Product Recall-White Paper

UNDERSTANDINGYOUR PRODUCT RECALL EXPOSURE

specific documentation of chargebacks may be omitted when the retailer sends the supplier a demand for reimbursement. In this example, there may be instances where insurers may exclude some chargeback costs associated with the claim if the charges are deemed by the insurer to be excessive or unsubstantiated. Additionally, the supplier may be limited in their negotiation power to dispute the charges indicated by the retailer, and a portion or all of the costs may ultimately be borne by the supplier. To avoid issues at the time an incident occurs and a claim is filed, suppliers should ensure that contractual language with retailers is reviewed in conjunction with their insurance policy to determine what, if any, gaps in coverage exist so that appropriate adjustments or risk retention financial planning can be implemented. For a consultation, analysis and pricing for your business, please contact us.

A product contamination or recall event can result in a number of expenses, including: Product retrieval, storage, and disposal

shipping, freight, disposal, special handling. In some instances, including in some insurance policies, these costs are referred to as compensatory damages. While contractual language with some retailers is very specific with respect to what will be charged back to suppliers, contractual language across all retailers is not standardized. For instance, one prominent retailer provides language in their supplier contract limiting the chargebacks to, “…actual, documented out-of-pocket costs…” in addition to a specified administrative fee (tiered based on the Class of the recall event). The same retailer also specifically outlines in their contract the methodology for calculating the chargebacks at all levels of the process. Another retailer broadens the language to include that the supplier is responsible for, “all costs and expenses associated with the recall, notice or action.” Because of the broad language, calculation methodology and

Crisis Communication Business Interruption Brand Restoration

Notification to affected (and potentially affected) parties Forensic accounting to assist with quantifying the financial cost associated with a product recall Costs associated with contractually obligated chargebacks from retailers and third parties are often overlooked. While indemnification language is relatively standard in most supplier agreement contracts, the language associated with the supplier chargebacks may vary significantly. Chargeback language is often broad in scope, generic, unlimited, and might not specifically outline how the costs are calculated. Many retailers contractually impose reimbursement requirements and administrative charges on the supplier that may include labor costs associated with retrieval/ handling of the product at all levels including store, warehouse,

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Disclaimer: This whitepaper is provided for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem.

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