Product Recalls – Prophylactic Measures to Reduce/Shift Risk

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Product Recalls – Prophylactic Measures to Reduce/Shift Risk Through Insurance and Indemnity

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Product Recalls – Prophylactic Measures to Reduce/Shift Risk

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

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