Tag Archives: Product Recall

Product Recall Expense Endorsements Becoming More Common

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A positive new trend is emerging for small businesses.  More product liability insurance carriers are starting to offer product recall expense endorsements to their product liability policies. 

The great thing about these add on endorsements are, they provide some product recall expense coverage at a much lower price than if a small business had to purchase a stand-alone or individual product recall policy.  Minimum premiums for a stand-alone product recall policy typically are in the $10,000 range per year and just too expensive for most small and start-up businesses to afford.  The product recall expense endorsements allow the small business owner to choose a smaller sub limit ($25,000 to $250,000) of their product liability limit to be used on for product recall and provides affordable premiums for 5% to 25% of the total product liability premium.  Some of the dietary supplement insurance carriers are offering $25,000 sub limits of coverage for as low as $500 or 5% of total premium, whichever is higher. 

Product recall or withdrawal is necessary when your product is deemed to have or suspected to have a defect that will potentially cause bodily injury or property damage.  The determination that a product needs to be recalled can be made by you or because a government entity has ordered you to withdraw your product from the market place.

Products recall expenses can include the following:

  1. costs of notification;
  2. costs of stationary, envelopes, product of announcement and postage or facsimiles;
  3. costs of overtime paid to regular nonsalaried employees and cost incurred by your employees, including costs of transportation and accommodations;
  4. costs of computer time;
  5. cost of hiring independent contractors and other temporary employees;
  6. costs of transportation, shipping or packaging;
  7. costs of warehouse or storage space;
  8. costs of proper disposal of “your products,” or product that contain “your products,” that cannot be reused, not exceeding your purchase price or your cost to produce the products.

The cost of getting this endorsement can vary greatly depending on limits of coverage you want, the type of products you sell and amount of product you have in the market place. 

If have any doubts about the need for product recall insurance, I highly recommend you go to www.recall.gov and look at the list of all the products similar to yours that are being recalled.  I believe you will quickly conclude that during the life of your business it is much more likely that your business will face a recall than a product liability claim.

Graco And Simplicity In The News Again

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How does the Graco and Simplicity product name survive and apparently continue to thrive, when it seems it has a major product recall about every other month?

Over the last ten years Graco and Simplicity has distinguished itself as one of the most embattled and recalled company’s in the history of the United States, yet it seems to be able to continue to live up to it’s business model of delivering inexpensive baby and children’s products.  During this time, products such as cribs (suffocation), strollers (finger amputations), high chairs (falls), car seats (choking), toddler beds, swings, walkers, baby carriers, bassinets and toys have been recalled by the millions.  The cost alone to handle all the recalls and product liability lawsuits has to have reached into the hundreds of millions of dollars over the past ten years.  I guess the Civil Penalty imposed by the CPSC of $4M for not reporting known product defects in a timely manner must have seemed like a small slap on the wrist.

I have to believe somewhere some college professor is teaching a class based on the business model of Graco.  You have to give Graco their props.  Despite it’s name being negatively being associated with baby and children’s injuries and deaths and spending hundreds of millions in fines, product recalls and product liability lawsuits they appear to not only survive, but to thrive and remain profitable.

Does The Peanut Corporation of America Have Product Liability Insurance?

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The technical answer to the question, does the Peanut Corporation of America have product liability insurance?’ is “yes”; however, the real answer may be “no”.

Of course the Peanut Corporation of America has a product liability insurance policy, but it may not provide any coverage because of the “intentional acts exclusion” in the policy.

It appears that via email the company president, Stewart Parnell, was informed by the plant manager, Sammy Lightsey, of a positive Salmonella test and despite of that warning instructed the plant manager to ship the products.

Typically, a commercial general liability policy states that the policy does not cover “bodily injury” or “property damage” expected or intended from the standpoint of the insured.  It could be easily argued that Stewart Parnell and Sammy Lightsey could have reasonably expected consumers to get sick and possibly die because of the positive Salmonella test and chose to ignore the positive test and warnings for profit.

