Recently, there has been publicity about suppliers recalling their products manufactured in China. Should insurers be concerned?
Liability policies generally purport to exclude cover for liability for the cost of any product recall. Typically, the policy excludes liability for:
the recall, inspection, repair, replacement or loss of use of the Insured's Products or work completed by or for the Insured or of any property of which such products or work [the insured's products or work] form a part if such products, work or property [the third party's products, work or property] are withdrawn from the market or from use because of any known or suspected defect or deficiency therein.
This exclusion is probably far more limited than it would appear on its face. Based on overseas judgments it excludes preventative recalls only, and not recalls where damage has already occurred.
Canadian Case Law
In Foodpro National Inc v General Accident Assurance Co of Canada (1987) 33 DLR 427, the Ontario Supreme Court considered two product recall exclusions that were substantially identical to the exclusion referred to above. The insured's product was defective. A third party claimed against the insured for the cost of the insured's defective product held by it. It also claimed for the cost of recalling its own goods from its customers that became defective as a result of incorporating the insured's defective product. The insurer declined indemnity on the ground that the product recall exclusion applied.
The Ontario Supreme Court held:
The language of the exclusions was limited to the expenses and claims arising when the property was withdrawn from the market or use and not the damages for the destruction or loss of the property itself.
To confine the exclusions to expenses and claims other than injury to the destruction of property was a reasonable construction of the language of the exclusions in the context of the token insurance coverage provided to the plaintiff by the policy. It reflected the underlying principle of general liability insurance. Just as the policy was not intended to cover damage to the insured's product or work, it did not cover the cost of preventive action resulting from the failure of the insured's product. The clause, however, had no application in the circumstances where, as here, the use of the defective product had caused damage to other property. (Underlining added)
In other words, if the third party's goods are damaged as a result of defects in the insured's product, the third party's claim for the cost of the recalling its defective goods from its customers, will not be excluded by the product recall exclusion.
What the exclusion is addressing is a product recall that is a preventative measure to ascertain whether any of the goods are damaged in the first place.
Whilst there are no New Zealand authorities on the interpretation of a product recall exclusion that we are aware of, a New Zealand court is likely to be guided by this Canadian decision.
Implications
If liability insurers intend their products recall exclusions to have wider application than this, we recommend they are drafted very clearly to achieve this. Most of the exclusions we have seen in the New Zealand market place are unlikely to do so.
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