GAO-09-512R Consumer Products 

United States Government Accountability Office

Washington, DC 20548 

April 22, 2009 

The Honorable John D. Rockefeller, IV 

Chairman 

The Honorable Kay Bailey Hutchison 

Ranking Member 

Committee on Commerce, Science, and Transportation 

United States Senate 

The Honorable Henry A. Waxman 

Chairman 

The Honorable Joe Barton 

Ranking Member 

Committee on Energy and Commerce 

House of Representatives 

Subject: Feasibility of Requiring Financial Assurances for the Recall or 

Destruction of Unsafe Consumer Products 

In 2008, the Consumer Product Safety Commission (CPSC) announced that it had 

obtained the voluntary recall of 563 unsafe or potentially unsafe products by the 

companies that manufactured, imported, distributed, or sold the products—the 

largest number for the agency in the past 10 years. In the prior year, CPSC announced 

472 recalls—which was also an increase from the previous year and included some 

high-profile recalls of lead-tainted toys—leading some consumer groups to call 2007 

the “year of the recall.” Consumer products can be recalled for a variety of reasons, 

including violations of safety standards, incidents of injuries that can occur from the 

design or manufacture of a product, or other conditions that present an imminent or 

substantial hazard to consumers. Since 1979 there have been few instances in which 

CPSC could not obtain cooperation from manufacturers or importers to conduct 

recalls, either because these companies did not have the financial resources to 

conduct a recall or because the companies refused to assume responsibility for a 

recall. This included troubled recalls involving more than 1.5 million imported cribs 

associated with multiple deaths of children. Another recall of imported tires, 

conducted under the National Highway Traffic Safety Administration, was the 

responsibility of a small importer that did not have the resources to conduct an 

effective recall. 

These, and similar events, have raised concerns from consumer groups and others 

about the ability of businesses to conduct effective recalls and of the federal 
government to ensure consumer safety. In addition to these concerns, CPSC reports 

that more than two-thirds of recalled products in 2008 were imported. The proportion 

of consumer goods sold in the United States that are manufactured abroad has 

shifted significantly since CPSC was created in the 1970s. From 1997 to 2007, for 

example, the amount of imported consumer goods sold in the U.S. has more than 

tripled—an increase of 217 percent—according to CPSC. 

In response to these issues, Congress in 2008 passed the Consumer Product Safety 

Improvement Act (CPSIA), which greatly expanded CPSC’s authorities over recalls 

and its ability to ensure the safety of products under its jurisdiction, including 

imported goods.1 Neither CPSIA nor other existing laws require companies to 

demonstrate that they have the financial resources to recall or destroy unsafe or 

potentially unsafe products.2

 Instead, section 224 of CPSIA mandated that GAO study 

the feasibility of requiring companies to demonstrate their financial ability to recall or 

destroy unsafe products by posting funds in escrow, insurance, or security, such as a 

bond. This law required GAO to submit, no later than February 14, 2009, a report to 

the Senate Committee on Commerce, Science, and Transportation and the House 

Committee on Energy and Commerce. As agreed with your offices, we briefed your 

staffs on February 13, 2009, on the results of our work. This product documents our 

compliance and provides supplementary information based on our written and oral 

briefing; enclosure I contains a copy of our briefing slides. Our objectives were to 

describe (1) the potential policy options for assuring CPSC that companies have 

adequate resources for the recall or destruction of consumer products, (2) the factors 

affecting implementation of these options, and (3) the potential consequences of 

implementing a financial assurance requirement, as one policy option, including 

potential benefits and disadvantages. 

To identify policy options that could ensure that companies have adequate financial 

resources for the recall or destruction of unsafe products, we reviewed relevant laws 

and interviewed representatives of 44 organizations from a variety of stakeholder 

groups, including trade associations representing consumer product companies, 

consumer interests, and financial services firms; international trade experts; and 

consultants that assist companies with product recalls. To identify the factors 

affecting implementation of these options, we relied on the interviews described 

above, and on interviews with officials from CPSC, Customs and Border Protection, 

the Office of the U.S. Trade Representative, and the U.S. Small Business 

Administration Office of Advocacy. We also convened a roundtable of 20 participants 

representing consumer product companies, financial services firms, product recall 

consultants, and federal government agencies on January 30, 2009, at GAO 

headquarters in Washington, D.C., to foster a dynamic discussion of the key options 

and challenges affecting their implementation.3

 We selected roundtable participants 

primarily based on their ability to provide a broad range of perspectives, level of 

expertise, geographic proximity, and availability. To identify potential consequences 

 

1

Pub. L. No. 110-314, 122 Stat. 3016 (2008) (amending 15 U.S.C. §§ 2051 - 2089). 

2

Section 224 of the CPSIA requires the CPSC to identify the consumer products for which the cost of 

destruction would normally exceed the custom bond and to recommend to the U.S. Customs and 

Border Protection a bond amount that would be sufficient to cover the costs. 

3

Please see enclosure I, slide 11, for a list of participating organizations. 

Page 2 GAO-09-512R Consumer Products
of implementing a financial assurance requirement, we relied on our interviews and 

the roundtable discussion. Finally, we analyzed CPSC recall announcements dating 

back to 1979 for incidences in which companies went bankrupt or did not have the 

financial resources to conduct a recall. We found this information on CPSC’s Web site 

by using the search terms, “bankruptcy,” “bankrupt,” and “liquidation.” As a data 

reliability measure, GAO provided a draft of this analysis to CPSC and received 

technical comments, which we addressed as appropriate. These data are limited in 

that they do not speak to the effectiveness of the thousands of recalls that have been 

conducted under CPSC’s jurisdiction or the financial condition of the companies that 

conducted them. 

We conducted our work from September 2008 to April 2009 in accordance with all 

sections of GAO's Quality Assurance Framework that are relevant to our objectives. 

This framework requires that we plan and perform our work to obtain sufficient, 

appropriate evidence to provide a reasonable basis for our findings and conclusions 

based on our objectives. We believe that the evidence obtained provides a reasonable 

basis for our findings and conclusions based on our objectives. 

Results in Brief 

We identified a variety of approaches to assure the federal government that 

companies have the financial resources to recall or destroy unsafe products. Many of 

these approaches took the form of financial instruments that companies could be 

required to obtain in amounts established by statute or regulation to cover, for 

example, the projected costs of a recall. These financial instruments included an 

escrow account, insurance policy, or surety bond to guarantee a company’s financial 

stability or ability to perform a recall, as well as line of credit guaranties, guaranties 

of personal or corporate assets, or liens on personal or corporate assets. 

Alternatively, many roundtable participants supported providing CPSC with funds to 

assist companies in conducting a recall, citing the approach as a potentially more 

efficient and suitable approach for industry and the federal government given the low 

incidence of troubled recalls in CPSC’s history. Nonfinancial options suggested by 

several sources we interviewed include requiring companies to document their 

strategies for ensuring product safety or conducting product recalls. Another option 

is to make no change, according to some roundtable participants and others we 

interviewed, citing the low number of inadequately funded recalls under CPSC and 

the ability of companies to generally fund recalls. They said CPSC should use its 

existing authorities to compel companies to conduct effective product recalls. For 

example, some participants said CPSC should strengthen efforts to obtain 

cooperation from companies throughout the supply chain, as well as act more quickly 

on its mandatory recall authority by filing an administrative complaint when a 

consumer product company says it has no resources to conduct a recall.4

 

4

Under Section 12 of the CPSA, 15 U.S.C. § 2061, the CPSC may file suit in a United States district court 

seeking the recall, repair, or replacement of, or refund for an imminently hazardous consumer product. 

This is one of two mechanisms for forcing a mandatory recall. Under section 15(d) of the CPSA, 15 

U.S.C. § 2064(d), the CPSC may order a repair, replacement or refund of a consumer product that it 

finds is a "substantial product hazard." The CPSC must conduct an administrative hearing unless it has 

filed a court action under section 12. See 15 U.S.C. § 2064(f). 