The Peanut Corporation of America’s insurance carrier, Hartford Casualty Insurance Company, will be within their rights, in my opinion, to deny the claim. However, based on an inside source at The Hartford, it is more likely The Hartford will pay the $10,000,000 in policy aggregate limits and wash their hands of the ugly mess.

From The Hartford’s viewpoint, even if they could successfully deny product liability coverage based on the “intentional acts exclusion”, they would still pay out the full $10,000,000 in policy limits sooner or later.  All the insurance carriers of the manufacturers such as Cliff Bar and Hershey that used Peanut Corporation of America’s products in their finished products and were sued, as a result, would sue The Hartford to recover their losses.

4 Ways You Can Assume The Liabilities of The Company You Are Purchasing

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While in most cases the company that purchases the assets of another company does not inherit the seller’s liability, there are four exceptions every buyer should be aware of that might transfer liability to buyer or purchasing company.

  1. Examine the purchase agreement carefully.  It may require the buyer to assume the predecessor’s liabilities.
  2. The transaction might be viewed as a merger.  In a merger, the selling company or predecessor’s rights and liabilities transfer to the buyer or surviving entity.
  3. If the company buying the other company is a similar business to the company they are buying, it may be viewed as a continuation of the seller’s operation.
  4. If it is determined that the transaction was fraudulent or for the purpose of the seller to avoid liability, liability could be transferred to the company that purchased the assets.

If any of the above possibilities exist, I recommend that you not only carry a product liability policy with higher than average liability limits, but that you also carry a product recall policy for added protection of you assets.

Buying The Assets of A Similiar Business? – You May Also Be Buying The Liabilities!

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When one corporation buys the assets of another similiar corporation, they may also being buying the liabilities of that corporation.  In most cases, the buyer of a firm or corporation’s assets does not inherit the seller’s liabilities.  However, there is an exception when the acquiring corporation is similiar and possibly viewed as a continuation of seller’s operation.  In an instance like this, the buyer may be strictly liable for injuries caused by defects, even if the product was previously manufactured and distributed by the selling corporation.   

A perfect example of this is SFCA, Inc’ purchase of Simplicity, Inc.  SFCA, Inc., an affiliate of Blackstreet Capital Partners, LLC purchased the debt and then purchased the assets through a Foreclosure sale of Simplicity, Inc.   Simplicity, Inc. was a leading juvenile and baby furniture designer, importer and distributor.  SFCA, Inc designs, distributes and imports cribs, changing tables, toddler beds, bassinets, etc. so there is a definite similiarity between SFCA and Simplicity.

Currently, the Attorney General Lisa Madigan of Illinois, has brought a lawsuit against SFCA, Inc. because SFCA acquired the inventory of Simplicity in March of 2008 and continued to sell design-flawed bassinets to retailers, despite knowing the bassinet design was responsible for, at least, one infant death.  Apparently, SFCA refused to participate in the recall because it claimed it was not responsible for the design flaws, since it did not design the defective bassinets.

The million dollar question in my mind is – did SFCA act on the advice of their legal counsel or was this an executive decision by one or more of the officers of the company not to fully participate in the recall of these defective bassinets?   Surely, SFCA’s legal counsel would have made them aware of this legal precedent.  Regardless of who was responsible for this curious decision, I am guessing if SFCA only spends a million dollars to resolve this mess, they will consider themselves fortunate.  Hopefully, SFCA, Inc. carried both product liability and product recall insurance.

Additional Insured On A Chinese Product Liability Insurance Policy? – Whoop Tee Doo!

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If you are an importer of Chinese products and have been told by the Chinese manufacturer or distributor that you are covered by their product liability insurance policy, I recommend you read Linda Stamato’s article below.  After reading this article, you will have a better understanding of why your U.S. insurance carrier does not provide discounted rates on your U.S. product liability policy when you can provide proof you are Additional Insured on the Chinese manufactures or distributitors insurance policy.  Simply put, nobody with any experience in the product liability field has any confidence that any type of restitution be found in the Chinese courts, even if the case is an obvious slam dunk of manufacturing defect or design defect.

