Product Liability 2009 - Arnold & Porter LLP

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Product Liability and Product Recall Insurance in the UK Herbert Smith LLP
installed in a larger item for use or onward sale by a third party. In
these cases there will be a distinction according to whether or not
the product caused damage to the larger item. The test is whether
there has been any physical change to the larger item as a result of
the incorporation or inclusion of the defective product. If the
defective product causes harm to the larger product, such that its
value is diminished, physical damage will have occurred. In
Tioxide Europe Ltd v. CGU International Insurance Plc, a defective
whitening pigment used in the manufacture of PVC doors which
had caused the PVC to turn pink was found to have caused physical
damage to the PVC for the purposes of the insurance cover.
The principle will not, however, apply where a product is installed
or fitted alongside the property of a third party where no physical
harm is caused and the harmful effects are confined to the product
itself. In Pilkington United Kingdom Ltd and CGU Insurance Plc
[2005] 1ALL ER (COMM), 283 glass panels supplied by Pilkington
were installed in the roof and vertical panelling of the Eurostar
Terminal at Waterloo in London. A small number of the panels
were defective and fractured on installation, although no physical
damage was caused to the building. The insurance policy excluded
cover for products which were defective at the time when installed
and, as the Court held that the only damage was to the glass panels
themselves (and not to third party property), the claim failed.
Pure economic loss
As product liability policies are principally directed to damage
caused to persons and other property by a defective product
supplied by the insured, the English courts tend to construe such
contracts in accordance with the law of tort. Accordingly, product
liability cover will not normally extend to liability for pure
economic financial losses which are not consequential upon the
damage.
This is exemplified by Horbury Building Systems Ltd v. Hampden
Insurance NV [2004] 2 CLC 543 where the insurance claim related
to the costs associated with the collapse of a suspended ceiling
installed in a cinema auditorium. The cause of the collapse was
initially unknown and the whole cinema complex was closed for
several weeks although it was accepted by the parties that the
damage caused by the collapsed ceiling had not physically
prevented the use of the rest of the complex. The court held that the
insurer was not liable to indemnify the insured subcontractor in
respect of loss of profit arising from the closure of the entire cinema
complex; the policy only covered liability for the physical
consequences of the damage in the auditorium where the ceiling
collapsed and the economic losses caused by that physical damage.
The policy did not extend to matters such as the cost of the
investigations or precautions taken to avoid physical damage.
Some policies contain financial loss extensions which cover
liability for third party financial losses but such coverage tends to
be limited. These extensions can be combined with product
guarantee insurance which provides protection against an insured’s
legal liability for claims arising out of the failure of its product to
fulfil its intended purpose or function (discussed further below).
Exclusions
There are a number of exclusions generally included in product
liability insurance policy wordings which can operate to exclude
liability otherwise falling within the scope of the cover. The most
common exclusions include:
The costs of recalling, replacing or repairing the product
itself. Plainly, these costs fall outside of the general ambit of
a product liability policy which is principally concerned with
liability for damage caused to third parties and/or third party
property. Insureds can protect themselves against the costs of
a product recall by obtaining product recall insurance
(discussed below).
Liabilities which arise from the failure of an insured product
to perform its function (so-called “product efficacy”
exclusions). Product functionality is only relevant where the
failure of product function may give rise to liability. The
functionality failure of certain products (such as clothing,
electrical goods or toys) will not necessarily cause liability
for loss or damage. However, failure of other products to
perform effectively (such as medicines or fire extinguishers)
will almost certainly give rise to loss and/or damage.
Contractual obligations assumed by the insured. This
exclusion accords with the fact that product liability
coverage is designed to cover the insured’s liability for injury
to persons or damage to physical property. It is not ordinarily
intended to cover those types of losses which might be
recoverable solely in a claim for breach of contract but not in
tort (provided that there is injury or damage it does not
matter that the claim is one for breach of contract). It is
possible to obtain contractual liability extensions but care
must be taken with the way these are drafted to ensure that
they do not simply cover contractual liability which is
concurrent with that in tort (which is normally covered).
The insured’s deliberate acts or omissions which can
reasonably be expected to cause harm, loss or damage which
is the subject of the claim. Where an insured fails to carry
out adequate due diligence in respect of a product or reacts
poorly in the wake of a product liability issue, insurers may
seek to deny cover on this basis.
Care should be taken to ensure that the wording of the policy and
the exclusions reflect the nature of the insured’s business,
particularly where there may be technical reasons for a product’s
failure/defect. If the policy terms are inappropriate or poorly
drafted, there may be grounds for dispute. In John Reilly v. National
Insurance & Guarantee Corporation Ltd [2008] EWHC 722
(Comm), the Court was unable to determine whether a product
efficacy exclusion applied as there was a lack of clarity about how
the clause applied to insured’s products. As a result, it was
ultimately unable to determine policy coverage.
Product Recall Insurance
This form of insurance used to be something of a speciality but the
insurance industry is now providing a wider array of coverage
options in light of a perceived increase in demand. There have been
18 product recalls in the UK in 2009 alone (as at 30 March 2009),
and there has been an annual rise on previous year recall levels
which is expected to continue. Several factors are attributed with
the increased demand for product recall insurance, including the
introduction of enhanced regulatory obligations, the increased
sophistication and regularity of product testing and continued
importance of reputation and brand protection.
The costs of a product recall can be substantial, particularly where
the products are distributed internationally and can include costs in
the supply chain (such as manufacturing plant cleaning costs and
material write offs), the handling costs of the recall (which can
include customer returns, call centre costs, trade claims and costs
relating to the storage and disposal of the recalled products,
advisory fees), and loss of profit (to include damage to reputation
and goodwill).
In the current climate many manufacturers and distributors now
seek to protect themselves against the consequences of an
expensive product recall through insurance cover.
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