Page 3 GAO-09-512R Consumer Products
Several roundtable participants and those we interviewed identified challenges that 

could complicate efforts to implement financial assurance options involving the use 

of financial instruments or a CPSC fund. Although they suggested various strategies 

for mitigating some of these challenges, significant limitations exist in using the 

proposed options as financial assurance for the recall and destruction of unsafe 

products. Representatives of consumer product companies said many companies—

especially small businesses—would be unable to afford the cost of posting assurance, 

especially during difficult economic times and if the required amount of assurance 

were high. Those representing financial services firms asserted that many of the 

proposed financial instruments are not currently designed for consumer product 

recalls and that a firm’s willingness to underwrite consumer product recalls would 

depend on a variety of factors, including the risk profile of companies seeking 

coverage and the amount of coverage sought. Enforcement of a financial assurance 

requirement presents challenges in that CPSC does not have the resources or 

experience to administer and enforce this type of requirement. Furthermore, there is 

no program or process that tracks all domestically produced consumer goods or 

companies, making it difficult to identify companies that may need to comply with a 

requirement. The proposed financial instruments also present challenges because 

firms may not make them available to consumer product companies that are 

financially unstable. In addition, it is unclear whether a requirement to post 

assurance using any of the financial instruments we studied would fully address 

cases involving companies that refused to assume responsibility for the recall of 

products produced by manufacturers it purchased, or recalls companies find to be 

financially catastrophic. We also note that a requirement targeted to the destruction 

or recall of goods under CPSC’s jurisdiction would not address some of the troubled 

recalls that have occurred involving other industries such as food, drugs, and 

automotive parts.5

Although roundtable participants and others we interviewed identified several 

benefits and disadvantages of implementing policies that ensure resources exist to 

recall or destroy unsafe products, there was no consensus on whether there is a need 

to pursue policy changes at this time. Consumer interest groups told us some of the 

potential benefits of requiring financial assurance, either through the use of financial 

instruments or a CPSC fund, include ensuring the public’s safety and improving the 

effectiveness of recalls conducted under CPSC, among other things. However, some 

roundtable participants and others we interviewed identified several potential 

negative consequences, including potentially limiting growth and innovation in 

consumer product companies and distorting incentives for companies to conduct 

voluntary recalls. Despite these potentially negative consequences, consumer interest 

groups said some financial backstop is needed to protect consumers when companies 

fail to effectively recall hazardous products and to address conditions that may 

increase the incidence of troubled recalls, such as increased U.S. reliance on 

imported products and new statutory provisions that require, among other things, 

testing products for lead. However, many others we interviewed and those that 

 

5

CPSC has jurisdiction over 15,000 types of consumer products, but some products subject to recall are 

regulated by other federal agencies. For example, the U.S. Food and Drug Administration regulates 

foods, drugs, and medical devices; the U.S. Department of Agriculture regulates meat, poultry, and egg 

products; and the National Highway Traffic Safety Administration regulates motor vehicles and motor 

vehicle equipment. 

Page 4 GAO-09-512R Consumer Products
participated in the roundtable questioned the need for requiring financial assurances, 

citing the low incidence of product recalls for which funding is not available and the 

low cost of most recalls, which companies have funded through operating income or 

insurance. They also cited incentives that will likely continue to facilitate cooperation 

from the industry to conduct recalls voluntarily, including the ability of consumers to 

sue companies to seek remedies for damages from the use of unsafe products, the 

risk of damaging a firm’s reputation from being associated with unsafe products, and 

CPSC authorities to fine companies for lapses in product safety. 

We provided a draft of this report to Customs and Border Protection (CBP), the 

Consumer Product Safety Commission, and the Office of the U.S. Trade 

Representative for review and comment. We received technical comments from 

CPSC staff and USTR that we incorporated where appropriate. CBP did not provide 

written or technical comments. 

Background 

CPSC was created in 1972 under the Consumer Product Safety Act to regulate 

consumer products to protect the public against those products that pose an 

unreasonable risk of injury and death.6 In this role, CPSC oversees more than 15,000 

types of consumer products, including household appliances and furniture, toys, and 

children’s products. CPSC issues and enforces mandatory safety standards and 

participates in the setting of voluntary standards; conducts compliance activities, 

such as obtaining the recall of hazardous products; and alerts the public to and 

provides information about safety hazards of and safe practices for using consumer 

products. According to CPSC, its objectives for companies conducting recalls are (1) 

to locate all defective products as quickly as possible, (2) to remove these products 

from the distribution chain and from the possession of consumers, and (3) to notify 

the public about the defect and the actions being taken to correct the hazard (e.g., 

refund consumers the price of the product, repair the defect, or replace the product). 

According to CPSC officials, products may be destroyed as part of a product recall or 

at a port of entry into the United States.7

The majority of CPSC’s recalls are conducted by companies on a voluntary basis, 

with CPSC negotiating a corrective action plan with the responsible companies. 

According to CPSC officials, the agency rarely uses its authority to seek a mandatory 

recall, citing a high level of cooperation from companies. The officials said some 

companies pursue recalls voluntarily in acknowledgment of CPSC’s authorities to 

seek mandatory recalls through litigation or to seek civil penalties for engaging in 

prohibited acts, such as, among other things, failing to report hazardous products.8 

 

6

Pub. L. No. 92-573, 86 Stat. 1207 (1972), codified at 15 U.S.C. §§ 2051 - 2089. 

7

The destruction of goods that occurs at ports of entry is outside the scope of our work. However, GAO 

has been mandated to report by August 2009 on the effectiveness of CPSC’s authorities to ensure the 

safety of imported goods under its jurisdiction, which includes the destruction of goods at U.S. 

borders. 

8

For mandatory recalls conducted under section 15 of the CPSA, 15 U.S.C. § 2064, CPSC can obtain 

certain involuntary corrective actions from consumer product companies. Before the passage of 

CPSIA, CPSC could order a manufacturer, importer, distributor, or retailer to engage in certain 

Page 5 GAO-09-512R Consumer Products
Moreover, although recalls are typically conducted by manufacturers, CPSC holds all 

companies along the supply chain responsible for recalls, including those companies 

that sell, import, or distribute consumer products. As such, according to CPSC, the 

agency is generally able to obtain recalls from these other entities when a 

manufacturer is unable to do so. 

The Consumer Product Safety Improvement Act (CPSIA) includes provisions that 

may possibly affect the frequency of recalls and, perhaps consequentially, the number 

of companies lacking adequate financial resources to carry out recalls. In particular, 

the CPSIA established, among other things, a stricter lead content standard for 

children’s products, which could increase the number of recalls from companies 

unable to meet these new requirements.9

 The CPSIA also made it easier for CPSC to 

require companies to stop distributing unsafe products and strengthened CPSC’s 

bargaining power over corrective action plans when companies pursue voluntary 

recalls. Also, a possible increase in CPSC’s budget and resources may result in a 

much more active staff that is able to more quickly investigate, test, and demand 

corrective action by companies. Furthermore, the CPSIA gave authority to each 

state’s attorney general to enforce consumer product safety standards and 

regulations, which could result in increased enforcement actions by CPSC to avoid 

multiple different approaches at the state level. CPSIA brought about another change 

that may counteract potential increases in the number of product recalls. Specifically, 

CPSIA increased the maximum civil penalty from $8,000 to $100,000 for individual 

violations and from $1.825 million to $15 million for a related series of violations, 

which could motivate companies to cooperate with CPSC on voluntary recalls in 

order to avoid potentially costly penalties.10 However, the full extent of the impact of 

 involuntary corrective actions if it determined that a consumer product was a substantial product 

hazard after conducting a trial-type administrative hearing. These actions include (1) to give public 

notice of the defect or failure to comply; (2) to mail notice to each person who is a manufacturer, 

distributor, or retailer; and/or (3) to mail notice to each known buyer or recipient. CPSIA gave CPSC 

authority to require these and three additional actions without a prior hearing, but only after CPSC 

notified the manufacturer and filed suit. The additional actions include (1) to cease distribution of the 

product, (2) to notify others to cease distribution, and (3) to notify State and local public health 

officials. CPSC may also order notice in languages other than English. If, after conducting a hearing, 

CPSC finds that a substantial product hazard exists, CPSIA gave CPSC greater authority over the 

actions a company takes to correct the hazard.

9

Other CPSIA provisions, sections 102 and 103, affecting manufacturers include a new requirement to 

certify that a children’s product had been tested for compliance with various safety standards by a 

third party entity, as well as a requirement to label children’s products with information—such as 

manufacturer, production date, and production batch—to help consumers identify recalled products 

and to enhance the ability of manufacturers to track unsafe products to their precise source. 

10We report inflation-adjusted penalty amounts. The maximum penalty amounts that were specified in 

statute before passage of CPSIA—$5,000 and $1.25 million—was adjusted for inflation in 2004 to 

$8,000 and $1.825 million for individual violations and a related series of violations, respectively. See

Civil Penalties; Notice of Adjusted Maximum Amounts, 69 Fed. Reg. 68884 (Nov. 26, 2004). Civil 

penalty amounts are applicable to violations of the Consumer Product Safety Act, the Federal 

Hazardous Substances Act, and the Flammable Fabrics Act. The maximum civil penalty must be 

adjusted for inflation every five years, beginning no later than December 1, 2011. The amended civil 

penalties take effect on August 14, 2009, or the date on which final regulations are issued, whichever is 

earlier. 

Page 6 GAO-09-512R Consumer Products
these, and other, provisions of the CPSIA is unknown at this time because 

implementation is ongoing. 

