Product Recall in India

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Product Recall Insurance

Posted: 2004-04-26 00:00:00+05:30 IST
Updated: Apr 26, 2004 at 0000 hrs IST

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: The classic definition of product liability reads, as ‘Manufacturers and anyone in the chain of product distribution can be legally liable for defective products that cause injury to the purchaser, a user or bystander, or their property’. The manufacturer or distributor can purchase a product liability insurance to protect against compensation payable, claimants’ costs, fees, expenses and defence costs up to the limits purchased.

Product recall refers to all the measures undertaken by a manufacturer, distributor or importer with the aim of stopping further sales and further use of individual series or batches of a specific product because they pose an acute danger to life, health or property of third parties. The recall could be a) Voluntary (by manufacturer or distributor on own decision) versus officially ordered (by a public authority based on statutory, regulatory or judicial powers), b) Silent (by means of letters addressed personally to actual or presumed buyer) versus public (publicised through media) c) First party (by manufacturer or distributor of defective product or component manufactured) versus third party (by manufacturer or distributor of defective product or component manufactured but raw materials, parts, intermediate products or service are supplied by suppliers or subcontractors).

Product liability policies typically exclude any of the above recall expenses, which would far outstrip the cost of defective products themselves. The recall of soft drink bottles might cost a hefty 15 million dollars. Obtaining product recall insurance is difficult, especially in India. It needs procuring capacity from world markets, which is dwindling strikingly in the United States and in Europe. What does product recall insurance cover? It reimburses expenses incurred like costs of correspondence, newspaper and magazine advertising, radio or television announcements and transportation costs for the return of products. It also covers costs of examination and replacement of product arising out of recall. A product guarantee coverage, which is also a part of product recall covers, the costs of removal, recovery, repair, alteration, treatment of products, which fail to perform the function for which they were manufactured.

The financial loss coverage extension makes good the financial loss incurred by buyers or third parties owing to failure of the products to perform the unidentified function including third party recall costs. The reasons for recall could be shorter production cycles, premature market introduction, reduced control over large number of components supplied by contractors and also increasingly critical consumers. A large number of recall have occurred in automotive components, pharmaceutical, food and beverage industries.

The financial loss coverage extension makes good the financial loss incurred by buyers or third parties owing to failure of the products to perform the unidentified function including third party recall costs

The general reasons for recall automotive components are like air bag deployment problems, defective-braking systems, steering problems, fuel tank related problems, and defective tyres. Similarly, the reasons for food or beverage recall include contamination, processing problems like small fragments of foreign items found in the beverage bottles, improper labelling, packaging defects etc. The reasons for pharma recalls include product tampering, wrong labelling, improper packing etc.

And examples galore:

* In August 2000, Bridgestone/Firestone recalled 6.5 million tiers when numerous accidents associated with defective tires were found

* Sulzer Medica appointed John C Wells as mediator to attempt a settlement of the 1,800 law suits brought against the company in the United States following the company’s recall of faulty hip and knee implants

* MG Rover recalled the 2001 output of its MGF model, the UK’s best-selling sports car, owing to safety concerns over the electronically controlled pre-tensioners in the seat belts

* Mitsubishi announced the recall of more than 12,000 Galant and Legnum vehicles in Japan, owing to a flaw in the braking system

* American Home Products increased its reserves by $950 million to cope with litigation concerning the fenphen diet drugs. It’s total reserves now stand at $12.25 billion, the largest in pharmaceutical litigation history

* Ford recalled over one million cars and trucks from the model years 2000 and 2001, after receiving reports alleging that faulty windscreen wiper ‘park’ switches were the cause of fires

* In 2000, the Federal Drug Authority (FDA) of US enforced 315 recalls. There is increasing awareness amongst the consumers in India about the rights. The active role of the consumer awareness group championing the rights of the consumer puts that much extra pressure on the manufacturers and distributors in the country. With the increase in exports by Indian industries to Europe, North America and other countries with higher litigation costs, they need to take specific steps for covering costs due to unforeseen recall exigencies.

Factors that impinge on the cost of insurance include turnover of the organisation, geographical reach of the product (domestic or abroad or both), processes/technology used in the production, limits of liability sought, past events involving recall and reputation of the manufacturer/distributor seeking insurance.

The author of is managing director of India Insure Risk Management Services Pvt Ltd

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