Product recall insurance for automotive components

In today’s global marketplace, the risk of product recall has never been greater. In the first 6 months of 2020, the European Commission issued 271 automotive related product safety/recall alert notifications.*

Increasing regulatory scrutiny, pressured margins, complex supply chains and changing technology can lead to an increase in the occurrence and severity of product recalls.

Some product defect risk can be mitigated using technology during production, but errors can affect even the most prestigious, global product manufacturers and brands.

Crisis planning and high-standard quality controls are key to mitigating the risk of product recall. Insurance cannot replace effective business governance, but product recall insurance can support and complement an effective risk management strategy by minimising the financial repercussions of a product crisis and enabling brand recovery.

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Crisis planning and high-standard quality controls are key to mitigating the risk of product recall.”

Louise Dorrian | Head of Product Recall Willis Towers Watson

What can be covered?

Product guarantee

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

Third party financial loss

Provides an Insured with coverage for costs that a third party (like a customer) holds them liable for, that have arisen as a direct result of the insured’s product defect or contamination.

Government recall

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

How can product recall insurance help you?

Product recall insurance can help a company to protect:

• Shareholder value
  Product recalls can have a significant effect on a company’s balance sheet, causing a cash shortage that can eliminate profit.
  We’ll work with you to make sure that product recall protection is embedded in your wider risk management strategy so that you meet your fiduciary duty to protect shareholder value.
• Brand and reputation
  When risk management systems and controls do fail, what matters is how you respond and manage the event.
  We’ll help you ensure your investment in risk transfer includes any crisis support you may need to respond to crises, protect and rehabilitate your brand.
• Costs expenditure
  Whether incurred by your company or a third party such as a direct customer. The costs to cover labour, transportation and disposal due to a product recall can be expensive. A product recall policy would typically cover these types of costs.

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.

Recall expenses

Rehabilitation of brand

Business interruption

Consultancy advice

Third party liability

Triggers

* Not given as standard and likely to be sublimited
** Product Liability cover can be included in some cases

Case study

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.

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 original equipment manufacturer (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 manufacturer was forced to replace the affected parts, resulting in a loss of $2 million with severe disruption to their business and a reduction in profits due to redistribution of resources to re-complete the client order.

In addition to this, their customer also sought to recover the $1 million loss they incurred in carrying out the recall (transport, labour and storage).

Automotive product recall coverage would offer comprehensive indemnity in this scenario, triggering where the insured comes into possession of evidence that a product defect would cause bodily injury and/or property damage.

In addition to the customer’s direct costs for recalling the vehicles, the coverage may reimburse other third-party expenses such as their loss of profit. Automotive product recall also covers the first-party expenses incurred by the manufacturer in providing replacement parts.

Other benefits are designed to mitigate the disruption a recall can cause, such as staffing costs and subcontracting expenses.

Source - *https://ec.europa.eu/consumers/consumers_safety/safety_products/rapex/alerts/