Using data from CPSC’s Web site, we identified 15 recall events dating back to 1979 

involving companies that did not have adequate financial resources to carry out a 

recall. These recalls involved 12.8 million units, mostly fire sprinklers, cribs, and wall 

heaters, but also included gas grills, thermostat regulating devices, worm probes, and 

a pull toy.11 For many of these events, the responsible company—typically the 

manufacturer or importer—was bankrupt or in the process of declaring bankruptcy 

at the time of CPSC’s recall announcement. In these cases, the responsible 

manufacturer or importer may have still provided consumers with a remedy for a 

limited time. To protect consumer interests, CPSC may have issued public notice 

advising consumers to either destroy to stop using the recalled product, or retailers 

may have refunded consumers the purchase price of the product. Some of the more 

recent events, notably those involving more than 1.5 million cribs in 2007 and 2008, 

involved issues relating to the entities that purchased or succeeded the bankrupt 

responsible company. In that case, the acquiring company refused to conduct a recall, 

claiming that it was not responsible for products that had been manufactured by a 

company whose assets it had purchased after the products were made. See enclosure 

II for additional details on these 15 recall events, including the size and scope of each 

recall. 

Out of the three financial instruments specified in the mandate, only insurers offer a 

product specifically designed to cover costs of consumer product recalls. Consumer 

product companies that choose to manage risk associated with potential product 

recalls through insurance generally either obtain an insurance policy from a private 

insurer or self-insure the risk by underwriting it to a captive insurance entity.12

According to some financial services representatives, insurers in the United States 

currently underwrite limited amounts of product recall insurance, with most of the 

market written for food and beverage products and comparatively little written for 

consumer goods. Some insurers said that for lower limits of coverage—generally 

$2 million or less—they may include coverage for withdrawing recalled products 

from distribution, among other activities, as part of a commercial general liability 

policy and, according to an insurer, may or may not charge a premium for this 

coverage.13 For higher limits—such as above $10 million—they said that 

policyholders typically obtain a customized policy that is written on a stand-alone 

basis, and not part of a general liability policy. Some insurance brokers also indica

that, as a condition of underwriting, insurers increasingly require policyholders to

develop policies and procedures for conducting recalls and maintaining product 

ted 

 

11Worm probes are steel shafts connected to an electric current, which when inserted into soil, shock 

earthworms to the surface to be gathered for fishing. CPSC cited 28 deaths involving worm probes. 

12For the purpose of insuring product recall risks, a captive insurance entity may generally be a wholly 

owned insurance company within the corporate structure of a consumer product company or a 

separate insurance entity used for the specific purpose of insuring risks that share similar 

characteristics. 

13Insurers said that this coverage can be written on standardized forms provided by the Insurance 

Services Office, a provider of insurance forms and other services to aid insurers. 

Page 7 GAO-09-512R Consumer Products
quality. For this reason, and because recalls can result in potentially large claims, 

product recall coverage is generally viewed by those we interviewed as an expe

form of insurance. The product recall insurance market covering consumer goods

shows indications of expanding, with brokers and consultants reporting a notic

increase in requests for this type of insurance, including from Asian manufacturers. 

Also, a risk consulting firm that designs computer models to help insurers understand 

their exposures has said it envisions developing models for recall risks within a few 

years, which could increase the willingness of some insurers to expand their product 

recall coverage. 

nsive 

eable 

 

Potential Policy Options to Ensure That Companies Have Resources to 

Recall or Destroy Unsafe Products 

We identified a variety of approaches to assure the federal government that 

companies have the financial resources to recall or destroy unsafe or potentially 

unsafe products. Many of these approaches took the form of financial instruments 

that companies could be required to obtain in amounts established by statute or 

regulation to cover, for example, the projected costs of a recall. These financial 

instruments included an escrow account, insurance policy, or bond to guarantee a 

company’s financial stability or ability to perform a recall. Additionally, roundtable 

participants and others we interviewed suggested that line of credit guaranties, 

guaranties of personal or corporate assets, or liens on personal or corporate assets 

could be suitable financial instruments. As discussed in table 1, these instruments 

function differently, leading some to say that if companies were required to post 

financial assurance, the federal government should allow them to choose from among 

a variety of financing options.14

14In prior work, we have shown that financial assurances vary in the financial risks they pose to the 

government, the oversight and enforcement challenges they pose to regulators, and the costs 

companies may incur to obtain them. See GAO, Environmental Liabilities: EPA Should Do More to 

Ensure That Liable Parties Meet Their Cleanup Obligations, GAO-05-658 (Washington D.C.: Aug. 17, 

2005). 

Page 8 GAO-09-512R Consumer Products
Table I: How Proposed Financial Instruments Might Work as Financial Assurance 

Option How option might work 

Escrow CPSC develops master escrow agreement and partners with one or more 

banks that act as escrow agents to establish escrow accounts with consumer 

product companies. Companies deposit cash or other approved assets in the 

account; the bank holds the funds until CPSC approves disbursement, and; 

CPSC, an agent of CPSC, or the consumer product company receives the 

funds to conduct or complete the recall. 

Insurance CPSC establishes coverage requirements, including minimum limits and 

covered risks. Consumer product companies purchase required coverage 

from private insurers and submit claims to cover costs of a troubled recall. 

Bond Sureties assess the financial strength, character, and capability of a 

consumer product company to perform a recall in accordance with 

requirements established by statute or regulation. CPSC makes a claim on 

the bond if a company failed to comply with regulatory requirements. The 

surety would pay CPSC for its claim, or it could conduct the recall according 

to regulation. 

Line of credit guaranty A consumer product company pays an annual fee to access a line of credit 

from a financial institution in an amount established by CPSC to fund 

potential recalls. 

Guaranty of personal or 

corporate assets 

Sole proprietors or the senior officers or principals of consumer product 

companies provide a written guaranty to CPSC that personal or corporate 

assets, such as real estate or machinery, would be available to fund potential 

recalls. 

Lien on personal or 

corporate assets 

CPSC receives a security interest in the personal assets of a sole proprietor 

or the corporate assets of a consumer product company to prioritize its right 

to collect payment in the event of a troubled recall before other creditors 

collect payment on unsecured claims. 

Source: GAO. 

Instead of requiring any of the previously described financial instruments, many 

roundtable participants supported the idea of providing CPSC with funds to assist 

companies in conducting a recall, citing it as a potentially more efficient and suitable 

approach for industry and the federal government given the low incidence of troubled 

recalls in CPSC’s history, among other things. CPSC could maintain an account to 

fund troubled recalls by completing them itself or through its agent, or by providing 

the responsible company with funds to complete a recall. Funding sources could 

include federal appropriations, assessments on consumer product companies, or civil 

penalties CPSC obtains from consumer product companies for violations of safety 

standards. Unlike the other proposed financial instruments, this fund could 

potentially cover recalls where the responsible company is no longer in business and 

no other company can be held responsible for the recall. 

Several sources we interviewed also suggested nonfinancial options to ensure that 

companies are better prepared to recall unsafe products, including requiring 

companies to document their strategies for ensuring product safety or conducting 

product recalls. A consumer products trade association said that the best way to deal 

with potential recalls was to prevent problems from happening in the first place and 

Page 9 GAO-09-512R Consumer Products
suggested that companies be required to develop quality assurance plans.15

Alternatively, some recall consultants we interviewed told us that a requirement to 

develop product recall plans could help companies mitigate the cost of potential 

recalls by virtue of increasing their awareness of how to budget for them.16 

The final option suggested was to make no change to the current system. Some 

roundtable participants and others we interviewed who suggested this option cited 

the low number of inadequately funded recalls under CPSC and the ability of 

companies to generally fund recalls with operating income or insurance, among other 

things. They said that CPSC should do more to use its existing authorities to compel 

companies to conduct effective product recalls. For example, some participants said 

that CPSC should strengthen efforts to obtain cooperation from companies 

throughout the supply chain, as well as act more quickly on its mandatory recall 

authority by filing an administrative complaint when a consumer product company 

said that it had no resources to conduct a recall.17 One roundtable participant said 

that CPSC has not pushed companies enough to recall unsafe products. According to 

CPSC, the agency has rarely acted on its mandatory recall authority, citing a high 

level of cooperation from the companies it regulates to conduct voluntary recalls. 

Moreover, a CPSC official said that if using its mandatory recall authority were 

perceived as penalizing companies that otherwise comply with statutory reporting 

requirements—the same ones that become the basis for some voluntary recalls—then 

the agency’s ability to obtain voluntary recalls could be negatively affected. 

Nonetheless, as recently as 2001, they filed suit against the manufacturers of 

defective fire sprinklers and obtained cooperation from some in recalling the 

product. For one company that did not have the resources to conduct a recall, CPSC 

obtained their cooperation in notifying building owners to replace the sprinklers. 

Some Challenges Could Make Implementing an Assurance Requirement 

Difficult 

Several roundtable participants and those we interviewed identified challenges that 

could complicate efforts to implement alternative financial assurance options. Some 

of these challenges were specific to stakeholder groups, particularly the financial 

services industry, and others were specific to the financial instruments themselves. 

However, strategies that were suggested could mitigate some of these challenges and 

make a financial assurance requirement more viable. 

 

15A quality assurance plan describes a company’s procedures and controls for monitoring the quality of 

its products—for example, materials and manufacturing procedures. 

16Product recall plans describe procedures for conducting a product recall, including the roles and 

responsibilities of key personnel. 

