A manufacturer recently asked us why their product liability policy did not cover the cost of a product recall campaign. The answer is that product liability covers the damage caused, and a recall is precisely what is done to prevent it from causing any damage.
What product liability covers
The personal or material damage that the product causes to a third party once delivered and out of the manufacturer's control, along with the economic losses derived from that damage. It operates when there is already an affected party. The defective product legislation is based on strict liability, so the discussion is not about whether there was fault, but whether the product offered the safety legitimately expected.
What recall cover includes
The cost of the operation: locating the affected batches, communicating it to the distribution chain and consumers, transporting, storing and destroying, and the hours of personnel dedicated to it. It is activated by a reasoned decision or by order of the authority, and does not require any damage to have occurred. It is a cost cover, not a liability cover.
The variants that should be distinguished
Own recall, which covers the cost of recalling one's own product. Third-party recall, which covers the cost incurred by the industrial customer who had already incorporated your component into their final product, and which is usually much greater. And blending and mixing, which covers the damage to another's product when your defective component renders it unusable. A component manufacturer that only has the first is covering the smaller part of the problem.
The sublimits and geographical scope
Recall is almost always contracted as a sublimit within the general liability limit, with its own deductible and often with a co-insurance percentage borne by the insured. And the scope matters more than in any other cover: exporting to the United States or Canada requires express extension, with very different conditions and premium, because both the liability regime and the cost of defence change.
What decides the case is traceability
The difference between recalling a batch and recalling a range is having records that allow delimitation. Batch documentation, supplier control and recipient registration turn a campaign from seven figures into five. No policy compensates for the lack of traceability: what cannot be delimited, is recalled entirely.
