Insight on Products Liability and Product Recall
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Insurance Community University
Disclaimer
Insurance forms and endorsements vary based on insurance
company; changes in edition dates; regulations; court decisions;
and state jurisdiction. This instructional materials provided by
Insight is intended as a general guideline and any interpretations
provided by Insight do not modify or revise insurance policy
language. The authors of these materials, Insight Insurance
Consultants is a division of Insight Consulting and Management
Inc. In providing these materials, Insight assumes neither liability
nor responsibility to any person or business with respect to any
loss that is alleged to be caused directly or indirectly as a result
of the instructional materials provided.
Copyright 2010 – 2012 All Rights Reserved
www.insurancecommunitycenter.com
Laurie: 714.803.5830 laurie@insurancecommunitycenter.com
Marjorie: 714.206.9583
Marjorie@insurancecommunitycenter.com
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Your Instructor Today
Marjorie L. Segale, AFIS, CISC, RPLU, CIC, CRIS,
ACSR, CISR
Insurance Community Center, LLC
Director of Education
marjorie@insurancecommunitycenter.com
714.206.9583
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What This Class Will Cover
1. Evolving legal theories and product
liability
2. Food Safety Modernization Act of 2011
3. Product recall
4. Food spoilage / contamination
5. Major exclusions and restrictions in the
policy that affect the insureds coverage
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Product Liability
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Products Liability
• This term refers to the liability of any or
all parties along the chain of
manufacture of any product for damage
caused by that product
◦ This includes the manufacturer of
component parts, an assembling
manufacturer, the wholesaler,
warehouseman and the retail store
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Evolution of Legal Theories
Began at common law under
doctrine of privity
• Injured party must have a contractual
relationship with defendant
• Breach of contract
• No remedy in tort for injured party
Common law derived from judicial
rulings carried over from England
to the US
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Evolution of Legal Theories
 MacPherson v. Buick Motor Co., 217 N.Y.
382, 111 N.E. 1050 (N.Y 1916) decision
◦ Cause of action not limited to contract
◦ New concepts of “inherently” or
“imminently” dangerous products
◦ Lack of privity is not a defense if it is
foreseeable that the product, if negligently
made, is likely to cause injury to class of
persons that includes the plaintiff.
◦ Essentially test for negligence
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Evolution of Legal Theories
 Greenman v. Yuba Power Products, Inc. ,
59 Cal.2d 57, 27 Cal. Rptr. 697, 377 P.2d
897(1963)
◦ A manufacturer is strictly liable in tort when an
article he places on the market, knowing that it
is to be used without inspection for defects,
proves to have a defect that causes injury to a
human being
◦ Under strict liability theory a plaintiff is not
required to prove either negligence or that he
was in privity of contract with the manufacturer
or other seller
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Products Liability Today
• This case became the foundation upon
which other courts have developed
strict liability rules
• 1965 – American Law Institute adopted
the concepts of Greenman into the
Restatement (Second) of Torts
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Products Liability Today
• Courts view strict liability as the remedy
for the injured consumer
– Strict liability was developed as a means of
social policy and focused on the protection
of the public
– Not designed to create absolute liability
• Many statutes both federal and state
address the issues of product liability
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Litigation Basis
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Negligence
A duty to supply a safe product applies to all
in the chain of distribution
These parties owe a duty of care to anyone
who is likely to be injured by such a product if
defective
These parties owe a duty to exercise care
involving all phases of getting a product to the
consumers or users.
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Manufacturing Defects
Design defects
Inherent – they exist prior to manufacturing
Manufacturing defects
Occur during the production of the product
Marketing defects
Improper instructions and failures to warn
consumers of latent dangers
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Doctrine Of Strict Liability
Product seller is liable
for any all defective or
hazardous products
that unduly threaten a
consumer’s personal
safety
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No defense based
upon degree of
carefulness by
defendant
Proof of
proximate
cause
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Breach of Warranty
Express
Warranty
• Written or oral
statement about a
fact or promise
made by the
seller to the buyer
related to the
quality or
performance of
the goods or
product
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Breach of Warranty
Implied
Warranty
• The law implies that the
product is suitable for ordinary
purposes for which it will be
used
• Implied warranties in the sales
of goods transactions unless
expressly excluded
• Merchantability quality
• Fitness for a particular purpose
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Defenses
Abnormal use by plaintiff
Modification of the product
by plaintiff or other parties
Notice of breach of warranty
given to plaintiff
Strict compliance with
regulations
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CGL Definitions and Key
Exclusions
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Occurrence
“Occurrence” means an accident,
including continuous or repeated
exposure to substantially the same
general harmful conditions.”
• Requires an accident
• Must occur during the policy period
• Must occur within the coverage
territory
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Bodily Injury
"Bodily injury" means bodily injury,
sickness or disease sustained by a
person, including death resulting
from any of these at any time.