17According to CPSC officials, mandatory recalls are most commonly initiated by filing an 

administrative complaint before an administrative law judge. However, the agency may also initiate a 

mandatory recall by filing a court action. 

Page 10 GAO-09-512R Consumer Products
Challenges Specific to Consumer Product Companies, Financial Services Industry, 

and CPSC

Those we interviewed and roundtable participants identified several major factors 

and challenges that affect the feasibility of implementing a financial assurance, either 

through the use of a financial instrument requirement or CPSC fund. First, 

stakeholder groups representing businesses said that a financial assurance 

requirement would be cost-prohibitive for many companies—especially for small 

businesses and during difficult economic times—if the amount of resources needed 

to conduct a recall were high. A variety of sources have indicated that recalls can 

cost from a few thousand dollars to tens of millions of dollars depending on the 

industry, product, and corrective action pursued. For example, items that require 

specialized repairs, such as fire sprinkler systems, might be more costly to recall than 

toys and other low-priced items, which consumers tend to discard rather than return 

for repair or other replacement. 

Those representing the financial services industry asserted that another challenge is 

that financial services firms might not have enough capacity to meet the potential 

demand for insurance or other coverage because of the limited number of large and 

specialized firms that could be willing to provide the coverage. They also said that 

firms—such as those that provide bonds—would be reluctant to provide coverage for 

recalls if only high-risk consumer product companies were subject to a financial 

assurance requirement or if potential costs for recalls rose to millions of dollars. 

Some suggested that financial service providers might be unwilling to pay for 

relatively costly remedies designated by CPSC, such as the repair and replacement of 

items. In addition, those we interviewed and roundtable participants, indicated that 

the willingness and ability of financial service firms to extend coverage for product 

recalls would depend on the terms and conditions of a financial assurance, including 

the financial service firm’s obligations, types of recall events or company actions that 

trigger provision of coverage, and pricing. For example, surety bonds are typically 

designed to cover short-term obligations of two years or less, but a product can be 

recalled after several years in commerce. Some suggested that financial service firms 

might be unwilling to pay for recall costs triggered by a voluntary recall, which 

constitute the majority of CPSC recalls. Moreover, pricing these new instruments 

would also be difficult because the financial firms would need to fully understand all 

the risk challenges of both the companies and their products—an especially daunting 

task if all companies were required to obtain coverage. Many of these financial 

instruments—excluding insurance—are not currently designed for consumer product 

recalls, so financial services firms would have to design financial products to cover 

product recalls. 

CPSC officials and others said, moreover, that any financial assurance requirement 

would be challenging to enforce. They said CPSC did not have the resources or 

experience to administer and enforce an assurance requirement. Moreover, consumer 

products trade associations reported there is no program or process that tracks all 

domestically-produced consumer goods or companies doing business in the United 

States, making it difficult to identify companies that may need to comply with this 

requirement. Any financial assurance requirement that is targeted at imported 

products could be perceived as a barrier to trade and implicate U.S. obligations under 

international trade agreements. 

Page 11 GAO-09-512R Consumer Products
Challenges and Limitations Specific to Implementing Financial Instruments

Those we interviewed and roundtable participants identified specific issues that were 

associated with using each of the financial instruments or CPSC fund to meet a 

financial assurance requirement. For example, according to financial services 

representatives, product recall insurance offered very limited coverage, would be too 

expensive for many companies needing large amounts of coverage, and was generally 

not available to the riskiest companies or industries. Because insurance relies on 

spreading risk among a broad range of companies, it would not be a viable financial 

tool if applied only to the riskiest companies. Escrows, as another financial 

instrument, allow companies to accrue interest on funds they set aside. However, 

escrows are difficult to establish without first determining the specific amount of 

money to set aside. Escrow accounts could also tie up a company’s resources to a 

greater extent than the other proposed financial instruments and could be 

particularly burdensome during difficult economic conditions. A bond program might 

not be an appropriate option for ensuring that company funds were available for 

recalls but could be used to keep financially unstable companies from engaging in 

commerce due to surety firms’ practice of prescreening companies for financial and 

operational stability. Companies that are in poor financial condition would have 

similar problems obtaining line of credit guaranties or providing personal or 

corporate guaranties, although these options might be comparatively less expensive 

and could potentially require less capital than other options. A CPSC fund could 

target resources to troubled recalls, but specific parameters and controls on the use 

of funds and capitalization would be needed for potentially large or catastrophic 

recalls. Some roundtable participants raised the concern that the availability of CPSC 

funds for recalls could create a disincentive for companies throughout the supply 

chain, such as retailers, to voluntarily cooperate with CPSC in conducting and paying 

for recalls when a manufacturer was unable to do so. 

A financial assurance requirement targeted to products under CPSC jurisdiction and 

that uses financial instruments we identified or a CPSC fund, faces several major 

limitations. It is unclear whether a requirement to post assurance using any of the 

financial instruments we studied would fully address cases involving companies that 

do not assume responsibility for recalled products produced by entities it purchased. 

It is also unclear whether highly catastrophic events, such as the incomplete recalls 

of fire sprinklers, could be adequately covered by any of the financial assurance 

options we studied, given that the cost of repair, replacement, or refund could be very 

high. A requirement targeted to the destruction or recall of goods under CPSC’s 

jurisdiction would not address some of the troubled recalls that have occurred 

involving other industries such as food, drugs, and automotive parts. 

Strategies for Mitigating Challenges 

Those we interviewed and roundtable participants suggested various strategies for 

mitigating some of the challenges that could potentially affect implementation of the 

proposed financial options. To make a financial assurance more affordable, for 

example, several interviewees and roundtable participants suggested that companies 

could be allowed to choose the type of financial coverage that would be most costeffective, an option that would be particularly beneficial for low-margin or small 

Page 12 GAO-09-512R Consumer Products
businesses. Some suggested that a financial assurance requirement be targeted 

towards specific types of companies or industries, such as those with a high 

incidence of troubled recalls. For example, one individual suggested that small 

businesses be excluded from meeting a financial assurance requirement and some 

suggested that a CPSC fund be created to target only those companies with troubled 

recalls. Furthermore, the terms and conditions of any requirement can be used to 

manage affordability and availability. For example, minimum financial coverage 

requirements should be set at a level low enough for companies to afford the 

coverage, yet high enough to meet the policy objective, such as covering the cost of a 

potential recall. Other terms and conditions that can affect the cost to companies, as 

well as the willingness of financial services firms to provide coverage, include the 

specific recall activities that an assurance would be required to address, as well as 

the point in time when coverage would be required—either once a product had been 

produced or once the need for a recall had been determined. 

In addition, clear policy goals should be established before devising the financial 

assurance requirement. According to some roundtable participants, for those rare 

instances in which having some form of financial backstop to protect consumers 

from unsafe products may be useful, the success of any new policy option depends 

on how well it matches the specific policy objectives for covering troubled recalls. 

For example, if the purpose of the requirement is to prevent financially weak 

companies from selling products, those we contacted said a bond program might be a 

suitable solution because sureties are unlikely to underwrite bonds for companies 

that cannot demonstrate the wherewithal to recall goods. This is because surety firms 

screen companies on their ability to perform either financially or operationally before 

underwriting a bond on their behalf, whereas other instruments we studied do not 

directly screen companies. In contrast, if the purpose is to ensure that resources are 

available to conduct a troubled recall, then some suggested a CPSC fund might be 

suitable given the infrequency of these events that make other financing options 

comparatively more onerous for consumer product companies and CPSC. However, 

care should be taken that such a fund does not inhibit the maturation of an insurance 

market or other private-sector solution covering product recall risks by crowding out, 

or competing with, insurers or others willing to assume these risks. To achieve this, 

some roundtable participants said a fund should be narrow in scope to fund only the 

most crucial recall activities, such as public notification, and be used in only the most 

critical circumstances. Also, some roundtable participants said that if civil penalties 

become the source of the funds, then controls should be designed to anticipate how 

this might affect the incentives facing CPSC to pursue civil penalties on companies 

under its jurisdiction. 

To improve CPSC’s ability to enforce a financial assurance requirement, some 

sources suggested requiring companies to register with CPSC, thereby creating a 

means to track companies or products under its jurisdiction and enabling CPSC to 

identify companies that may need to comply with a requirement. Alternatively, some 

roundtable participants suggested that CPSC may have existing authority it could use 

to request more financial information from consumer product companies. 

