What are the risks of product recall in 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?
With increasingly complex products, tighter regulation and stringent contractual obligations, manufacturers are more exposed than ever. A single defective product can have global implications, and the cost of repairing or replacing these products continues to rise.
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What can Product Recall Insurance cover?
Product safety
Provides cover where there is evidence that a product defect would cause bodily injury or property damage, or because a product has caused bodily injury or 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.
Costs can also include analysis, legal claims, crisis communication and brand rehabilitation, which are not covered by general insurance or product recall extensions.
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 the affected product. The exposure to original equipment manufacturers’ (OEM) exposure can far outweigh what a supplier is able to accept.
Brand and reputation: A publicized automotive product recall can 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, OEMs require a set level of Product Recall insurance before engaging with new suppliers.
Key coverage comparison
This analysis shows how standalone Product Recall cover differs from Product Liability cover and Recall extensions in general insurance policies.
| Standalone product recall | Products liability - recall extension | |
|---|---|---|
| Policy trigger | ||
| Product safety | ✔ | ✔ |
| Product guarantee | ✔ | ✔* |
| Government recall | ✔ | ✔ |
| Impaired property | ✔ | ✖ |
| Coverage | ||
| Recall expenses (insured or third party) | ||
| Communications costs | ✔ | ✔ |
| Costs of return shipping | ✔ | ✔ |
| Cost of disposal | ✔ | ✔ |
| Additional warehousing / storage space | ✔ | ✔ |
| Cost to hire additional persons | ✔ | ✔ |
| Replacement expenses (insured) | ||
| Repair and return | ✔ | ✖ |
| Refunds (including customer repairs) | ✔ | ✖ |
| Costs to re-Install | ✔ | ✔ |
| Costs to produce or acquire replacements | ✔ | ✖ |
| Additional coverage | ||
| Defence costs | ✔ | ✔ |
| Third party financial loss | ✔ | ✖* |
| Forensic accountancy | ✔ | ✖* |
| Crisis consultants Costs | ✔ | ✖* |
| Extensions | ||
| Cyber loss (within manufacturing)* | ✔* | ✖ |
| First party loss of gross profit* | ✔* | ✖ |
*Subject to insurer appetite and underwriting consideration
Note: This is a generalised comparison tool that selects a variety of covers where the triggers may be similar. 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.
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.
Note: 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.
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