton recommends users replace annually.

According to the U.S. Consumer Safety Product Commission, the clip-in pedals can break unexpectedly during use, causing laceration injuries. Of the 16 leg injuries reported, five customers required medical care, including stitches. The recall comes during a boom time for the New York-based company, which has seen its stocks soar almost 600 percent1 since mid-March as demand for at-home fitness equipment has skyrocketed during the pandemic.2 Peloton spin bikes start at about $1,895 for a basic model, plus $49 per month for live-streamed classes.

“Peloton is more popular than ever because more individuals are working from home,” said Angela Tam, Vice President, Brokerage Manager, Burns & Wilcox, San Francisco, California. “A negative incident like this can tarnish a company’s brand if it is not handled quickly and professionally; unfortunately, as in this case, a recall can occur when a company’s profile is at a high point and how they respond can affect their balance sheet.”

Repairing the reputational damage caused by a recall is one of many expenses that Product Recall Insurance can help mitigate, said Tyson Peel, Vice President and Director, Property and Casualty, Burns & Wilcox, Toronto, Ontario. “Brand rehabilitation expenses such as print or television advertising can be included in a Product Recall Insurance policy,” he said. “Burns & Wilcox’s policies include a consultant to advise companies on the best strategy to minimize losses and rebuild customer relationships in the wake of a recall.”

Notification, repairs among common recall expenses

Companies typically face a wide range of expenses in the event of a recall. Primary costs include notifying customers, which could involve placing advertisements or sending letters, and shipping for recalled items and replacement products. Products may need to be tested to determine the source of the issue and manufacturing equipment could require repairs or cleaning before they are put back in service. “The expenses associated with a recall add up quickly and the total can be substantial,” Tam said. “Without adequate Product Recall Insurance, one incident can destroy a company.”

Replacing a single $5 part on tens of thousands of units, for example, is an enormously costly undertaking, said Steve Bartell, Broker, Burns & Wilcox Brokerage, Chicago, Illinois. “That replacement cost, which can easily reach several hundred thousand dollars, is on top of the expenses associated with addressing adverse publicity and loss of profits,” he said.

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A Product Recall Insurance policy that provides extensive coverage is highly affordable, even for a small business. It is a solid investment in protecting a company’s balance sheet.

Loss of gross profit is a key coverage component of Product Recall Insurance, helping to replace profits that would have been made in the absence of the recall as well as any third-party gross profit losses.

Product Recall Insurance can also help companies recover when recall-related brand damage leads to a decline in sales, Peel explained. “A recall can lower the value of the affected items and the anticipated sales for the upcoming year,” he said. “As part of a Product Recall Insurance policy, business interruption coverage can help recoup losses when there is a downward spiral in sales following a covered incident.”

Product Recall Insurance policies vary widely and companies should review the available options carefully, including add-ons for voluntary and governmental recalls, adverse publicity and loss of profits. These add-ons are generally affordable, especially in consideration of their potential benefit. “A Product Recall Insurance policy that provides extensive coverage is highly affordable, even for a small business,” Bartell said. “It is a solid investment in protecting a company’s balance sheet.”

Injuries, illness can escalate recall fallout

On October 14, a recall was announced for Cottonelle flushable wipes produced between February 7 and September 14. Parent company Kimberly-Clark said the wipes were being recalled due to the possible presence of pluralibacter gergoviae, a bacteria that can cause infections in those with compromised immune systems. The only adverse reactions reported were “non-serious complaints, such as irritation and minor infection,” according to the company.

When injuries or illnesses occur as a result of a recalled product, payouts to those affected are generally covered by a company’s Products Liability Insurance, which may be combined with Commercial General Liability (CGL) Insurance.

“Product Recall Insurance is all about protecting a company and its products– including helping provide what that company may need to execute and recover from a recall. Products Liability Insurance, on the other hand, is what is needed when there are expenses and potential legal ramifications associated with damages or injuries that a product is alleged to have caused,” Bartell explained. Initiating a recall when an issue is identified, he said, can help stave off an influx of lawsuits. “By recalling and fixing the problem, a company can minimize or even prevent potential losses.”

Bodily injury lawsuits can be prohibitively expensive, depending on the nature of the symptoms or the extent of harm. Many factors influence the total cost of such settlements, Bartell noted, such as the severity of injury, whether or not an affected individual is able to work, and what the individual’s potential earnings might have been in the absence of the injury.

Injuries and even death can result from incidents involving seemingly benign products, such as paper coffee cups and lids named in a lawsuit over burns suffered by a Northern California Starbucks customer in 20183 and Twizzlers black licorice, which made the headlines last month following the death of a 54-year-old Massachusetts man who reportedly suffered cardiac complications from overconsumption of the candy.4 If consumed in excessive amounts, the glycyrrhizic acid found in black licorice and other foods and dietary supplements can create mineral and electrolyte imbalances that can disrupt cardiac rhythms.

