Defective Product Risk Is An Increasing Peril For Companies

Sadaka Associates Defective Products 0 Comments

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If there is one thing consumers dislike, it’s having a product they own be the subject of a recall. However, over the past 10 years, the number of recalls has increased substantially. With defective product risk being an increasing peril for companies around the world, many industries are attempting to find various ways to eliminate the problems they have been experiencing.

Industries Most Affected by Defective Products

According to data from the past decade, certain industries have been affected by recalls much more so than others. Leading the way has been the automotive industry, followed by the food and beverage industry and the IT/Electronics industry. Many reasons have been given for the increase in recalls, including stricter regulations, less money being spent on Research and Development, increasing consumer awareness, and harsher penalties being handed out by government agencies.

Financial Damage to Companies

Along with posing risks to consumers, recalled products also inflict significant financial damage to companies. Over the past five years, incidents involving defective products have led to insurance losses totaling more than $2 billion. As a result, the recalls are the largest generator of liability losses for companies around the world. In fact, in studying over 360 insurance claims spanning a five-year period involving 12 different industries, it was found that the average legal settlement exceeded $12 million. While this is a large amount, it should be noted that many incidents far exceeded that total, with only 10 incidents making up 50 percent of the total losses.

The Ripple Effect

According to industry experts, recalls from the automotive industry have created a ripple effect in other industries. This is because recalls in this industry account for over 70 percent of recalls around the world, and with the increasing shift toward autonomous technology in vehicles, recalls are expected to increase in this industry as well as many others.

Food and Beverage Industry

Accounting for 16 percent of insured losses at an average of $9.5 million per settlement, the food and beverage industry ranks second behind the automotive industry in recall incidents. The most common reasons for recalls include mislabeling, contamination from plastic, metal, and glass, tampering, and what is known as “food fraud,” defined as substituting one food for another without disclosure to consumers. As with the auto industry, stricter regulations and consumer awareness are looked at as the leading reasons why more recalls are occurring.

Preventing Recalls

Since companies lose millions and billions of dollars when recalls occur, they are eager to prevent these incidents from happening. As a result, new forms of technology are being tested in an effort to make products safer. One of the most unique is genome-sequencing technology, which allows for quicker tracing of contaminated products. Along with keeping consumers safe, the technology is also expected to make it easier for investigators to identify perpetrators, increasing the chances of litigation against those responsible.

With so much money at stake as well as their corporate reputations, companies realize the peril that exists in future recalls of defective products. Because of this, an increased emphasis on Research and Development, along with using advanced technology to prevent defective products from reaching consumers, will be the main areas emphasized over the next decade. By doing so, companies using this crisis management approach will likely have far fewer recall incidents.

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