They happen often and much to the chagrin of retailers, independent sellers, and their customers when they do: a product recall.

They can happen for a variety of reasons for any item that’s sold to consumers. For example, an electronics product that overheats due to faulty wiring or a battery, food contaminated by salmonella, or poorly manufactured toys and other household items that pose a risk to children.

For example, you may recall (no pun intended) that in 2016 Samsung had to discontinue manufacturing and recall 2.5 million Galaxy Note 7 smartphones after some of the sold units burst into flames because of overheating batteries. That event cost Samsung an estimated $5.3 billion.

A damaged mobile phone

Retailers (online and offline) are responsible for the products they sell or distribute, including faulty products. And managing a product recall is not inexpensive. There are customer notification, shipping, disposal costs, and expenses related to reimbursing your customers or replacing the recalled product in question. That’s when product recall coverage within a retail insurance policy can be a saving grace.

How Product Recall Insurance Helps Retailers Save Face (and Money)

Product recall insurance reimburses business owners from financial losses sustained when a product is recalled, whether the government or a manufacturer orders that recall after discovering a defect.

A business owner may face bankruptcy if they don’t have product recall coverage since small businesses can’t afford to absorb substantial financial losses – especially if they’re named in a third-party personal injury or property damage lawsuit.

Does Product Liability Insurance Cover Product Recalls?

A product recall is all a first-party expense and loss. Your product liability coverage is vital and valuable as a third-party coverage. That means if another party suffers a loss, it will trigger your product liability coverage. While product liability protects businesses from damages related to the design, manufacturing, and marketing of any item they manufacture, distribute, or sell, not all commercial general liability insurance policies automatically include product liability coverage. Double-check to ensure your policy does. If it doesn’t, you can add it to your existing policy.

4 Tips for Protecting Your Retail Business From Product Recalls

As a retailer or independent seller using a third-party marketplace to sell goods, such as Amazon, Etsy, or Wayfair, there are a few steps you can take to shield yourself from the financial and reputational fallout caused by a product recall, including:

1. Be aware of government-ordered recalls

The Canadian government issues recalls, advisories, and safety alerts on products for consumers and merchants. Keeping tabs on the government’s latest recalls and safety alerts can help you know as soon as possible if an item you sell is listed.

2. Know the products you sell

Ensure that every product you sell complies with regulatory and industry safety standards. The Canada Consumer Safety Act can serve as a guide for the items you sell that may pose a danger to health and safety and help ensure you comply with the law. Even if you only sell goods online occasionally as a hobby or side hustle, you need to be responsible for what you sell. That leads to the next point.

3. Communicate with your customers

Keep track of who you sell goods to, what was sold, and when. If there’s a product recall, you should initiate contact immediately with your customers first than vice-versa (doing so may help reduce the risk of a lawsuit). Provide them with the information they need about the product being recalled and what you’re doing to help them, such as offering a refund and covering the cost of shipping the item back to you.

4. Know if your suppliers and manufacturers indemnify you for recalls

Take a magnifying glass to your procurement contracts with suppliers and manufacturers you do business with to see if they indemnify you for liabilities related to a product recall. You might want to consider not selling their goods if they don’t.

As product recalls are common, all retailers and independent sellers should be ready to deal with one when they happen. Being prepared to take charge of the situation by reacting quickly and ensuring you’ve got the insurance coverage you need can help protect you from expensive lawsuits and shield your brand and reputation.

— Reviewed by Matt Jardine, Team Lead, Property & Hospitality, Zensurance.

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About the Author: Liam Lahey

Liam is the Content Marketing Manager at Zensurance. A writer and editor for more than 20 years, he has been published in several newspapers and magazines, including Yahoo! Canada Finance, Metroland Media, IT World Canada and others.