Food-related recalls can affect a particularly large number of consumers in a short period of time; such recalls are also quite common. Recent food recall examples include a September wood ear mushroom recall5 and an August recall of onions—both recalls involved multi-state salmonella outbreaks. The onions were distributed to wholesalers, restaurants, and retail stores in all 50 states, the District of Columbia and Canada, and reportedly sickened at least 1,127 individuals in 48 states.6

While recalls are a serious concern for the food industry, “almost every single industry is vulnerable,” Bartell noted.

Recalls related to health concerns frequently make news headlines. Many brands of hand sanitizer were recalled in the U.S. earlier this year after testing revealed contamination with methanol,7 which could pose serious health risks if ingested. This month, Health Canada announced a recall of counterfeit hand sanitizer that was suspected to contain methanol.8

“Many companies reconfigured their operations to develop in-demand items like hand sanitizer, but some had challenges with quality control and insufficient testing in their rush to market,” Peel said.

Recall expenses often underestimated, coverage misunderstood

Although some retailers will cite that the CGL Insurance policies they offer include a sublimit for product recall, the coverage may be limited to the expense of physically recovering the products and returning them to the manufacturer or distributor. This coverage is frequently misunderstood, said Tam.

“Because product recall coverage is mentioned in a CGL Insurance policy, many businesses mistakenly assume they are covered for all expenses associated with a product recall,” she explained. An attorney’s bill or the cost of mailing out letters to notify the public or customers could easily exceed the limits of such coverage, she added.

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From a financial standpoint, if a company is involved with a product, especially one that has the potential to cause bodily injury or property damage, that company needs Product Recall Insurance coverage.

Too many companies decide against investing in Product Recall Insurance to save money. Others purchase only when forced to by contract as many big box stores now require coverage from their vendors. The non-purchasers sometimes learn too late that their losses were far greater than what they would have spent for the appropriate coverage. “From a financial standpoint,” Tam stressed, “if a company is involved with a product, especially one that has the potential to cause bodily injury or property damage, that company needs Product Recall Insurance coverage.”

Peel agreed; many companies, he said, fail to realize the potential costs they could face in a recall. “All of those expenses are losses a company must absorb,” he said. “With margins being as tight as they are, and the current state of the economy, ensuring it is properly insured is essential for every company.”

A broad range of businesses should have Product Recall and Products Liability Insurance coverage, Tam said. Besides manufacturers, entities that could be impacted directly by a product recall or other product-related incident include co-packers, processors, service providers, assemblers, importers, exporters, distributors and suppliers. “These types of businesses are regularly named in product-related lawsuits,” she explained. Additionally, many big box stores, department stores, building material stores, and grocery chains are requiring evidence of Product Recall Insurance prior to product delivery. “I have seen minimum policy limits of $10 million or more as standard practice,” she said.

Another line of business that is often overlooked is Discontinued Product coverage, which is meant for companies that are closing or have products that are being phased out or no longer in service. “Some of these products have very long shelf lives,” Tam said, which means they could be involved in an incident well past the time they leave the warehouse, assembly line or store. The process to obtain a Discontinued Product quote can be cumbersome as it requires a lot of prior data. Unless required, many also elect not to purchase the coverage.

Insurance brokers and agents experienced in Product Recall and Products Liability Insurance are important advisors to agents, Tam emphasized. “The more likely a product has the potential to cause bodily injury or product damage, either through accidental contamination or as a result of being defective, the greater the need for Product Recall Insurance.”

Bartell concurred. “Consulting a qualified agent, and purchasing insurance from a qualified wholesaler,” he said, “can help any company navigate the rough waters of a product recall more successfully.”

 

Sources
1 Peloton. Q4 2020 Shareholder Letter.
2 Miller, Henry. “Home gym industry seeing sales skyrocket.” Monitor, August 30, 2020.
3 Callahan, Chrissy. “Man sues Starbucks over burns he suffered in a drive-thru.” Today.com, September 18, 2020.
4 Marchione, Marilynn. “Too much candy: Man dies from eating bags of black licorice.” The Associated Press, September 23, 2020.
5 U.S. Food and Drug Administration. “Outbreak Investigation of Salmonella Stanley: Wood Ear Mushrooms - Dried Fungus (September 2020).” Updated October 5, 2020.
6 Centers for Disease Control and Prevention. “Outbreak of Salmonella Newport Infections Linked to Onions: Final Update.” Updated October 8, 2020.
7 U.S. Food and Drug Administration. “FDA updates on hand sanitizers consumers should not use.” Updated August 27, 2020.
8 Neustaeter, Brooklyn. “Health Canada recalls counterfeit hand sanitizer sold at Dollarama.” CTV News, October 19, 2020.

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