Page 13 GAO-09-512R Consumer Products
A Financial Assurance Requirement Could Provide Benefits but May Have 

Negative or Unintended Consequences, with No Consensus on the Need for a 

Financial Assurance Requirement at this Time 

Although roundtable participants and others we interviewed identified several 

benefits and disadvantages of implementing policies that ensure resources exist to 

recall or destroy unsafe products, there was no consensus on whether there is a need 

to pursue policy changes at this time. Consumer interest groups told us that a 

financial assurance requirement mandating the use of financial instruments or a 

CPSC fund would help ensure the public’s safety. This would be particularly 

important when economic conditions put pressure on companies to lower costs, 

potentially compromising product quality and increasing the incidence of troubled 

recalls. According to one group, a requirement would have been particularly useful in 

the recent and incomplete recall of a large number of imported cribs that were 

associated with at least two infant deaths and that caused much confusion among 

consumers about how to repair the crib. Further, such a requirement could help 

improve companies’ quality controls and standards if companies needed to meet 

underwriting requirements for financial services firms. For example, as a condition of 

underwriting, insurers typically require companies to document their quality 

assurance and product recall plans and a trade association told us surety firms would 

likely require companies to carry recall insurance as a condition of qualifying for a 

bond. Finally, these consumer interest groups said a financial assurance requirement 

could improve the effectiveness of recalls conducted under CPSC, given that the 

agency has made limited use of its mandatory recall authority.18

However, some roundtable participants and others we interviewed identified several 

potentially negative consequences that could affect companies, consumers, and U.S. 

exports. For example, the cost associated with providing financial assurance could 

limit growth and innovation in consumer product companies and cause bankruptcies, 

especially among small business or businesses in low-margin industries, such as toys. 

Also, it could distort incentives for companies to conduct voluntary recalls or 

continue risk management programs that support product safety because coverage 

would be available for these events. Finally, some international trade experts noted 

that any financial assurance requirement could cause other countries to establish 

similar requirements for U.S. exports, particularly if the requirement were viewed as 

a trade barrier on goods imported to the United States. 

Despite these potentially negative consequences, consumer interest groups said some 

financial backstop was needed to protect consumers when companies fail to 

effectively recall hazardous products. Increased U.S. reliance on imported products 

and new statutory provisions that require, among other things, testing products for 

lead, may also increase the incidence of troubled recalls. Finally, CPSIA also 

strengthened CPSC’s recall authorities, which may create additional troubled recalls 

depending on the extent to which CPSC exercises its new authorities over product 

recalls. 

 

18However, CPSC may begin using its mandatory recall authorities more often, because provisions of 

CPSIA make it easier for the agency to require that companies stop distributing unsafe products and 

strengthen the agency’s bargaining power over corrective action plans when companies pursue 

voluntary recalls. 

Page 14 GAO-09-512R Consumer Products
However, many others we interviewed and those that participated in the roundtable 

questioned the need for such a requirement, citing, among other things, the low 

incidence of product recalls for which funding is not available, recent statutory 

changes that improved product safety standards, and the low cost of most recalls, 

which companies have funded through operating income or insurance. They also 

cited industry’s increased attention to product quality after the high profile recalls of 

2007. A variety of incentives appear to contribute to a high level of cooperation from 

industry to conduct voluntary recalls. For example, CPSC has authority to require 

companies to recall unsafe products involuntarily and to assess civil penalties against 

companies that fail to meet certain safety standards. CPSIA expanded these 

authorities by, for example, increasing the maximum civil penalty amount from 

$1.825 million to $15 million for a related series of violations.19 Other incentives that 

will likely continue to facilitate cooperation from industry include the risk of 

damaging a company’s reputation by being associated with the manufacture or sale of 

unsafe products, and U.S. tort law that allows consumers to sue companies for 

liability associated with unsafe products. 

Agency Comments 

We provided a draft of this report to Customs and Border Protection (CBP), the 

Consumer Product Safety Commission, and the Office of the U.S. Trade 

Representative for review and comment. We received technical comments from 

CPSC staff and USTR that we incorporated where appropriate. CBP did not provide 

written or technical comments. 

_________________________________________________________________________ 

We are sending copies of this report to the Consumer Product Safety Commission, 

Customs and Border Protection, the Office of the U.S. Trade Representative, and 

interested congressional committees. In addition, the report will be available on 

GAO’s Web site at http://www.gao.gov. 

 

19In accordance with 15 U.S.C. § 2069(a)(3), the maximum penalty amount for a related series of 

violations that was specified in statute before passage of CPSIA—$1.25 million—was adjusted for 

inflation in 2004 to $1.825 million. See 69 Fed. Reg. 68884. 

Page 15 GAO-09-512R Consumer Products
If you or your staffs have any questions, please contact me at (202) 512-8678 or 

sciremj@gao.gov. Contact points for our Offices of Congressional Relations and 

Public Affairs may be found on the last page of this report. Major contributors to this 

report were Debra Johnson, Assistant Director; Meghana Acharya; Emily Chalmers; 

Elizabeth Guran; Linda Rego; and Kathryn Supinski. 

Mathew Scirè 

Director, Financial Markets and Community Investment 

Enclosures 

Page 16 GAO-09-512R Consumer Products
Enclosure I: Briefing to the Senate Committee on Commerce, Science, and 

Transportation and the House Committee on Energy and Commerce 

1

Feasibility of Financial 

Assurances for Consumer 

Product Recalls

Briefing to the

House Energy and Commerce Committee 

and

Senate Commerce, Science, and 

Transportation Committee

February 13, 2009

Page 17 GAO-09-512R Consumer Products
Enclosure I 

2

• Objectives

• Summary of Findings

• Background

• Scope and Methodology

• Discussion of Findings

Overview

Page 18 GAO-09-512R Consumer Products
Enclosure I 

3

In response to a mandate in the Consumer Product 

Safety Improvement Act of 2008, GAO addressed the 

following objectives:1

(1) Identify public policy options that the Consumer 

Product Safety Commission (CPSC) could use to 

ensure that companies have the resources to conduct 

product recalls, including destroying recalled products.

(2) Identify factors that could affect the feasibility of 

implementing the proposed policy options.

(3) Identify potential consequences of requiring a financial 

assurance, as one policy option, including potential 

benefits and disadvantages. 

Objectives

1 Pub. L. No. 110-314, § 224, 122 Stat. 3016, 3069 (Aug. 14, 2008).

Page 19 GAO-09-512R Consumer Products
Enclosure I 

4

• Public policy options for ensuring that companies can carry out recalls include the use of financial assurances and other options.

• Financial assurance options such as escrow, insurance, or bond, as well as letter of credit, guarantee of, or lien on personal or corporate 

assets, and a CPSC fund for recalls.

• Nonfinancial options, such as requiring quality assurance or recall plans.

• No change to current laws, but have CPSC make better use of existing recall authorities.

• Factors affecting the feasibility of implementing the financial assurance options include:

• The cost to businesses,

• The capacity of the financial services industry to provide coverage,

• Terms and conditions, and 

• Enforcement mechanisms.

• Potential consequences of a financial assurance requirement include potential improvements to consumer safety, but many stakeholders

question the need for such a requirement, citing the low incidence of CPSC 

recalls for which companies could not pay, among other things.

Summary of Findings

Page 20 GAO-09-512R Consumer Products
Enclosure I 

5

• CPSC oversees more than 15,000 types of consumer products, 

including household products, toys, children’s products, and sports 

products, among other things.

• Recalls conducted under the jurisdiction of CPSC are intended to

protect consumers from unsafe or potentially unsafe products.

• CPSC may require companies to conduct recalls, but most recalls 

have been voluntary. 

• CPSC reported that all recalls it oversaw in fiscal year 2008 were voluntary, totaling 563.

• According to CPSC officials, the agency rarely uses its authority to seek a mandatory recall, citing a high level of 

cooperation from companies. They said some companies 

pursue recalls voluntarily in acknowledgment of CPSC’s

authorities to seek mandatory recalls through litigation or to 

seek civil penalties for failing to report hazardous products.

Background

Page 21 GAO-09-512R Consumer Products
Enclosure I 

6

• CPSC holds all companies along the supply chain responsible for 

implementing product recalls, including manufacturers, importers, 

distributors, and retailers.

• CPSC’s objectives for companies conducting recalls are:

• To locate all defective products as quickly as possible;

• To remove these products from the distribution chain and from 

the possession of consumers, and;

• To notify the public about the defect and the actions being 

taken to correct the hazard (e.g., refund consumers the price of

the product, repair the defect, or replace the product).

• According to CPSC, products may be destroyed as part of a 

product recall.

Background

Page 22 GAO-09-512R Consumer Products
Enclosure I 

7

GAO identified 15 recalls since 1979 under CPSC jurisdiction that involved 

companies without adequate resources to conduct a product recall. 

• These recalls involved 12.8 million units, mostly fire sprinklers, cribs, 

and wall heaters. Other products included gas grills, thermostat 

regulating devices, worm probes, and a pull toy.2

• The companies could not carry out these recalls because they had

limited financial resources, had filed for bankruptcy protection as a 

result of a recall, or for reasons unrelated to a recall.

• GAO provided a draft of this analysis to CPSC and received technical 

comments, which we incorporated where appropriate. Our interviews 

with product recall consultants and others did not supplement or

contradict these data.

• These data do not intend to describe the effectiveness of other recalls 

conducted under CPSC. 

