Article first published in Insurance Day
Samsung recall highlights importance of handling product recall correctly
The recent tale of the Samsung Galaxy Note 7 raises points of interest for product manufacturers and their insurers. Soon after the device launch in August, there were reports of batteries overheating, in some cases allegedly causing personal injury or property damage.
Samsung initially announced batteries from one of its suppliers were an issue and commenced a recall campaign, apparently before notifying authorities, including the US Consumer Product Safety Commission (CPSC). The corrective measures included issuing replacement devices containing batteries from another supplier. However, further reports came to light, allegedly involving replacement products. Soon afterwards, Samsung decided to discontinue the model entirely and recall and dispose of approximately 2.5 million shipped devices.
Such a scenario raises issues for products insurers. As a matter of risk, lithium ion batteries have been highlighted in a number of recent issues affecting laptops and hoverboards through to Boeing 787s. Lithium ion batteries are now high on the agenda at the CPSC. Furthermore, it is suggested Samsung’s design, specifically the way in which adhesives were used in the device, meant simply substituting new batteries into affected devices might not be a realistic remedial option.
Recall expenses may be insured in various ways, such as mitigation expenses under liability policies and standalone product recall policies. Various triggers can be found, but some policies will not respond to design flaws. If cover is triggered, there may be issues such as when the insured had first knowledge of the potential defect and whether notification was timely, and questions about the conduct of recalls. The CPSC has already said Samsung should have reported the issue sooner than it did and before commencing the first recall campaign.
In quantifying covered recall claims, there may be questions such as whether certain expenses were necessary to prevent injury and whether any loss of business was caused solely and directly by the defect. It has been suggested that if Samsung’s initial root cause analysis and remedy had been adequate, the second recall and the discontinuance of the model might not have occurred. Understandably, there are many examples of manufacturers, for the purpose of protecting reputation, taking measures that are more costly than necessary to prevent injury. Where certain mitigation expenses are covered in relation to loss of business, such expenses may be sub-limited.
Regarding refunds, it is interesting to consider there is, at the time of writing, tentative approval of a multibillion-dollar buy-back of Volkswagens involved in the emissions issue. Even if insurance is not relevant in these particular incidents, the risk of large-scale product refund or buy-back may be a key concern for underwriters of any policy that potentially covers loss of product value and loss of profit on lost sales. The economic aspects of any recycling exercise will also make interesting reading, as far as quantification of salvage and loss are concerned.
It is not unusual to have consumer class actions alleging breach of warranty or personal injury. There have also been investor class actions alleging, for example, that company statements about risk, reserves and product controls were misleading and caused loss of share value. It is less common to see allegations a company’s handling of a recall has caused loss of share value, but this may also be a possibility. Whether products policies provide any relevant cover, such as defence costs, will depend on the claims and the policy concerned.