How do these policies work?
The recall of a product triggers the policies. The ultimate vehicle manufacturer is responsible for initiating the recall, but the source of the problem could come from any level of supplier — the guy that makes the screw or an integrated system provider to the OEM.
Generally speaking, there does have to be potential for bodily injury or property damage to occur because of the product in question. One thing that has changed is the availability to include ‘impaired property’ in the coverage.
Impaired property is an extension to these programs that extends the trigger beyond the bodily injury aspect, so that your product is making the end product less useful because it incorporates your product that is known to be defective. In other words, you get beyond that bodily injury aspect. So if the window doesn’t go up and down on a car, it’s not really a safety issue, but there is certainly an impairment issue.
While these policies were initially designed to respond only to those instances where there was potential for bodily injury, with the addition of this impaired property coverage, it can be extended to include situations where the end product is simply less useful.
How does product recall insurance respond to a claim?
There are a few ways these policies can respond. We generally look at either first- or third-party losses under these policies.
First-party losses are segregated into the losses that the insured themselves incur. For instance, take a component part manufacturer that incurs expenses to recall the product, such as notification, shipping and pulling stock back from its customers. Those expenses would be considered a first-party recall expense; they can be covered under the policy.
The policy also can cover the repairing, replacing or refunding of those products if they can’t be reused.
The flip side of that is the third-party expenses covered by these policies. For example, the insured is making widgets and sends those off to the customer, who comes back to it looking to be reimbursed for its own recall expenses. Depending on the actual carrier, third-party coverage can include third-party recall expenses. The same types of expenses are covered as for first-party expenses, and they are also extended to various other elements of third-party financial loss, such as loss of profits, extra expense or rehabilitation expense, again, depending on the carrier.
One other aspect that these policies provide is defense costs. So if the insured doesn’t believe that it is at fault for the problem, the policy will defend it against its customer.
If moving forward with a product recall, what can a company do to ensure it is getting the right amount of coverage for its needs?
The No. 1 thing to do is make sure you’re working with a broker that is familiar with the marketplace. It is a very specialized coverage, and a specialized number of carriers provide this coverage. It’s important that insureds are working with brokerage companies that have the expertise globally and have access to the various markets that can put these programs together.
Bernie Steves is managing director of Aon Risk Solutions Crisis Management Practice. Reach him at [email protected] or (312) 381-4145. In Detroit, contact managing director Mike Stankard at (248) 936-5353.