Background: Incomplete Recalls under CPSC

2 Worm probes are steel shafts connected to an electric current, which when inserted into soil, shock 

earthworms to the surface to be gathered for fishing. CPSC cited 28 deaths involving worm probes.

Page 23 GAO-09-512R Consumer Products
Enclosure I 

8

• Our review included:

• Recalls conducted under the jurisdiction of CPSC to protect 

consumers from hazardous products,

• Imported and domestically produced products, and 

• All products under CPSC jurisdiction.

• To do this work, we:

• Compiled and analyzed data from 1979 to 2008 on product safety 

recalls that CPSC collected on companies lacking adequate 

resources to conduct a recall; 

• Interviewed organizations representing consumer product companies, 

financial services firms, product recall consultants, consumer interest 

groups, international trade experts, and government agencies; and 

• Convened a roundtable of experts and others to obtain a deeper 

understanding of the need for and issues involved in implementing a 

financial assurance requirement.

• We conducted our work from September 2008 to February 2009 in 

accordance with all sections of GAO's Quality Assurance Framework that 

are relevant to our objectives.

Scope and Methodology

Page 24 GAO-09-512R Consumer Products
Enclosure I 

9

• As of January 30, 2009, we had conducted interviews with 48 

organizations representing various stakeholder groups, including:

• Consumer product trade associations (12) representing large 

and small manufacturers, importers, distributors, and retailers;

• Individual retailers (5);

• Financial services trade associations (7) representing banks, 

insurers, sureties, and brokers of these services;

• Large insurers, sureties, banks and insurance brokers (8);

• Product recall consulting firms (8);

• Consumer interest groups (2);

• International trade experts (2); and

• Federal agencies (4), including CPSC, Customs and Border 

Protection, the Office of the U.S. Trade Representative, and 

the U.S. Small Business Administration Office of Advocacy.

• We selected organizations to interview based on breadth of 

membership, size, prior knowledge, and availability.

Scope and Methodology: Interviews

Page 25 GAO-09-512R Consumer Products
Enclosure I 

10

• We convened a roundtable of 20 participants representing 

consumer product companies, financial services firms, product 

recall consultants, consumer interests, and federal government 

agencies.

• On January 30, 2009 we held an all-day meeting with these 

participants at our headquarters office in Washington, D.C.

• We selected participants who represented the different stakeholder 

groups that would likely be involved in developing a financial 

assurance requirement for product safety recalls, if such a program 

were initiated. We judgmentally selected participants based on:

• Ability to provide a broad range of perspectives and speak to 

as many areas of knowledge as possible,

• Nationally renowned expertise or national constituency,

• Our professional judgment on a participant’s knowledge of 

issues, and

• Geographic proximity and availability for our panel.

Scope and Methodology: Roundtable

Page 26 GAO-09-512R Consumer Products
Enclosure I 

11

Public Citizen Zurich North America

International Fidelity Insurance Co. for the 

National Assoc. of Surety Bond Producers

Toy Industry Association

SunTrust Banks, Inc.

Consumer Interests Surety and Fidelity Assoc. of America

Retail Industry Leaders Assoc. Insurance Information Institute

Small Business Administration

Office of the U.S. Trade Representative

Safe-T-Source Inc. Customs and Border Protection

Consumer Federation of America The Bank of New York Mellon

Product Recall Consultants Government

Marsh USA CPSC

National Assoc. of Home Appliance Colemont Insurance Brokers

Manufacturers

American Assoc. of Importers and Exporters Bank of America

Consumer Products Industry Financial Services Industry

Scope and Methodology: Roundtable participants

Source: GAO.

Page 27 GAO-09-512R Consumer Products
Enclosure I 

12

The mandate requires that GAO study escrow, 

insurance, and a bond as potential options for use as 

financial assurance.

Roundtable participants and others we interviewed 

suggested additional financial instruments that could 

be used as financial assurance, including:

• A letter of credit,

• Guarantee of personal or corporate assets,

• Lien on personal or corporate assets, and 

• CPSC fund that would provide funds to cover 

troubled recalls.

Objective 1: Proposed options

Page 28 GAO-09-512R Consumer Products
Enclosure I 

13

Objective 1: Proposed Options 

Escrow – How It Might Work

• CPSC partners with one or more banks that act as escrow 

agents to establish escrow accounts.

• CPSC establishes terms and conditions through a draft 

model escrow agreement. Under the agreement:

• Companies deposit cash or other approved assets in an 

amount that is calculated according to the volume of 

goods sold or produced or projected recall costs. 

• The bank holds the escrow funds until CPSC approves 

disbursement in the event of a recall or upon determining 

that a company has not dedicated adequate resources for 

conducting a recall.

• CPSC, an agent of CPSC, or the consumer product 

company receives the escrow funds to conduct or 

complete the troubled recall.

Page 29 GAO-09-512R Consumer Products
Enclosure I 

14

Objective 1: Proposed Options 

Insurance – How it Might Work

• CPSC establishes coverage requirements, such as terms of 

minimum limits and covered risks (e.g., public notification, 

product removal, and corrective action), among other things.

• Consumer product companies purchase required coverage 

from private insurers.

• Companies then submit claim(s) to the insurer on their policy 

to cover the costs of a troubled recall.

• Variation: If required coverage is not available in the private 

market, the federal government could establish an insurance 

pool funded with premiums assessed on consumer product 

companies (i.e., policyholders).

Page 30 GAO-09-512R Consumer Products
Enclosure I 

15

Objective 1: Proposed Options 

Bond – How it Might Work

• Consumer product companies obtain a bond from a surety company to 

assure the CPSC that resources are available to cover legal recall 

obligations.

• In exchange for an annual premium, sureties assess the financial

strength, character, and capability of a consumer product company to 

perform a recall in accordance with requirements established by 

statute or regulation.

• CPSC could make a claim on the bond if a company failed to comply with 

regulatory requirements.

• The surety company would pay CPSC for its claim, or it could conduct the 

recall according to regulation.

• Variation: Instead of using a bond to cover all aspects of a recall that can 

be costly, require companies to obtain a bond to guarantee their

compliance with CPSC statutes or regulations related to consumer safety 

or recalls, such as a requirement to develop a quality assurance plan. 

This option might carry bond penalties in amounts lower than the potential 

costs of conducting recalls, making the underwriting more feasible for 

surety firms. 

Page 31 GAO-09-512R Consumer Products
Enclosure I 

16

Objective 1: Proposed Options 

Other Financial Options

CPSC maintains an account to fund troubled recalls by completing them itself or 

through its agent, or by providing the responsible companies with funds to complete 

a recall. The account is funded by federal appropriations or civil penalties that 

CPSC assesses on consumer product companies under its jurisdiction. 

CPSC fund for troubled 

recalls

CPSC receives a security interest in the personal assets of a sole proprietor or the 

corporate assets of a consumer product company to prioritize its right to collect 

payment in the event of a troubled recall before other creditors collect payment on 

unsecured claims.

Lien on personal or 

corporate assets

Sole proprietors or the senior officers or principals of consumer product companies 

provide a written guarantee to CPSC that personal or corporate assets, such as real 

estate or machinery, would be available to fund potential recalls.

Guarantee of personal or 

corporate assets

A consumer product company pays an annual fee to access a line of credit from a 

financial institution to fund potential recalls.

Letter of credit

Option How it Might Work

Source: GAO.

Page 32 GAO-09-512R Consumer Products
Enclosure I 

17

Objective 1: Proposed Options

Nonfinancial Policy Alternatives

In lieu of requiring financial assurance, several sources we interviewed suggested the federal government could do more to promote product 

safety and effective recalls by requiring consumer product companies to 

develop:

• Quality assurance plans that describe procedures and controls for monitoring the quality of materials and manufacturing procedures, 

among other things.

• Product recall plans that describe procedures for conducting a product recall, including the roles and responsibilities of key 

personnel.

• According to a risk management firm retained by two large product recall insurers, about 15 percent of consumer product companies 

have written recall plans, compared with more than 90 percent of

food companies.

Some roundtable participants and others we interviewed said no change is needed, citing the low number of troubled recalls, among other things. 

Some roundtable participants said CPSC should do more to use its

existing authorities to compel companies to conduct effective product 

recalls.

Page 33 GAO-09-512R Consumer Products
Enclosure I 

18

Objective 2: Factors Affecting Feasibility

Those we interviewed and roundtable participants identified several 

major factors and challenges that affect the feasibility, including the 

affordability, availability, and enforceability, of implementing a 

financial assurance requirement using any of the financial tools

considered in the mandate. These include:

• The cost to consumer product companies,

• The capacity of the financial services industry to provide 

coverage,

• The difficulty of establishing terms and conditions, and 

• The lack of an existing enforcement mechanism.

Page 34 GAO-09-512R Consumer Products
Enclosure I 

19

• Given difficult economic conditions, companies might not be able to put resources toward obtaining financial coverage, particularly when many are struggling to stay in business. 

• Several interviewees, including a consumer group, expressed concern that a financial assurance requirement could negatively 

impact small businesses in particular and potentially drive them out 

of the market.

