Americans started new small businesses in record numbers during the COVID-19 pandemic. And as any small business owner will attest to, margins are tight and purchasing the best-possible insurance is not always a top priority.

Yet, “any business that manufactures, sells, or distributes a physical product is at risk for recalls," says Matt Carpenter, executive vice president, Amwins Brokerage of the Midwest. “Small business owners need to consider what it would look like if a large segment of their products had to be recalled."

While product liability insurance is essential to cover bodily injury and property damages an insured's product causes, a recall policy is much broader than its name suggests. “It will cover recalls, stock recoveries—when the product is still in the insured's possession—and market withdrawals," says Alex Marti, product recall focus group leader - U.S., Beazley.

When discussing product recall liability insurance with a client, here are four areas an agent should consider:

1) Adequate levels. “Many clients will take entry-level coverage and not necessarily realize that they need higher limits than what they're purchasing," says Darryl Holmes, vice president, corporate underwriting, Selective Insurance.

“There are many factors that can affect what kind of limit a client should purchase, including sales level, industry, balance sheet, and contractual requirements," Marti says. “That being said, the most commonly purchased limit is $1 million." 

2) Coverage terms. Ensuring a client has the proper coverage will give them the right protection “to replace the product with a product of like kind and quality, so as not to lose the opportunity to gain revenue while that product is out of the stream of commerce," Holmes says.

In terms of coverages, buyers should be made aware of “coverage for removal, replacement, business loss, and third-party damages, as well as triggers that broaden how the policy responds, including governmental advisories and adverse publicity," Marti says.

3) Consequential loss of profits. For any small business that provides a product to a third party, consequential loss of profits is an essential coverage to include in their product recall coverage. Once included, “if a customer loses profits as a result of a covered recall of a product that the insured sells, payment will be made for that," Holmes says.

For some clients, the name product recall may lead them to believe they do not require such coverage, particularly those who aren't name brands. However, “they may be a critical supplier to a name brand and this coverage is particularly important for them," Marti says.

“More business owners are contractually required to carry recall coverage—these requirements are coming from manufacturers who are purchasing component parts from the insured, such as co-packers, as well as retailers who are utilizing these requirements to insulate themselves from any potential costs they might incur from a supplier having a recall," Marty explains.

“The food and beverage sector is very familiar with product recall insurance, but we're seeing growing interest from non-food manufacturers in general but more specifically in the automotive, aviation/aerospace and medical device sectors as well," Marti adds. 

Product recall insurance policies have traditionally addressed only first-party exposures. However, many carriers have now begun offering some forms of broadened third-party coverage.

4) Reputation risks. “The financial impact to a business when facing a recall can be devastating," Carpenter says. “Their brand reputation can be damaged and there are a host of risks insureds must be made aware of."

And in today's world of social media, any adverse media can be devastating for a client. “There's a higher potential for an adverse publicity event where someone on social media could spread information, whether it be true or false, about certain products that could cause an insurable event," Carpenter says.

In particular, “TikTok is the social platform most businesses—especially smaller businesses—should be most concerned about," says Robert Balogh, senior vice president, product recall, Amwins Brokerage of the Midwest. “A consumer could post a story making false accusations about a company or product, for example claiming it made them sick or contains a foreign object or material. If the video goes viral, the company is dealing with mass repercussions because of it, whether it's true or not."

“While the biggest roadblock is a poor claims experience, the best opportunity for growth is new buyers," Balogh says. “The hard property-casualty market that we have been experiencing is going to put stress on buyers' budgets, but we do expect if and when the market softens, there is an additional opportunity for new buyers to afford the coverage."

As more agents discuss this coverage with their clients, they're beginning to understand the benefits of having this coverage in their risk management portfolio. 

Olivia Overman is IA content editor.