Product recall insurance for automotive components

The pace of change within the automotive sector is unprecedented. Modern vehicles are now one of the most advanced products being manufactured today. Innovation within software and electronics applications enable vehicles to predict, identify and avoid potential collisions.

But what happens when these products fail?

Complex products enhanced regulatory pressure and severe contractual obligations leave manufacturers more exposed than ever.

The consequence of a single defective product can have global implications, and the cost of repairing or replacing these products continues to rise further.

The risk of a product recall to a manufacturer has never been greater. Access to product recall insurance, and the dedicated crisis consultants that support the coverage, provides an effective solution to minimise the financial and reputational damage of a recall.

What can be covered?

Product safety

Provides cover where there is evidence that a product defect would cause bodily injury/property damage, or because a product has caused bodily injury/property damage already.

Product guarantee

Provides cover for when a design or manufacturing error results in the failure of a product to perform its intended function.

Government recall

Provides cover for the insured where a government authority or safety agency orders or mandates a recall.

Third party financial loss

Provides cover for sums which the insured is legally liable to pay as damages to a third party, as a direct result of the above.

How can product recall insurance help you?

• Balance sheet protection:
  Maintaining adequate product recall cover can help to alleviate the catastrophic impact on a clients balance sheet. The overall costs to a client can often significantly outsize the value of affected product, and exposure to original equipment manufacturers (OEM) can far outweigh what a supplier is able to accept.
• Brand and reputation:
  An automotive product recall can be highly publicised and lead to significant brand damage in an industry underpinned by safety and quality. Access to crisis support can ensure clients can manage a recall effectively, including interaction with customers, suppliers and the media.
• New business opportunities:
  Increasingly, OEM’s require a set level of product recall insurance before engaging with new suppliers.

Key coverage comparison

Please note below is a generalised comparison tool that selects a variety of covers where the triggers may be similar, but where discussion of the differences regarding cover will help understanding of our offering.

There are many derivatives of these wordings; it would not be possible to include every eventuality. For this reason, while we have made every effort to ensure this is a fair comparison there may be examples where the below assessment is not accurate in some areas. This is a guide only and professional advice should be sought from the appropriate professional before making any decisions based on this comparison.

Comparative coverage analysis

Case study

Product defect creates safety risk

A manufacturer supplying cast metal engine parts to some of the world’s largest automotive producers was informed by a customer that they would be recalling 100,000 vehicles due to an issue with the cylinder heads they provide.

It was found that hairline cracks were present in some products already in the field, having been integrated into OEM vehicles. On review, the issue occurred as a result of the product being cooled too quickly after casting.

Though there were no reported accidents involving the affected vehicles, the defect created a potential safety issue that resulted in a requirement to recall and replace all affected parts.

The insurance provided a comprehensive solution to assist in the management of the recall process from first identification of the defect, utilising the crisis response fees available. This focused on coordinating customer communication alongside the insured’s traceability and root cause analysis.

The manufacturer was forced to replace the affected parts, resulting in a cost of $2 million, with severe disruption to their manufacturing plant and additional resource allocated to manufacture of non-defective components. The OEM who the product was supplied to sought to recover all costs incurred to carry out the recall, along with labour costs to install replacement product.

In addition to the insured and the customers direct recall expenses, all third party financial damages incurred by the customer that the insured was legally liable to pay would be indemnified. Within the ‘replacement expenses coverage’, the insured would be covered for costs required to produce equivalent non-defective product and reinstall them into affected vehicles. In the event this was not possible, this could be completed via the issuance of customer credits.

*All names, characters, and incidents portrayed in the case studies are fictitious. No identification with actual persons (living or deceased), places, buildings, companies, entities or products is intended or should be inferred.

For specialist help discovering smarter ways to manage product recall risk in the automotive sector, please get in touch.