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Product Recalls – Prophylactic Measures to Reduce/Shift Risk

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Dano0403

This document summarizes a panel discussion on prophylactic measures to reduce and shift costs related to product recalls. The panel discussed issues like supplier selection and negotiation, recall insurance policies, and coverage under traditional insurance policies. Key points included that 2/3 of US consumer product recalls are of imported products, recall insurance has high premiums and deductibles and limited coverage, and commercial general liability policies may cover some third party recall costs but have exclusions like the "sistership exclusion".

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Recalls – Prophylactic Measures to Reduce/Shift Costs A Panel Discussion USLAW Spring – 2009 Charleston, South Carolina March 28, 2009
The Panel Brad Brush, General Counsel Lasko Products, Inc. Westchester, PA Chris Galla, Associate Counsel Genuine Parts Company Atlanta, GA Dan Gerber Goldberg Segalla LLP Buffalo, NY Jim Martin, Vice President Standard Lines Liability/Major Case Unit CNA Insurance Chicago, IL Tom Segalla Goldberg Segalla LLP Buffalo, NY
THE PROBLEM 2008 CPSC Recalls 563 voluntary recalls Largest number in last 10 years 60.8 million product units 3.675 million in civil penalties recovered for failure to report 2/3 of al U.S. consumer product recalls are of imported products
The Fact Pattern
Discussion Overview Liability and Risk Shifting Insurance Related Issues
Supplier Selection & Negotiation Issues What concerns are there when selecting suppliers -- especially with recalls in mind? Domestic Overseas
Supplier Selection and Negotiation Issues What proactive measures can taken at the negotiation stage? What obstacles need to be overcome with suppliers to achieve protective measures during negotiations?
Recall and Potential Recalls After a recall is issued, what can downstream entities do to force the supplier to handle the recall? What are the pitfalls? What other the potential issues and hazards relate to a recall? Is enforceable insurance in place?
Insurance Issues Recall Insurance Policies Who purchases, if at all? Food and beverage companies Pharmaceutical companies Consumer products manufacturers
Insurance Issues What issues should be addressed during the contract negotiation process? See generally, Siemens, Cohen & Christensen, Finding Insurance for Product Recalls, Knowing Where to Look, BNA, June 23, 2008 (155N 0092-7732).
Insurance Issues Recall Insurance Policies What is purpose of coverage? Direct Expense – costs to inspect, ship, store and replace a recalled product and notify customers of recall
Insurance Issues Recall Insurance Policies What is purpose of coverage? Indirect Expenses – brand rehabilitation costs, loss of business income during any suspension period
Insurance Issues Recall Insurance Policies What is purpose of coverage? Third Party Liability – bodily injury and losses incurred by customers Product Extortion – product tampering and threats
Insurance Issues Recall Insurance Policies What are the Pitfalls? Specified products Costs only “reasonably” incurred or only after insurer’s consent Initiation of recalls – excluded if initiated by insured Recalls related to design or manufacturing defect may be excluded Recalls excluded where recall is a result of the disregard of regulations or safety standards
Insurance Issues Recall Insurance Policies What are other considerations? Premiums exorbitant Deductibles high Coverage limits low
Insurance Issues Traditional Policies Purchased Property policy Commercial general liability Professional liability
Insurance Issues Traditional Policies Purchased Property Policy – Coverage Physical damage to insured’s premises and covered goods Economic losses from business interruption
Insurance Issues Traditional Policies Purchased Property policy – coverage Destruction of inventory Temporary suspension of business
Insurance Issues Traditional Policies Purchased Property Policy – Exclusions Faculty workmanship Inherent vice Pollution
Insurance Issues Traditional Policies Purchased CGL Policy Coverage – damage or loss the policyholder is legally obligated to pay because of bodily injury or property damage Third party related recall costs
Insurance Issues Traditional Policies Purchased CGL Policy Courts – product recall or replacement liability are covered “damages” that result from “property damage” Examples – direct costs to recall and repair and property damage. Also costs such as reputatural damage, value of inventory destroyed, breach of contract damages
Insurance Issues Traditional Policies Purchased CGL Policy Exclusion “ Sistership Exclusion” Only applies to the costs of prophylatic recalls (i.e. costs of withdrawing a non-defective product for preventative or curative action) Does not recover costs of recalling products that are actually defective or replacing products that have failed
Insurance Issues Traditional Policies Purchased Professional Liability Policy (E&O) Coverage – liability insurance for an insured’s professional service Recall costs – tangible v. intangible property
Recalls – Prophylactic Measures to Reduce/Shift Costs A Panel Discussion USLAW Spring – 2009 Charleston, South Carolina March 28, 2009