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Property Damage
17.
"Property damage" means:
• a.
Physical injury to tangible property,
including all resulting loss of use of that
property. All such loss of use shall be
deemed to occur at the time of the physical
injury that caused it; or
• b.
Loss of use of tangible property that
is not physically injured. All such loss of use
shall be deemed to occur at the time of the
"occurrence" that caused it.
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Impaired Property Definition
Impaired Property means tangible
property, other than “your product” or
“your work”, than cannot be used or
is less useful because:
(1)It incorporates “your product or
“your work” that is known or thought
to be defective, deficient, inadequate
or dangerous; or
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Impaired Property Definition
(2)You have failed to fulfill the terms
of a contract or agreement; if such
property can be restored to use by:
• (a)The repair, replacement,
adjustment or removal of” your
product” or “your work”, or
• (b)Your fulfilling the terms of
the contract or agreement.
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Products-Completed Operations CGL
Definition
16. "Products-completed operations
hazard":
a. Includes all "bodily injury" and
"property damage" occurring away from
premises you own or rent and arising
out of "your product" or "your work"
except:
(1) Products that are still in your
physical possession; …..
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Damage to Your Product
Exclusion
k. "Property damage" to "your product"
arising out of it or any part of it.
No exception for elements of the insured's
product supplied or performed by someone
else
Any part of the product that damages any
other part of the product will trigger the
exclusion
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Impaired Property Exclusion
m. Damage To Impaired Property Or Property Not
Physically Injured
"Property damage" to "impaired property" or property that
has not been physically injured, arising out of:
(1) A defect, deficiency, inadequacy or dangerous
condition in "your product" or "your work"; or
(2) A delay or failure by you or anyone acting on your
behalf to perform a contract or agreement in accordance
with its terms.
This exclusion does not apply to the loss of use of other property arising
out of sudden and accidental physical injury to "your product" or "your
work" after it has been put to its intended use.
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Recall Exclusion
n. Recall Of Products, Work Or Impaired Property
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:
(1)
"Your product";
(2)
"Your work"; or
(3)
"Impaired property";
if such product, work, or property is withdrawn or recalled
from the market or from use by any person or organization
because of a known or suspected defect, deficiency,
inadequacy or dangerous condition in it.
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Domestic CGL Territory
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CGL Territory Definition
a. The United States of America(including
its territories and possessions), Puerto
Rico and Canada; ...
c. All parts of the world if:
(1)The injury or damage arises out of:
(a) Goods or products made or sold by you in the
territory described in a. above or …
and
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CGL Territory Definition
(2)The insured responsibility to pay
damages is determined in a “suit” on
the merits, in the territory described in
a. above or in a settlement we agree to.
Suit on the merits must be filed in U.S.,
et al for products coverage.
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Distribution Territory Concerns
Product made or sold in US
Suit filed here - coverage applies in domestic form
Product made and sold outside the US
Suit filed here or elsewhere - no coverage in domestic form
Product made outside US – sold by distributor,
wholesaler or retailer here
Substitutes for manufacturer
Suit filed here – coverage
applies in domestic form
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Solutions
Foreign products liability
• Multinational claim unit
• Admitted vs.. Non-admitted
World wide coverage form
Master controlled program
Self-insurance or captive
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Food Contamination
FSMA of 2011
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Food Contamination
• Annually 48,000,000 Americans become
sick from food borne disease
• 128,000 hospitalized
• 3,000 die
» Centers for Disease Control and Prevention
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Annual Average Food Recalls
– 41 Class I recalls (cases posing the highest
health threat)
• 24 million pounds of food occur each year.
– 10 Class II recalls
– 4 million pounds of food.
» USDA-Economic Reporting Service
– http://www.fsis.usda.gov/recalls/Open_Federal_Cas
es/index.asp
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Food Borne Illness
FSMA 2011
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Food Borne Illness
Bacteria
• Salmonella
• Wisteria
• E-Coli
• Foot and Mouth
disease
• Mad Cow disease
/ Anthrax / Bird
Flu
Foreign material
• Glass / Plastic
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Development of Federal Law
Major Federal statutes
• 1906 Pure Food and Drugs Act
• 1906 Meat Inspection Act
• Federal Food, Drug, and Cosmetic Act
1938
• Federal Bioterrorism Act of 2002,
Section 306
• Food Safety Modernization Act 2011
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Development of Federal Law
Establishment of various Federal
agencies
• FDA
• USDA
• CDCP
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Food Safety Modernization Act
2011
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FSMA
The most sweeping
reform of food
safety laws in more
than 70 years
Goal is to ensure
food safety in the
U.S.
