Airbags, ground beef, ice cream and medical devices: all subjects of high-profile product recalls. Just the word “recall” can send a chill down the spine of even the most seasoned risk professional. Whether the product is yours or it contains a component your company produced, a recall can damage finances and brand value with years of litigation and protracted insurance coverage disputes.
Speakers in this RIMS 2016 session were:
- Joann Lytle, Partner, McCarter & English, LLP
- Tabitha Prestler, Director of Risk Finance & Insurance, Wilbur-Ellis Company
There have been numerous well-known product recalls in the news in recent years and the presenters gave several examples, one of them being Perdue chicken nuggets where over 4,500 pounds were recalled because of potential contamination of plastic.
The costs of product recalls can be significant and include product replacements, repairs, bodily injury, lost profits, notification and advertisement, reputational and other costs.
If there is a potential recall, it’s important to work quickly to minimize the impact of the defect, determine the scope and put insurers on notice. Product recalls may also require working with governmental entities like the FDA.
It is critical that you learn what coverage you have (or do not have) under a standard commercial general liability (CGL) policy. This coverage states “We will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies.”
Other potentially covered damages include loss of use and consequential damages, including lost profits, and increased costs.
Common defenses to coverage may include:
- Lack of property damage – Property damage does not necessarily require actual destruction of property.
- Your product exclusion – Bars coverage for “property damage” to “your product” arising out of it or any part of it.
- Impaired property exclusion – Applies only to property that can be restored to use.
- Sistership exclusion – Precludes coverage for damage associated with recall of products, work or impaired property.
- Pollution exclusion – It’s considered “pollution” if it’s something that shouldn’t be in the product.
It may not be safe to rely just on your CGL policy for a potential recall. Recall coverage may need to be considered.
First-party recall insurance states that “We shall reimburse you for product recall expenses resulting directly from a covered incident…” Third-party recall insurance states that “We shall reimburse you for product recall liability damages resulting directly from a covered incident…”
There are numerous product recall expenses that will be covered first-party recall expenses with recall coverage including notifying others of the recall, transporting recalled items, disposal of items and many others. There are also several covered third-party recall damages, defense costs being among them.
Of great importance is the duty of the insured after a recall:
- Provide notice as soon as possible
- Cooperate in any investigation, settlement or defense of claim
- Provide a sworn proof of loss
It’s important to note too that your response to a recall can make or break your business. Planning a recall response strategy can avert disaster!