This article was produced with Amwins Group.
Gia Snape, of Insurance Business, sat down with Rob Balogh, executive vice president at Amwins Brokerage in Chicago, Illinois, to talk about the evolution taking place in the product recall space, particularly for small- to medium-sized enterprises (SMEs), with a shift towards protecting specifically against product defects, and to introduce a new product that offers a more affordable and expanded coverage option than what SMEs usually see in the market.
Navigating product recall risks is a complex undertaking for small- to medium-sized businesses, which often face barriers to accessing adequate insurance coverage. Firms of any size can face devastating financial consequences if they experience a product recall or contamination event.
Traditionally, SMEs purchase small Product Withdrawal endorsements via their primary General Liability policy, but don’t explore standard market Product Recall or Contaminated Products coverage, a more robust and expensive cover to address the exorbitant 1st party business costs associated with removing unsafe products from the stream of commerce.
“Historically, most small businesses with revenues under $25 million didn’t buy this coverage,” said Rob Balogh, executive vice president at Amwins Brokerage in Chicago, Illinois. “It was often seen as too expensive, or (SMEs) didn’t feel the need for it, or they were deterred by the complicated application process.”
A single product recall or contamination event can trigger a cascade of consequences that may threaten a company’s financial stability, reputation, and even its ability to continue operations.
Product defects can arise when a product fails to perform as intended, posing potential risks such as bodily injury or property damage. Recalls are reactions to such manufacturing defects or contaminations.
All companies face the same vulnerabilities surrounding recalls, with smaller manufacturers, distributors, and co-packers often dealing with the associated costs and fallout without the robust risk management structures of their larger counterparts.
"The risks faced by small, mid-sized, and large companies are essentially the same—whether it's a voluntary or government-mandated recall or a manufacturing defect that could cause bodily injury or property damage,” said Balogh.
Consider the expenses involved in recalling a product from the market. Direct costs include notifying customers, retrieving the faulty product, and handling logistics – but these are just the tip of the iceberg. Companies must also consider replacement costs, refunds, lost revenue during the disruption or facility closure, and – if the situation escalates – legal expenses and expenses incurred by customers.
And financial losses are only part of the story. Reputational damage can be a more insidious and long-term effect of a product defect or recall. For larger brands, media scrutiny can be fierce, but they often have the resources to launch damage control campaigns, regain consumer trust, and rebuild their reputation.
SMEs, particularly those leveraging social media for brand visibility, face unique challenges when public perception turns negative. Balogh said these firms must be prepared not just for the initial recall but also for the long and potentially costly process of brand rehabilitation.
“Even for smaller companies who heavily advertise via social media, platforms like Instagram, Facebook, and TikTok can impact their ability to be successful,” he said.
To help make insurance coverage for product defect risks more accessible to SMEs, Amwins has rolled out a comprehensive product defect insurance offering. An expansion of recall/withdrawal expense endorsements, Product Defect Insurance fills a long-standing gap in the market, removing entry barriers for smaller firms, and expanding their coverage options.
“Our product defect insurance broadens that coverage to include contamination or manufacturing defects that could lead to recalls, covering not just recall expenses but also replacement costs, first-party loss, third-party recall liability, and brand rehabilitation,” said Balogh.
Aside from offering comprehensive protection, Amwins has also streamlined the process by removing the cumbersome, long-form application, binding quotes with just four data points: name, revenue, NAICS code, and address. The new program provides coverage to over 700+ NAICS codes.
“While big companies can sometimes absorb these costs, a six- or seven-figure loss could bankrupt a small business that lacks the financial means to self-insure,” said Balogh. “This policy could be the difference between survival and closure.”
Claims trends have shown a marked increase in product defects and recalls, underscoring the growing necessity for comprehensive coverage. “Claims activity has increased tremendously in the last 12 months,” Balogh said. “As we've come out of COVID-19, we've seen a large increase in overall claim activity, and not just from a frequency standpoint, but from a severity standpoint.”
The dual increase highlights that product defect insurance is no longer just about guarding against catastrophic, one-off incidents – it can address a more dynamic risk environment for SMEs. For retail brokers, the streamlined submission process, affordable pricing, and expansive coverage should be key selling points to clients.
“Product recalls have evolved; they’re a reaction to an event, typically involving contamination or a manufacturing defect,” Balogh said. “You don’t need a traditional recall for the coverage to apply, which has been a major misconception among agents and insurers. Most companies have likely faced some contamination or defect event, and this coverage is designed to respond to those scenarios.”
Learn more about Amwins’ product defect insurance offering here.
