Emerging from the shadow of product liability coverage, growing usage by the food and beverages sector is expected to be among factors increasing demand for product recall insurance, observers say.

Product recall insurance can cover many expenses related to recalling products, including loss of business income.

For example, the RecallResponse policy offered by Boston-based Lexington Insurance Co. includes costs associated with notifying customers of a produce recall as well as shipping, disposal, repairing, replacing or providing refunds for recalled products. Expenses associated with extra warehousing and personnel to support a recall can be insured as an endorsement.

“It covers the full balance sheet exposure that a company would suffer if they had an insured event, so we characterize this coverage as being a balance sheet protection,” said Ian Harrison, a partner at Lockton Cos. L.L.P., a London unit of Lockton Cos. L.L.C.

Mr. Harrison said the market's largest segment, food and beverages, has about $350 million in annual premiums. Observers estimate food and beverages account for about 75% of the product recall market, while consumer goods and automobile parts are growing segments of the business.

A major reason for product recall's relatively small takeup compared with product liability insurance is that it took off only after the 1982 Tylenol poisonings, while product liability coverage has been in existence for many decades. Other reasons could include a lack of understanding of the coverage, that it is relatively expensive as well as firms' confidence in their internal controls and ability to control the exposure, experts say.

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The latter, though, “may be misplaced because a recall can occur because of something happening outside the company's control,” such as an outsourced part of the manufacturing process, said Louis Lubrano, New York-based senior vp of global crisis management for Liberty International Underwriters, a unit of Liberty Mutual Group Inc.

Linda Pirlot, Walnut Creek, Calif.-based assistant risk manager for Del Monte Corp., which has this coverage, said, “It's a cost-benefit analysis, where some companies just don't realize the amount of money it can cost to recall a product. They also don't realize what kind of market clout” major retailers have. “They can demand you take a product off their shelves and reformulate it without there being an official recall.”

U.S. grocery store chains are “a very clear driver in the marketplace right now,” said Peter Dion, Chicago-based director-product liability for Zurich Services Corp. Many of the chain grocers “are demanding evidence of recall coverage” from their suppliers, he said.

Bob Nevins, Boston-based vp of product liability for Lexington, said the coverage is particularly important for small- to medium-size companies because large companies generally take sizable retentions and have sophisticated quality management programs.

David Pugson, London-based senior vp of Willis North America's casualty practice, predicted the market will grow as the coverage develops for sectors outside food and beverages.

Mr. Lubrano estimates there are about 15 markets that write the coverage, including Lloyd's of London syndicates. Several insurers have come into the market recently, and more are interested in doing so “because they see this as an area where there's less competition for business.”

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“I think that as product recall becomes a more necessary coverage for various kinds of insureds to carry, we'll see more carriers offering the coverage,” said Lori Hunter, executive vp at Los Angeles-based Worldwide Facilities Inc., a wholesale broker and managing general agency.

“Part of the problem now is not many underwriters have expertise, so there's not a lot of intellectual capital out there” in the market, she said.

Mr. Pugson said many buyers purchase capacity of $10 million to $20 million. Lexington, for instance, offers limits up to $10 million in its RecallResponse policy, before an endorsement.

Bernie Steves, Chicago-based managing director of Aon Risk Solutions' crisis management team, said capacity up to $100 million can be pulled together from several sources, “but a lot of that depends on the types of products involved,” including whether it is safety-critical and the type of coverage sought.