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American Risk Managers News
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Product Recall Supply Chain Perils Loopholes
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Wednesday, August 19, 2009
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16:56
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The purchase of "product recall insurance" sounds simple enough. Fill out the application, pay the premium and when and if the product is deemed defective to the point of causing property damage or bodily injury, file your claim and be reimbursed for the expense of recalling your product.
Unfortunately movement of parts from one entity to another manufacturer provide opening for substandard or counterfeit goods to enter the legitimate stream of commerce. These substandard components can compromise the quality of the goods, diminish the manufacturer brand equity, impose huge expenditures for investigations, testing and product recall and create the potential for debilitating lawsuits. The perils are present in the exposure to bulk purchasers of spare parts, components and finished goods.
According to Anderson Kill and Quick statement released on August 13, it takes only one weak link in the supply chain to create real issues. It is not surprising that the insurance industry has introduced product recall and product tampering insurance, which they claim, will cover losses arising out of supply-chain crises. Risk managers are advised to read the fine print; however, lest they find that they have not only been cheated by counterfeiters, but by the insurance companies as well.
Product recall insurances purport to cover against the cost of recalling products, including products that are deemed to have been manufactured using counterfeit or otherwise faulty components. Product recall may cover the cost of notifying customers about the recall, collecting, and shipping the product back to the plant. It may further cover repairing and returning the items to customers and disposing of those items that cannot be repaired. Most product recall insurance, however excludes coverage for lost profit caused by a product recall or liability claims from people insured by an allegedly faulty product the primary costs associated with a product recall.
Like product recall insurance, product tampering insurance pays the cost of recalling and fixing a product that poses some hazard to the consumer. Unlike product recall insurance, product tampering insurance protects against lost profit caused by a product tampering recall. Buyers of the coverage are cautioned to examine the definition of "tampering" very closely before purchasing this type coverage. Many insurance policies provide coverage for allegedly "malicious" forms of product tampering. Not surprisingly, these policies frequently take a narrow view of what constitutes "Malicious". For example, a case involving General Mills, Inc vs. Gold Metal Insurance Company, the Minnesota Court of Appeals, applying New York law, held that malicious product tampering requires a subjective intent to injure the policyholder.
In this case even though the contractor had switched to a less expense and unapproved pesticide to treat the grain. General Mills' losses amounted to $167 million plus interest and costs. General Mills had purchased malicious product tampering policy. Although General Mills settled for $17.5 million, the insurance company contended and the trial court agreed that the grain contractor acted with ordinary, but not actual malice because it was his belief that it would not be discovered and no one would be harmed by his action. In the absence of a desire to injure the policyholder, the court held that he laced actual malice to trigger coverage. The court of appeals triggered the trial court's decision.
Insurance buyers seeking to secure coverage for supply chain type risks such as the one described above should carefully review proposed policy forms to ensure the intentional acts of tampering will be covered whether or not there was an intent to cause harm to the consumer. Buyers may also wish to see if "accidental tampering coverage" which generally covers "inadvertent" or "accidental" acts of contamination.
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