• Determining the amount of financial assurance companies should maintain could be difficult, given that the costs of conducting a recall can vary widely. A variety of sources have indicated that recalls can cost from a few thousand to billions of dollars depending on the industry, product, and corrective action required.

Objective 2: Factors Affecting Feasibility 

Cost to Consumer Product Companies

Page 35 GAO-09-512R Consumer Products
Enclosure I 

20

• A variety of sources representing the financial services industry reported concerns about whether insurers, sureties, and banks would 

provide adequate capacity to meet the increased demand for their

products that requiring a financial assurance could create, particularly 

if the assurance is intended to cover all aspects of a recall and to 

cover recalls that are infrequent, costly, and difficult to predict.

• For example, according to a corporate escrow agent, there is a finite number of banks large enough to handle the potential demand for escrow agreements.

• Industry representatives said sureties and insurers in particular would be reluctant to underwrite bonds and insurance, respectively, if

financial assurance was required only from high-risk companies or 

companies that had already initiated a recall, potentially resulting in 

adverse selection. Roundtable participants cited concern about their 

ability to profit from these arrangements.

• Some of the financial firms indicated that the industry may not have enough capacity to cover large recalls that could cost in the millions or 

billions of dollars.

Objective 2: Factors Affecting Feasibility 

Capacity

Page 36 GAO-09-512R Consumer Products
Enclosure I 

21

Those we interviewed and roundtable participants, including financial services firms, indicated that it would be difficult to extend coverage for product recalls 

without first determining the terms and conditions of a financial assurance. 

Some of these terms and conditions include: 

• Duration of the financial obligation. Products can be recalled after several 

years, but financial tools such as surety bonds are typically designed to 

cover short-term obligations.

• Point in time when coverage would be required. Companies could provide financial assurance once a product had been produced or once a recall 

was about to occur, for example.

• The recall activities covered. A financial assurance could cover the costs 

of notification, removal, and remedies. However, some financial service 

providers might be unwilling to pay for relatively costly remedies, such as 

the repair and replacement of products.

• Triggering recall event for coverage. Financial assurance requirements could specify whether voluntary and mandatory recalls were covered, for 

example. One concern has been that some insurance providers might only 

cover mandatory recalls, even though the majority of CPSC recalls are 

voluntary.

• Pricing of financial coverage. It would be difficult to price a financial product if not enough is known about the quality controls and other risks 

presented by a consumer product company and how much a recall might 

cost. Obtaining this information would difficult for the wide range of 

products regulated by CPSC and for imported products.

Objective 2: Factors Affecting Feasibility 

Establishing Terms and Conditions

Page 37 GAO-09-512R Consumer Products
Enclosure I 

22

• There is no existing mechanism at CPSC, nor the resources or 

experience to administer and enforce a financial assurance 

requirement for consumer product companies, according to 

CPSC officials and sources we contacted.

• Consumer products trade associations reported there is no 

program or process that tracks all domestically-produced 

consumer goods or companies doing business in the United 

States, making it difficult to identify companies that may need to 

comply with this requirement.

• International trade experts indicated that any financial 

requirement that is targeted or perceived to be targeted unfairly 

towards imported products or is restrictive beyond what is 

needed to meet its regulatory objective could be challenged 

under international trade agreements.

Objective 2: Factors Affecting Feasibility 

No Existing Enforcement Mechanism

Page 38 GAO-09-512R Consumer Products
Enclosure I 

23

Those we interviewed and roundtable participants, including financial services firms, described challenges that were specific to implementing 

the financial assurance options presented in the mandate.

• Insurance: Insurance functions by spreading risk among a broad pool of individuals. For insurance to be a viable tool, it would have to be 

applied to all companies rather than the ones that have the greatest 

number of recalls. Moreover, current product recall insurance is 

expensive because this type of coverage is considered risky. One

advantage of insurance is that it requires less capital from companies 

than other financial options.

• Escrow: Escrows would be difficult to establish unless a specific amount of assurance is first determined. While escrows are relatively easy to establish, provide contractual flexibility, and allow companies 

to accrue interest on any funds they set aside, determining the 

specific amount might be difficult given the range of recall costs. 

Moreover, it could tie up resources that companies could use for other 

purposes.

• Bond: Bonds operate with the expectation of zero loss (claims) and require pre screening of companies. Thus, while a bond program could help keep financially unstable companies from engaging in 

commerce, another financial option might be more appropriate for

providing funds for recalls.

Objective 2: Factors Affecting Feasibility

Challenges to Implementing Financial Assurance Options

Page 39 GAO-09-512R Consumer Products
Enclosure I 

24

Those we interviewed and roundtable participants, including financial services firms, described challenges that were specific to implementing 

other financial assurance options.

• Letters of Credit: Unlike cash escrows, companies would not have to set aside capital to cover recalls and the annual fees might be less 

than those for cash escrows. However, companies could find it 

difficult to obtain letters of credit under difficult economic conditions 

and companies that are not in good financial standing might not meet 

pre screening conditions for accessing credit.

• CPSC Fund: A fund could ensure that recalls would be covered even 

if companies could not pay for them. However, possible challenges 

include:

• The fund could create a moral hazard in that if CPSC funds were 

available, companies, such as retailers, might be less inclined to 

conduct and pay for voluntary recalls. 

• The parameters and controls would have to be established on the use of such a fund, as would a means for initial capitalization and 

any subsequent capitalization. 

• Roundtable participants debated what the size of such a fund would need to be to account for potentially large or catastrophic 

recalls, such as the recent ineffective recalls involving 1.6 million 

cribs.

Objective 2: Factors Affecting Feasibility

Challenges to Implementing Financial Assurance Options

Page 40 GAO-09-512R Consumer Products
Enclosure I 

25

Objective 2: Factors Affecting Feasibility

Strategies for Mitigating Major Challenges

Those we interviewed and roundtable participants suggested various strategies for mitigating some of the factors affecting implementation of the proposed 

financial options:

• Providing flexibility. To make a financial assurance more affordable, several interviewees and roundtable participants suggested that 

companies should be allowed to choose the type of financial coverage 

that would be most cost effective, an option that would be particularly beneficial for small businesses.

• Establishing clear goals. The feasibility of using a financial assurance 

tool to provide coverage depends on the goals of the program. For example, if the purpose is to prevent financially weak companies from 

selling products, then a bond program might be a suitable solution. In 

contrast, if the purpose is to ensure that resources are available to conduct a troubled recall, which is an infrequent event, then some

suggested the CPSC fund might be suitable.

• Targeting the requirement to specific companies. Some suggested that a financial assurance requirement be targeted towards specific types of 

companies or industries, such as those with a high incidence of troubled 

recalls. For example, one individual suggested that small businesses be 

excluded from meeting a financial assurance requirement and some

suggested that the CPSC fund be created to target only those companies 

with troubled recalls.

Page 41 GAO-09-512R Consumer Products
Enclosure I 

26

• Establishing terms and conditions. To make a financial 

assurance requirement more affordable and available, terms 

and conditions would need to be established, such as 

minimum financial coverage requirements for companies, 

specific recall activities and obligations for financial service 

firms, and limits on the use of CPSC funds.

• Establishing an enforcement mechanism. Some sources 

suggested establishing a voluntary system that allowed 

companies to register with the CPSC, or for CPSC to use its 

existing authority to request more financial information from 

consumer product companies. These strategies could 

support CPSC’s enforcement of recalls.

Objective 2: Factors Affecting Feasibility

Strategies for Mitigating Major Challenges, cont.

Page 42 GAO-09-512R Consumer Products
Enclosure I 

27

Objective 3: Potential Consequences

Benefits of Requiring a Financial Assurance

Representatives for consumer interest groups said some financial backstop was needed to protect consumers when companies failed to effectively recall hazardous products, citing 

of the 15 troubled recalls under CPSC that GAO identified and another under the 

National Highway Traffic Safety Administration. Also, increased U.S. reliance on 

imported products and new Consumer Product Safety Improvement Act provisions that 

curtail the export of recalled products and require testing products for lead may increase the incidence of troubled recalls, justifying the need for a financial assurance 

requirement. Benefits include:

• Ensuring public safety: Because of current economic pressures to keep consumer prices low, potentially leading to declines in product quality, requiring a financial 

assurance would ensure that companies could pay for a recall in those instances 

when the consequences of not conducting a recall could result in widespread injury 

or death. 

• Improving the effectiveness of CPSC’s recalls: A proponent said a financial assurance requirement could give CPSC an important tool to enable product safety 

recalls in light of challenges it faces in using its mandatory recall authority.

• Prior to CPSIA, mandatory recalls involved a trial-type administrative hearing that could take a year or longer to complete, according to a CPSC official. With 

new authorities under CPSIA, CPSC may file a suit and notify the manufacturer 

that it has determined a product to be imminently hazardous to cease the 

distribution of the product.

• Improving quality controls and standards: Given that insurance providers, for example, require companies to develop recall and quality assurance plans before 

extending coverage, a financial assurance requirement could encourage companies 

to improve their quality controls and standards.