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Product Recalls – Prophylactic Measures to Reduce/Shift Risk

  • 1. Recalls – Prophylactic Measures to Reduce/Shift Costs A Panel Discussion USLAW Spring – 2009 Charleston, South Carolina March 28, 2009
  • 2. The Panel Brad Brush, General Counsel Lasko Products, Inc. Westchester, PA Chris Galla, Associate Counsel Genuine Parts Company Atlanta, GA Dan Gerber Goldberg Segalla LLP Buffalo, NY Jim Martin, Vice President Standard Lines Liability/Major Case Unit CNA Insurance Chicago, IL Tom Segalla Goldberg Segalla LLP Buffalo, NY
  • 3. THE PROBLEM 2008 CPSC Recalls 563 voluntary recalls Largest number in last 10 years 60.8 million product units 3.675 million in civil penalties recovered for failure to report 2/3 of al U.S. consumer product recalls are of imported products
  • 5. Discussion Overview Liability and Risk Shifting Insurance Related Issues
  • 6. Supplier Selection & Negotiation Issues What concerns are there when selecting suppliers -- especially with recalls in mind? Domestic Overseas
  • 7. Supplier Selection and Negotiation Issues What proactive measures can taken at the negotiation stage? What obstacles need to be overcome with suppliers to achieve protective measures during negotiations?
  • 8. Recall and Potential Recalls After a recall is issued, what can downstream entities do to force the supplier to handle the recall? What are the pitfalls? What other the potential issues and hazards relate to a recall? Is enforceable insurance in place?
  • 9. Insurance Issues Recall Insurance Policies Who purchases, if at all? Food and beverage companies Pharmaceutical companies Consumer products manufacturers
  • 10. Insurance Issues What issues should be addressed during the contract negotiation process? See generally, Siemens, Cohen & Christensen, Finding Insurance for Product Recalls, Knowing Where to Look, BNA, June 23, 2008 (155N 0092-7732).
  • 11. Insurance Issues Recall Insurance Policies What is purpose of coverage? Direct Expense – costs to inspect, ship, store and replace a recalled product and notify customers of recall
  • 12. Insurance Issues Recall Insurance Policies What is purpose of coverage? Indirect Expenses – brand rehabilitation costs, loss of business income during any suspension period
  • 13. Insurance Issues Recall Insurance Policies What is purpose of coverage? Third Party Liability – bodily injury and losses incurred by customers Product Extortion – product tampering and threats
  • 14. Insurance Issues Recall Insurance Policies What are the Pitfalls? Specified products Costs only “reasonably” incurred or only after insurer’s consent Initiation of recalls – excluded if initiated by insured Recalls related to design or manufacturing defect may be excluded Recalls excluded where recall is a result of the disregard of regulations or safety standards
  • 15. Insurance Issues Recall Insurance Policies What are other considerations? Premiums exorbitant Deductibles high Coverage limits low
  • 16. Insurance Issues Traditional Policies Purchased Property policy Commercial general liability Professional liability
  • 17. Insurance Issues Traditional Policies Purchased Property Policy – Coverage Physical damage to insured’s premises and covered goods Economic losses from business interruption
  • 18. Insurance Issues Traditional Policies Purchased Property policy – coverage Destruction of inventory Temporary suspension of business
  • 19. Insurance Issues Traditional Policies Purchased Property Policy – Exclusions Faculty workmanship Inherent vice Pollution
  • 20. Insurance Issues Traditional Policies Purchased CGL Policy Coverage – damage or loss the policyholder is legally obligated to pay because of bodily injury or property damage Third party related recall costs
  • 21. Insurance Issues Traditional Policies Purchased CGL Policy Courts – product recall or replacement liability are covered “damages” that result from “property damage” Examples – direct costs to recall and repair and property damage. Also costs such as reputatural damage, value of inventory destroyed, breach of contract damages
  • 22. Insurance Issues Traditional Policies Purchased CGL Policy Exclusion “ Sistership Exclusion” Only applies to the costs of prophylatic recalls (i.e. costs of withdrawing a non-defective product for preventative or curative action) Does not recover costs of recalling products that are actually defective or replacing products that have failed
  • 23. Insurance Issues Traditional Policies Purchased Professional Liability Policy (E&O) Coverage – liability insurance for an insured’s professional service Recall costs – tangible v. intangible property
  • 24. Recalls – Prophylactic Measures to Reduce/Shift Costs A Panel Discussion USLAW Spring – 2009 Charleston, South Carolina March 28, 2009