by Ed Sneneh, Illinois Product Liability Insurance Expert
Product recall is not uncommon to hear about these days. Besides their negative publicity, product recalls will come with enormous amount of financial losses to the manufacturer or the distributor of the product under recall. Government agencies such as the Food & Drug Administrations as well as other consumer protection agencies may force a particular manufacturer to issue a recall for products that may prove to be harmful for human use or consumption, such as food products, children toys, and vehicles. Companies that do not comply with the recall orders can be subject o sever penalty. Some companies may voluntarily recall certain products if they fear safety issues.
Besides paying in negative publicity and bad public image, companies that are volunteering or forced to make a product recalls incur tremendous financial losses. One of the well known recall case was the Chicago Tylenol scare of the 1982. The media gave the manufacturer Johnson & Johnson much positive coverage for its handling of the crisis. But the recall cost the company millions of dollars, and cost the society immense stress and scare. As a result the government has changed the whole laws of packing and distributing over the counter medicine and formula.
In 2010 Toyota announced a recall of over 139,000 luxury Lexus vehicles in the US markets only because of some faulty engine valves and springs. About 10 millions vehicles were expected to be affected by this recall worldwide. The total financial loss for this recall in the US markets only was projected to be over $2.5 billion. Losses like that can be devastating for a company that was struggling with the negative influence of recession.
Connection of Product Recalls & Product Liability Insurance
Based on the definition of 'occurrence', products liability insurance does not provide any protection for "anticipated" bodily injury or property damage. The product maker is expected to issue an immediate product recall if the manufacturer has reason to believe that a product in the market is expected to cause bodily injury and harm to the users or the public, in order to keep products liability coverage for that product in tact.
Product Liability Insurance does not cover any part of the cost of recalling the bad products, including cost of inspection. replacement or repair of the product. Any and all aspects of costs affiliated with product recall are specifically excluded from the product liability coverage. The exclusion applies to all losses and expenses directly or indirectly associated with product recall process. It also applies to any product that the manufacturer has reasons to believe its defective.
If a defective or harmful product was part of another product (faulty brakes in a vehicle), then recalling the whole product (vehicle) is not covered under product liability because of sistership exclusion. Where the manufacturers of the parts are different, some courts may not interpret the sistership exclusion and may allow product liability coverage for the component part manufacturer (brakes) if sued by the main product maker (vehicles) due to a recall of the product.
While product liability insurance specifically excludes cost of product recalls, special coverage for product recalls can be purchased in the insurance marketplace. Organizations seeking this coverage must take in consideration the direct and direct costs of recalling their products including logistic, advertisement and publicity expenses. Even in that case, some insurers may limit their exposure to the US, European, or Canadian markets.