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Case Study: Samsung Galaxy Note 7 Product Recall

Case Study: Samsung Galaxy Note 7 Product Recall

In the fall of 2016, Samsung found itself with a problem: the Samsung Galaxy Note 7. Just a few weeks after their latest product was released, consumers were reporting charging problems with the battery. These weren’t just any problems, either. The batteries were catching fire and exploding.  They issued a voluntary recall to anyone concerned about the battery.

Samsung thought they had solved the problem by changing battery manufacturers, but the problems persisted.  Soon they issued a formal recall of all Note 7 devices, even going so far as to issue a software update that would render these devices inoperable (though some wireless carriers refused to push the update).

Product Recall Coverage

Products liability insurance would cover bodily injury and property damage to consumers that were injured by the exploding batteries. This would include damage to clothing, furnishings, or vehicles. Medical expenses related to burns experienced by consumers would also be covered.

However, the costs to recall products that may cause damage or injury is usually not covered under a standard products liability policy. That’s where product recall insurance would come in.

Product recalls are happening every single day, and they can have a massive impact on the cost of doing business. In December 2016 the Food & Drug Administration (FDA) reported 51 separate product withdrawals or recalls, nearly 2 per day. In the first 8 days of February 2017, the Consumer Product Safety Commission reported 5 product recalls.

Costs of Product Recall

The Samsung recall affected not only the Note 7 in its first iteration, but also the faulty phones that were issued to replace the original faulty phones. This amounts to a double recall: recalling and replacing original phones with new ones, then recalling and replacing the new ones.

The company press release also states that consumers will be refunded for their purchases of accessories for the Note 7. In addition, many consumers would receive a statement credit or other compensation, depending upon whether they replaced the product with another Samsung product.

It was estimated that around 2.5 million Note 7 phones were recalled at a retail cost of $850 per phone, resulting in a retail loss of $2.125 billion. Recall costs of the product alone would bankrupt smaller businesses. In addition there are costs for:

  • Replacement of the recalled product.
  • Shipment of the recalled product back to the manufacturer.
  • Repair or replacement of a recalled product.
  • Destruction of recalled product.
  • Loss of reputation to the business.
  • Loss of business.
  • Loss of business and reputation to the industry.

Larger businesses can absorb these losses even if they don’t have product recall insurance. Smaller businesses could face severe financial losses and possibly even bankruptcy and business closure without product recall insurance.

Do You Need Product Recall Insurance?

Any business that produces a tangible product for sale to the public should purchase product recall insurance. While products liability covers your business in the event of bodily injury or property damage, product recall insurance covers your business if there is even a high probability that bodily injury or property damage may occur because of your product.

Contact Hayes Brokers today for a free risk management analysis to determine the type of product recall insurance that would offer the right protection for your business.

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