As reported by Linda Stamato of NJ.com: In the United States, we have no end of attacks on product liability litigation, consumer protection laws and class action lawsuits. (A visit to Americans for Tort Reform provides information and perspective on these efforts.) As this group and others question the “excesses” of lawsuits in compensating the injured and doubt their efficacy in bolstering product quality, consider what is taking place in China……  Read the Full Story on Toxic milk and poisoned babies: Product liability limits in China

Confidence in Chinese products is so low that I predict that more retailers and U.S manufactures that use Chinese parts in their finished products are going to start requiring the U.S. Importers and Distributors of these products to start carrying Product Recall Insurance with a third party endorsement that will cover the expenses of any third party (retailer) for the recall of any product that incorporates your product including the cost to repair or replace such product.

Understanding The Differrences Between Product Liability, Product Recall and Impaired Property

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One of the most common confusions for many of the prospects and customers I come in contact with is there understanding the differences between Product Liability, Product Recall and Impaired Property.
 
Many people will wrongly assume that Product Recall and Impaired Products are covered by their Product Liability policy.  It is important to note that the standard ISO Product Liability policy form specifically exclude “damages claimed for any loss, cost or expense incurred by you or others for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of your product, your work or impaired property.”
 
The other most common mistake that prospects make when contacting me is assuming “Impaired Property or Products” are covered by a Product Recall policy. The trigger for product recall is when your product has caused bodily injury or property damage or poses an imminent danger of bodily injury or property damage. Impaired Property is “tangible property (other than your product(s)) that cannot be used, or that is less useful, because it incorporates your product(s) that is known or thought to be deficient, defective, or inadequate, but only if such property can be restored to use by the repair, replacement, adjustment or removal of your product(s).”  Most calls I receive regarding product recall the prospects are really looking for profit protection in the event they are required to warranty or pull their products because of their product is found to be defective or does not perform as promised and is returned by the end user for a refund. While it is possible to find Product Recall policies that will offer an “Impaired Property” endorsement, it is important to note that the “Impaired Property” endorsement does not cover your obligation to replace your product(s) or to refund the price paid for your product(s).  Impaired Property is specifically designed to provide some protection to the third party that incorporates your component or ingredient into the their finished product.
 
In summary, product liability does not provide coverage for product recall or impaired property and product recall does not provide coverage for impaired property without endorsement and impaired product does not provide coverage to replace or refund the price paid for your products.

Product Recall Vs. Product Guarantee – Know The Difference

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We often get calls from prospects wanting to buy product recall insurance. After a little while of discussion it becomes obvious that most of the prospects are really looking for product warranty insurance. It is important to understand that the trigger for Product Recall Insurance is the potential for the product to cause bodily injury or property damage and as a result, is considered to be unsafe and must be removed from the market or public. Product warranty is much more passive and involves a promise to repair or replace or refund the purchase price of a product because it fails to meet a particular standard of performance.
 
 Increasingly, large retailers are asking manufacturers, distributors and wholesalers to warranty their products in the event they fail to perform to a reasonable standard for the retail customer and the retailer is forced to take back the products and provide refunds.
 
Most manufacturers or importers that contact me are looking for an inexpensive way to protect their profits in the event they are forced by warranty or indemnity agreement with the distributor to take back product. To the best of my knowledge, there are no insurance carriers willing to provide this type of insurance coverage. Most warranty insurance coverages are extended warranties for the repair of automobiles and equipment such as electronics, washing machines, etc. 
 
Important point – product warranty insurance is provided for the end user. For example, when you buy a car or washing machine, you can purchase an extended warranty insurance to cover repair or replacement costs. This insurance is a money maker for the retail establishment and the insurance carriers that provide this coverage.
In most cases, companies that call and ask for product recall or product warranty insurance are in fact looking for cheap insurance that would protect their profits in the event they would have to take back their product because the product was defective or simply did not perform as advertised.