Food products
regulated by the
FDA
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• January 4,
2011
• Proactive
instead of
reactive
• Not applicable
to meat,
poultry or egg
products
(USDA)
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FSMA
New enforcement authority for FDA
Require
comprehensive,
science-based
preventive
controls
Order
companies to
recall food
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Imported food
held to same
standards as
domestic
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Mandatory Preventive Controls
Evaluate hazards that could affect food safety
Specify preventive steps, or controls to minimize or
prevent the hazards
Specify monitor controls to ensure effectiveness
Maintain routine records of the monitoring
Specify actions to correct problems that arise
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Mandatory Produce Safety
Standards
Establish
sciencebased,
minimum
standards
for safe
production
and
harvesting
of fruits
and
vegetables
• Naturally occurring hazards
• Intentional or unintentional
hazards
• Soil amendments
• Hygiene, packaging, temperature
controls
• Animals around growing area
• Water
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Prevent Intentional
Contamination
Regulations to protect
against intentional
adulteration
Prepare and protect
food supply chain a
specific vulnerable
points
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Inspection and Compliance
Provide oversight,
Ensure compliance
with requirements
and respond
effectively when
problems emerge
Mandated
inspection
frequency
High risk facilities
within 5 years (by
2016); tri-annually
thereafter
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Inspect 600 foreign
facilities within next
5 years
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Inspection and Compliance
Records access
• Document
implementation of
safety plans
Testing by accredited
laboratories
• Establish laboratory
accreditation
program
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Response
Mandatory
recall
• Request recall
first
• Require if
company fails to
voluntarily recall
Expanded
administrative
detention
• Allows FDA to
detain products
(suspected, not
necessarily
known)
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Response
Suspension of
registration
Reasonable
probability of serious
adverse health
consequences
Facility is prohibited
from distribution
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Response
Enhanced product tracing abilities
System will track and trace domestic and imported
foods
Additional Recordkeeping for High Risk Foods
Foods to be
designated by
Secretary of USDHHS
Manufacture, process, pack or
hold foods must maintain
records
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Imports
Third Party
Certification
Certification for
high risk foods
• Qualified third parties
certify that foreign
food facilities comply
with U.S. food safety
standards
• May be used to
facilitate the entry of
imports
• High-risk imported
foods be accompanied
by a credible third
party certification or
other assurance of
compliance as a
condition of entry into
the U.S.
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Imports
Voluntary qualified importer program
• Must establish a voluntary program for
importers that provides for expedited review
and entry of foods from participating
importers
• Eligibility is limited to, among other things,
importers offering food from certified
facilities
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Imports
Authority to deny entry
Can refuse entry into the U.S.
of food from a foreign facility
if FDA is denied access by the
facility or the country in
which the facility is located
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Products Recall
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Recall
Voluntary action - decision is made by
company management
Includes corrective actions to protect
consumers
Enforceable by federal agencies
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Successful Recall Process
A smooth recall process
can save a company’s
name and prevent
further damage due to
negative publicity
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Minimize the cost
of the recall
Regain and
improve the
company’s
reputation
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Successful Recall Process
Pre-plan
recall
management
• Who
• What
Time is
critical factor
• Must minimize
negative
publicity
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Communicate
with media
effectively
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Successful Recall Process
Recall assessment
• Post-recall assessment is extremely
important in determining the
effectiveness of the recall plan in
order to improve the efficacy of
potential future recalls
• The current recall plan also should be
evaluated through simulated recalls
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Product Recall Coverage Basics
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Products Recall Coverages
• Standard Insurance Company coverage
– A sub-limit “gift”
– Limited definition of coverage
• Products Recall Coverage
– Specialty form
– Not all forms are created equal
• Trade Name Restoration Coverage
• Product Contamination Coverage
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Generally Desirable Coverages
Value of recalled or destroyed contaminated products
Costs to re-manufacture
Notification costs to distributors
Transportation and relocation of contaminated products
Lost Gross Profit
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Generally Desirable Coverages
Recall expenses are typically specified
• Broadly written
• Need to be established by the insured
Storage of contaminated products
Disposal of contaminated products
Crisis Response/Consultant Expenses
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Generally Desirable Coverages
Third Party
Coverage
• Notifying vendors
• Shipping to
designated place
• Extra Expenses
such as additional
employees and
storage space
Third Party Impaired
Property Coverage
• Loss of use
• withdrawal, recall,
inspection,
replacement,
adjustment,
removal, disposal
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Markets
• Chartis and Lloyd’s of London
– Largest insurers by market volume
•
•
•
•
•
Liberty Mutual
XL
C. V. Starr
Crum & Forster
Zurich
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Summary
• Risk Management
– Insured should be prepared
– Quality control measures in place
– Updates on government requirements
• Insurance
– Proper recall coverage is hard to find and
very expensive
• Insured will share in loss with large deductibles
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Summary
• This is a necessary area of risk review
• Check your insurance markets FIRST
– Understand what is available
• Identify insured’s specific risks
– Match with best available coverage form
• Present and explain
– If rejected – obtain signature from your
customer
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