Page 43 GAO-09-512R Consumer Products
Enclosure I 

28

Those we interviewed and some roundtable participants also identified several potentially negative consequences of establishing a financial assurance 

requirement:

• Could limit company growth and product innovation by restricting the cash and credit available to companies,

• Could increase the cost of consumer goods and possibly limit consumer choice,

• May distort incentives for companies to conduct voluntary recalls or continue risk management programs that support product safety by introducing an 

element of moral hazard,

• May increase the number of bankruptcies among smaller and low-margin businesses, depending on the cost of a financial assurance,

• May increase lawsuits against companies to access the “new” pool of financial assurance funds, knowing there is a financial remedy available, and 

• Could cause other countries to impose similar requirements on U.S. exporters if it were viewed as a trade barrier.

Objective 3: Potential Consequences 

Disadvantages of Requiring a Financial Assurance

Page 44 GAO-09-512R Consumer Products
Enclosure I 

29

Consumer advocates said there was some need for requiring a financial 

assurance, but many others we interviewed and those that participated in 

the roundtable questioned the need, citing:

• The low incidence of product recalls for which funding is not available;

• The small proportion of products that are recalled;

• Improved safety standards and attention to product quality and safety;

• The low cost of most recalls, which companies have funded through 

operating income or insurance, and

• Incentives from the U.S. tort system for private companies to ensure 

the safety of their products.

However, perhaps acknowledging that some recalls under CPSC are not 

conducted effectively and put consumers at risk, many roundtable

participants from a variety of perspectives supported the idea of providing 

CPSC with funds to deal with these troubled recalls.

Objective 3: Potential Consequences

Many Questioned Need for Financial Assurance

Page 45 GAO-09-512R Consumer Products
Enclosure II: Data on Incomplete Recalls 

Table 2 describes recalls announced by CPSC in which companies did not have 

adequate resources to complete a recall program. For many of these events, the 

responsible company—typically the manufacturer—was bankrupt or in the process 

of declaring bankruptcy at the time of the recall announcement. More recently, a 

company that had purchased a manufacturer of recalled products—baby cribs—

refused to cooperate with CPSC, claiming it was not responsible for products 

manufactured before the purchase was completed. We obtained these data from 

recall announcements published on CPSC’s Web site and incorporated technical 

comments from CPSC officials who reviewed our analysis. These data do not intend 

to describe the effectiveness of other recalls conducted under CPSC. 

Table 2: Incomplete Recalls under CPSC, 1979-2008 

Event 

number 

Original date of 

recall 

announcement 

Product/ 

estimated 

number 

units 

affected/ 

estimated 

unit price 

Defect 

description 

Reported 

injury 

Company disposition/ 

scope of recall 

1 September 17, 

2008 

Crib 

600,000 

$150-$300 

Hardware is not 

appropriate 

size and can 

cause 

structural 

failure 

None Manufacturer went out of 

business. Company that 

purchased the assets of the 

manufacturer of these cribs 

refused to conduct recall 

program. CPSC eventually 

compelled retailers to refund 

consumers. 

2 September 21, 

2007 

Crib 

1,000,000 

$100-$300 

Error in 

assembly 

instructions, if 

followed, can 

weaken 

hardware and 

pose 

entrapment 

hazard; 

hardware not 

appropriate 

size and can 

cause 

structural 

failure 

3 deaths, 7 

infant 

entrapments, 

55 incidents 

Manufacturer provided 

consumers with repair until 

company was sold in March 

2008. The purchasing 

company (same as above) 

refused to conduct recall 

program, but continued with 

limited repair program on at 

least one affected crib 

model, and published 

revised assembly 

instructions for some other 

affected models. 

Page 46 GAO-09-512R Consumer Products
3 March 4, 2004 Fire engine 

pull toy 

323 

$20 

Small parts 

pose a choking 

hazard 

None Private label retailer had 

declared bankruptcy at time 

of recall announcement. 

They refunded consumers 

the purchase price for a 

period lasting less than a 

month after the recall 

announcement. When 

discontinued, CPSC advised 

consumers to destroy or 

discard the product. 

4 April 25, 2003 Fire sprinkler 

60,000 

not reported 

Units fail to 

operate in a fire 

None Company that purchased 

bankrupted manufacturer 

dedicated $1 million towards 

consumer reimbursement of 

replacement products for 

approximately 29 months 

from the date of the recall 

announcement. 

5 April 25, 2003 Fire sprinkler 

400,000 

not reported 

Units fail to 

operate in a fire 

None Manufacturer had no assets 

to conduct a recall, but 

issued notice to building 

owners to replace sprinklers. 

6 July 19, 2002 Gas grill 

155,000 

$160 

Design flaw 

can cause grill 

to collapse 

44 burn 

incidents to 

legs, hands, 

and fingers 

Manufacturer declared 

bankruptcy after CPSC sued 

to obtain a recall. Some 

retailers announced a 

program to provide 

consumers with refunds. 

CPSC advised consumers to 

stop using the grill and seek 

a remedy from their retailer. 

7 September 27, 

2000 

Gas-fired 

furnace 

190,000 

$2,000 

Unit can 

overheat, 

deteriorate, and 

ignite 

30 reports of 

fires and 

damage to 

homes; no 

injuries 

Manufacturer had declared 

bankruptcy by time of recall 

announcement. In 2001, 

some distributors provided 

free inspection, repairs, or 

replacements covering 

30,000 units. In 2002, the 

settlement of private class 

action litigation created a 

fund to compensate owners 

for some expenses of 

repairing or replacing units. 

CPSC advised consumers to 

inspect units using a 

licensed heating contractor. 

8 February 1, 2000 In-wall heater 

1,900,000 

not reported 

Unit can 

overheat and 

ignite, and 

become 

energized and 

create risk of 

electric shock 

4 deaths, 2 

serious burn 

incidents, 

property 

damage 

claims 

exceeding 

$4.3 million 

Manufacturer declared 

bankruptcy after CPSC sued 

to obtain a recall. As part of 

the court settlement, 

manufacturer sold 

replacement heaters at a 

discount for about 2 years 

following original recall 

notice. After this period, 

CPSC advised consumers to 

replace unit at their own 

expense. 

Page 47 GAO-09-512R Consumer Products
Page 48 GAO-09-512R Consumer Products

9 October 14, 1998 Fire sprinkler 

8,400,000 

not reported 

Units fail to 

operate in a fire 

At least 4 

burn or 

smoke 

inhalation 

incidents; 

$4.3 million 

in reported 

property 

damage 

The manufacturer's reported 

financial condition revealed 

limited ability to pay for 

sprinkler replacement. 

Manufacturer provided 

replacement parts and 

partial reimbursement for 

removal and replacement of 

defective units for 10 months 

from date of recall 

announcement. 

10 July 12, 1993 Crib 

8,000 

not reported 

Small parts 

pose a choking 

hazard 

None Company was in bankruptcy 

at time of recall 

announcement and did not 

proceed with a recall. CPSC 

advised consumers to 

contact retailers for 

replacement part. 

11 September 16, 

1992 

Worm probe 

30,000 

$8 - $27 

Energized shaft 

poses 

electrocution 

hazard to users 

and, when 

inserted into 

the ground, to 

those nearby 

At least 28 

deaths 

associated 

with 

functionally 

identical 

worm probes 

Company was bankrupt at 

time of recall announcement 

and did not proceed with a 

recall. CPSC advised 

consumers to destroy 

product. 

12 February 11, 

1987 

Crib and 

playpen 

unknown 

not reported 

Unit design 

violates 

multiple CPSC 

safety 

requirements 

21 incidents, 

several 

involving 

bruises to 

children 

Company was in bankruptcy 

at time of recall 

announcement and did not 

proceed with a recall. CPSC 

provided toll-free telephone 

hotline and advised 

consumers to call for 

potential remedies. 

13 May 2, 1984 Oil/wood 

furnace 

12,000 

not reported 

Weld failure 

can cause 

carbon 

monoxide to 

escape, posing 

risk of illness or 

death 

None Company was in process of 

filing for bankruptcy at time 

of recall announcement and 

did not proceed with a recall. 

CPSC advised consumers to 

inspect units using 

professional heating 

equipment installer. 

14 September 22, 

1982 

Crib 

1,000 

$200 

Design of crib 

slats and rail 

height pose 

asphyxiation 

and fall hazard 

1 death Company was in bankruptcy 

at time of recall 

announcement and did not 

proceed with a recall. CPSC 

advised consumers to 

discontinue use of the crib. 

15 October 15, 1979 Energysaving 

thermostat 

regulator 

20,000 

$20-$25 

Unit can 

overheat and 

start fire 

None Manufacturer conducted a 

repair program before filing 

for bankruptcy about a year 

after initiating a recall. Upon 

conclusion of the program, 

CPSC advised consumers to 

contact retailers for refund or 

replacement. 

Source: GAO analysis of CPSC information. 

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