Managing the Risks of a Defective Product
Product recalls are an extreme action, but they help companies to protect customers, reduce litigation costs, and preserve their reputations.
- By Kelly M. Lippincott
- Sep 15, 2008
A company’s brand name is often its most
valuable asset. A brand name takes years to
develop but can be irreparably harmed in an
instant if a trusted brand causes harm to the
consumers who have grown to rely on it.When a company
learns that one of its products has caused harm to
one or more of its customers, it needs to take swift action
to prevent future harm to its consumers and to salvage
its brand name.
A company may learn of problems with its products
through a number of sources, including customer complaints,
claims, news coverage, and regulatory agencies
such as the U.S.Consumer Product Safety Commission
or the U.S. Food and Drug Administration. The problem
may be the result of a design defect,manufacturing
defect, malicious tampering, accidental contamination,
misbranding, or mislabeling.Whatever the reason for
the defect, the company must decide what it will do to
address the problem. Immediate action is necessary to
protect customers, to protect the brand name, and to
comply with the requirements of the regulatory agencies
that have jurisdiction over the specific product.
Recalls Are Rising
Product recalls are an extreme and expensive remedy,but
in recent years they have occurred with increasing regularity.
In January 2008, the Consumer Product Safety
Commission’s Web site listed more than 30 recalls of a
variety of products—from air compressors to toy train
sets.During that same month,FDA’s Web site listed more
than 20 recalls, market withdrawals, and safety alerts.
The number of recalls has increased dramatically in
the past decade. In 2000, FDA reported approximately
80 recalls,market withdrawals, and safety alerts. In 2007,
that number rose to 375. The reason for the increase is
unclear. The cynical view is that product quality is in a
steep decline. Alternatively, it might be that companies
are taking a more proactive approach to warning their
customers of known defects. Although they constitute
an extreme action, product recalls help companies to
protect their customers, reduce their litigation costs,and
preserve their reputation and brand name.
Deciding Whether to Recall a Product
The decision of whether a company should initiate a
product recall depends on a number of factors, including
whether the defect affects safety, the risk of physical
harm to customers, the involvement of regulatory agencies,
and the cost of the recall.While a product recall can
be a costly endeavor for a company—often,much higher
than production costs—the cost of not conducting a
recall can be even greater. The longer a dangerous and
defective product remains in the market, the greater the
risk of product liability lawsuits and the potential for
both civil and criminal action by regulatory agencies.
If a product is monitored by federal agencies, there
may be mandatory notification requirements. Many
federal agencies regulate products, including CPSC;
FDA; the National Highway Traffic Safety Administration;
the Bureau of Alcohol, Tobacco, Firearms and Explosives;
the Food Safety and Inspection Service of the
U.S.Department ofAgriculture; the U.S.Department of
Housing and Urban Development; the U.S. Environmental
Protection Agency; and the Federal Aviation Administration.
Each agency has rules and regulations that
producers of certain products must follow in the manufacturing
of their goods, and in some instances, the
agency provides guidelines regarding product recalls.
First-party costs
In August 2007, Castleberry Food Company faced a
product recall following a botulism scare. Castleberry’s
parent company, Connors Bros., estimated the recall of
90 different brands of the company would cost approximately
$40 million.
The cost of a recall can be very high, depending on the size of the company, the number of products
affected, and the number of its consumers.
The cost of not taking a proactive
approach to guarding the health and safety
of your consumers from a known danger,
however, can be much higher, a determination
Castleberry made in deciding to go
ahead with its recall.
Liability to third parties
When a product is the subject of a recall, the
first concern is often liability issues related to
the consumers of that product. In addition
to the purchasers and users of its products,
however, a company might be liable to its
distributors and other third parties, such as
other companies that incorporate the component
or ingredient into their own product.
A recall of that component or ingredient
may cause the third-party manufacturer to
suffer an interruption to its business, loss of
profits, and damage to its reputation because
of the recall of the product.
Third-party liability might not be a concern
if the company only sells its products
under its own label or sells its product directly
to consumers. If the product is incorporated
into other products, however, then
the recall’s affect on other manufacturers will
likely increase the associated expense.
Protection through Insurance Coverage
Some of the steep costs associated with product
recalls can be defrayed by insurance coverage.
General product liability coverage,
however, does not usually cover the costs associated
with a product recall.While general
product liability coverage is still essential for
claims brought by consumers, there are many
other risks associated with a product recall
that a company must mitigate.
To alleviate those risks, a growing number
of insurance carriers offer product recall
coverage.To be properly prepared, a company
should organize a corporate team that
will be responsible for identifying triggers
to determine when a recall might be necessary.
The team also should be organized to
implement the recall process swiftly if necessary.
Having a crisis management plan in
place before a company is confronted with
the decision of whether to conduct a recall
can minimize the costs of a recall, reduce litigation,
and prevent adverse publicity that
can scar a brand name. In addition to proper
protocol preparation, a company’s quick
response to a defective product is the key to
reducing the risk of others being harmed by
the product, thus reducing the company’s
exposure to liability.
This article originally appeared in the September 2008 issue of Occupational Health & Safety.