Policyholder Pulse
If you believe the news, I may be lucky to make it out of the driveway alive on my morning commute tomorrow. That microwave-ready triple egg breakfast sausage sandwich I stuff into an increasingly jowly face on my way to the car? Recalled. The overpriced technology-assisted car that practically backs itself out of the driveway as I struggle to wipe away the remnants of my savory breakfast? Recalled. Each morning brings fresh product recall announcements involving everything from contaminated sunflower seeds to exploding toilets. This year contamination recalls in Food and Drug Administration (FDA) regulated industries alone rose 167% from the first quarter to the second quarter. The exponential rise of product recalls stems from a convergence of factors, including increased governmental regulation and more extensive and technologically sophisticated testing of products.
The often significant costs involved in addressing product recall and contamination issues can affect participants across the entire chain of commerce—from manufacturers and suppliers through to retail vendors. To lessen their possible economic exposure, businesses are increasingly relying on varying forms of product recall/contamination insurance. Recall/contamination insurance typically consists of one or more of the following coverages: (1) accidental contamination; (2) malicious product tampering; and/or (3) government or voluntary recall. The insurance industry, however, frequently asserts defenses to coverage in the face of any significant recall/contamination claim, defenses that policyholders should resist.
Accidental Contamination
Accidental contamination coverage generally is triggered when an unintentional contamination, impairment or mislabeling of a product occurs, which the use or consumption of has or would (or “likely would” or “probably would” or “will” or some other similar linguistic variation) result in bodily injury or property damage.
An area of frequent dispute with insurers occurs when a business has identified a product defect prior to any actual resulting bodily injury or property damage and takes proactive steps to avoid that liability by replacing or recalling the product. Insurers will often deny coverage by asserting that the defective or contaminated product would not in fact have caused bodily injury or property damage had the policyholder allowed it to market. Critical to avoiding this defense is to negotiate the most favorable language possible to the bodily injury/property damage requirement when purchasing the policy. The success or failure of a coverage claim may turn on whether the policy contains “will result in,” “would result in,” “probably would result in,” or similar variations as the lead-in language to the bodily injury/property damage requirement.
Policyholders should also be aware that, contrary to what many insurers may assert, the bodily injury or property damage requirement may not necessarily require an actual visible physical manifestation of injury or damage. Just because my contaminated microwave-ready triple egg breakfast sausage sandwich didn’t cause me to collapse in a feverish heap on the driveway before I even got to my recalled car, doesn’t mean that, unbeknownst to me, the sandwich has not caused a detrimental physical change to the lining of my increasingly expanding stomach.
Malicious Product Tampering
Malicious product tampering insurance was first marketed after cyanide-laced Tylenol resulted in its manufacturer incurring millions of dollars of costs in the early 1980s. Malicious product tampering coverage generally is triggered by the actual or alleged intentional, malicious and illegal adulteration of a product so as to render it dangerous or unfit for use. Insurers, focusing on the “malicious” requirement, typically take the position that the product must have been deliberately adulterated, with the specific intent to cause harm to the product or others. In many cases, however, the malice/intentionality requirement may be satisfied with a showing of extreme or deliberate recklessness without specific intent to harm.
Indeed, as a result of the Tylenol poisoning incidents, Congress passed the Federal Anti-Tampering Act, making malicious tampering with consumer products a federal offense; that act has been interpreted to require only conscious or deliberate indifference, rather than specific intent to harm, for a criminal malicious tampering violation. Policyholders should therefore consider carefully whether a product that is unfit for use or dangerous may trigger malicious tampering coverage if it resulted from adulteration that was the product of some degree of deliberate or extreme recklessness.
Government or Voluntary Recall
Coverage for the voluntary recall of products that have already hit the market generally requires that the policyholder demonstrate the same elements applicable to accidental contamination (or malicious tampering), including that the product has caused or would cause bodily injury or property damage. Governmental recall coverage, on the other hand, may sometimes be available without any requirement that the product have caused or would cause bodily injury or property damage. Instead, coverage is triggered by a mandatory government recall order. Policyholders should be aware, however, that even in situations where a governmental agency has not issued a mandatory official recall order, coverage may still be triggered where the governmental directives and communications amount to a mandatory recall.
Product recall/contamination insurance is not a solution for my unfortunate breakfast commute habits, but it is an important tool for businesses to mitigate the risk of recall and contamination issues. The negotiation of the wording of the policies (which varies widely) and a willingness to challenge insurers’ coverage positions, however, are critical factors in maximizing the return on that investment.