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Do you operate in numerous markets? If so, you may face an increasingly troubling peril — liability for a defective
product. That’s what Japanese company Takata discovered when it was revealed the airbags they supplied were faulty
and dangerous, leading to the largest safety recall in U.S. history. The ongoing recall is estimated to impact more than
41.6 million vehicles in the U.S. manufactured by 19 different companies.
Not surprisingly, this recall caused the demise of Takata. In addition, many of Takata’s partners, some of the largest
automotive companies in the world, have been affected.
How can you defend your business from a similar catastrophe? Consider general liability insurance, product liability
insurance and product recall insurance. Let’s review the differences among these three coverage options

Product Liability and Your Business

Do you operate in numerous markets? If so, you may face an increasingly troubling peril — liability for a defective
product. That’s what Japanese company Takata discovered when it was revealed the airbags they supplied were faulty
and dangerous, leading to the largest safety recall in U.S. history. The ongoing recall is estimated to impact more than
41.6 million vehicles in the U.S. manufactured by 19 different companies.
Not surprisingly, this recall caused the demise of Takata. In addition, many of Takata’s partners, some of the largest
automotive companies in the world, have been affected.
How can you defend your business from a similar catastrophe? Consider general liability insurance, product liability
insurance and product recall insurance. Let’s review the differences among these three coverage options.

Commercial general liability (CGL) insurance

Liability insurance provides protection from the financial losses (payments of damages and legal costs) that occur
when liable for injury or property damage. Liability exposure can arise from a variety of sources, so different types of
liability coverage are required to protect a business.
A commercial general liability policy will cover your business against claims involving bodily injuries and property
damage resulting from your products, services or operations. However, your CGL policy is limited. A standard CGL
policy includes a separate aggregate coverage limit for “products and completed operations”. If your main business
operations include the design, manufacture, assembly, distribution, installation or sale of products, a liability claim
could easily exceed your coverage limit. As a result, you may want to purchase a proper product liability policy from
your insurance broker.

Product liability (PL) insurance

If your product is faulty, the fallout could be enough to bankrupt your company. Even if your company’s involvement
in a product is limited, you could be found liable in a lawsuit. In fact, you may be liable if all your company does is
repackage and distribute a product manufactured elsewhere.
You could also face a liability risk if your marketing materials or promotions lead to the misuse of your product.
Product liability insurance protects the manufacturer, distributor or seller from legal liability resulting from personal
injury or damage to property caused by a dangerous or defective product.
Failing to have dedicated product liability insurance could even represent a missed business opportunity. Other
reputable companies (including retailers and dealers) may stipulate that you have PL insurance before entering into a
contract with you, and investors often require proof of coverage before they will commit to a joint venture.

Be mindful of the sistership exclusion

Standard CGL and PL policies include the sistership exclusion — also known as the product recall exclusion. This
provision excludes any losses related to the withdrawal, inspection, repair, replacement, adjustment or loss of use of
your product. Essentially, if you recall a product that could cause damage or injury, your standard CGL or PL policy
will not apply.
However, you can take steps to mitigate these substantial losses by obtaining product recall coverage. This can offset
many of the operational costs of a recall, as well as the costs of re-establishing your company’s brand.

Product recall (PR) coverage

As supply chains become more complex, consumer protection regulations become more stringent, and social media
places your company under the microscope. The way your company handles a product recall could mean the
difference between survival and bankruptcy. No matter how strong your reputation and safety record, you are never
immune to this risk.
Product recalls are logistically complex, expensive and potentially very damaging to your reputation. You could be
faced with the cost of investigating the defective product, advertising and promoting the recall, and paying fees and
compensation to distributors and retailers. Then there is the logistical nightmare of arranging the return, repair and
replacement of the defective products or components. You may also have to pay to dispose the unsafe product. You
will likely have substantial legal and professional fees and may face business interruption costs, in addition to
decreased consumer confidence and company credibility.
Yet, a failure to act decisively enough when a defect is discovered could also prove extremely damaging to your
business.
Manufacturers, suppliers and distributors erroneously think that their CGL or PL insurance policies will cover the costs
associated with a product recall. If your company has substantial business interests in the manufacture, supply or
distribution of products, speak with your insurance broker to determine whether you have sufficient coverage and to
make any necessary changes.