Products Liability Policy

Collated by Pratik Priyadarshi

Products Liability

This policy covers all sums (inclusive of defence costs) which the insured
becomes legally liable to pay as damages as a consequence of:
1.accidental death/ bodily injury or disease to any third party.
2.accidental damage to property belonging to a third party.
3.arising out of any defect in the product manufactured by the insured and
specifically mentioned in the policy after such product has left the insured's
premises.

The policy offers the benefit of retroactive period on continuous renewal of

policy whereby claims reported in subsequent renewal but pertaining to
earlier period after first inception of policy, also become payable.
A product is defined as any physical item that is sold or given away.
Products must be "fit for purpose", and under the Consumer
Protection Act1987 you are legally responsible for any damage or
injury that a product you supply may cause.

Also defined as any tangible property (after it has left the

custody or control of the Insured) which has been designed,
manufactured, sold, supplied or serviced by the Insured.

"Product" means any tangible material property which has been

designed, specified, formulated, manufactured, constructed, installed,
sold, supplied, distributed, treated, serviced, altered or repaired by or
on behalf of the Insured and which has left his possession, custody or
control. This shall not apply to food and beverages supplied by or on
behalf of the Insured to his employees.
Scope
The defect in the product may be a manufacturing defect or may even
be due to faulty packaging, delivery specifications or instructions as to
use of the product.

The policy covers the sales turnover of the company- both domestic
and/or exports.

The policy is on a claims made basis i.e. the claims must arise and be
made in writing on the insurance company during the policy period.

The policy does not cover any liability for product recall, product
guarantee, pure financial loss such as loss of goodwill or loss of market.

The policy also does not pay for the cost incurred for repairing or
reconditioning or modifying the defective part of the product.
Who should buy this policy ?

Product Liability Insurance indemnifies the manufacturer, distributor,

wholesaler, and retailer against third party liability arising out of the
sale of products by the manufacturer.

The policy can be taken by the manufacturer of any product whether

it be the final product or part of the final product.

A defect in the product, which has been used by the consumer.

A defect in the packaging, which has compromised the safety of the
product.
Inappropriate usage of the product by the consumer due to absence
of/ or wrong labels indicating usage precautions / warnings and
Warranties or representations made at any time with respect to the
fitness, quality, durability or performance or use of "your product“.
All Manufacturing units and all those in the chain of supply whether in the
wholesale or retail trade, Loan License and Contract Manufacturers, On-behalf
Producers as also those on the marketing or the branding side, have Product
Liability exposures and therefore the target market for this class of business is
enormous.

Also this product intends to be of service to the large Indian Exporting

Community who may be contractually bound to effect Product Liability
Insurance.
Rating Parameters
Risk classification/ category
Limit of indemnity
AOA/AOY ratio
Turnover amount
Optional extra covers chosen

Loading for exports to different categories of countries

Optional Extra Cover

Vendor’s liability
Subcontractor’s/ Loan & License Manufacturer’s liability
Add on covers
The policy can be extended to cover liability arising out of judgments or
settlements made in countries which operate under the laws of U.S.A or
Canada (which is an exclusion under the policy) by opting for the North
American Jurisdiction Clause.

The policy can also be extended to cover Limited Vendors Liability for
named or unnamed vendors. Limited vendors liability means liability
arising out of the sale and distribution of named insured products by
vendors with original warranties and instructions of use of the product
specified by the manufacturers.
How to select the sum insured?
In Product Liability Policy, the sum insured is referred to as Limit of
Indemnity. This limit is fixed per accident and per policy period which is
called Any One Accident (AOA) limit and Any One Year (AOY) limit
respectively. The ratio of AOA limit to AOY limit can be chosen from the
following:
1:1
1:2
1:3
1:4
The AOA limit which is the maximum amount payable for each accident
should be fixed taking into account the nature of product covered and the
maximum number of people who could be affected and maximum property
damage that could occur, in the worst possible accident after sale of the
product.
Product Guarantee Insurance provides
-cover against the cost of replacing, reworking or recovering products
that have failed to perform their intended function due to faulty design,
manufacture and installation, after handover to the customer.
-It goes hand-in-hand with Financial Loss and Product Recall Insurance.
-The cover exists because a products liability policy does not cover repair
or replacement of the faulty products themselves nor consequential
losses sustained by the user arising out of these faulty products.

Financial Loss Insurance

The insured is indemnified by this section in accordance with the
operative clause for damages and costs and expenses arising as a result
of any financial loss which is incurred by customers or third parties as a
result of any Product (or part thereof) which fails to perform the function
for which it was manufactured, designed, sold, supplied, installed,
repaired, despatched or delivered by or on behalf of the insured.
A product that fails to perform its intended function can devastate a company's
brand name and profitability.

Products Guarantee - the costs of removing, repairing, replacing, reworking or

recovering products that have failed to perform their intended function due to
faulty design, manufacture, installation etc., after unqualified acceptance by a
customer;

Financial Loss - incurred by a third party as a direct consequence of the defective

product and for which the policyholder is legally liable. These may include the
customer’s recall costs, advertising costs, additional warehousing costs, additional
staff costs, destruction costs, downtime and loss of profits; and

Products Recall - reasonable and necessary costs of recalling the product to the
manufacturers' nominated premises where their continued use or consumption
may cause the policyholder to incur a legal liability either by reason of the
products having failed to perform their intended function, or the use or
consumption could cause bodily injury and/or property damage.
Product Recall Insurance is typically provided as an add-on to a Product
Liability Insurance

The Product Recall Liabilities indemnifies the insured for those sums
that the insured becomes legally obligated to pay as compensatory
damages arising out of recall, removal, recovery of possession or
control, or disposal of the Product that is manufactured, sold,
marketed, handled, or distributed by the insured.

The client has a duty after the discovery of any defect or danger in a
product supplied to take precautions (including a recall of the product if
necessary) against injury or damage caused by it.
He decides therefore to recall such a defective product before it causes
such injury or damage to third parties and to his brand reputation.

Prime examples over recent years have included vehicles, tyres, mineral
water and chocolates.
Product recall situations present real threats to manufacturers.
Hence, maintaining key business relationships, restoring production and
protecting cash flow is absolutely vital.

Skilful handling of a recall not only minimises any damage caused by a faulty
product, but also demonstrates reliability and professionalism to important
wholesale and retail connections – which will be essential components when
the time comes for speedy redistribution and remarketing of the product.

So, what are the Product Recall Expenses ?

These are the reasonable and necessary costs incurred during the 12 month
period commencing on the first day such costs are incurred by reason of
recall, recovery, disposal, or withdrawal.
Product Recall Expenses:

• Communications to notify others of a recall, removal, recovery or disposal of a

product, including but not limited to radio and television announcements and
printed advertisements.
•The cost of shipping the Product from any purchaser, distributor or user to the
place of Insured.
•The actual cost of disposal of the products, but only to the extent that specific
methods of disposal other than those usually employed for trash discarding or
disposal, are required to avoid bodily injury or property damage as a result of
such disposal.
• The extra expense to rent additional warehouse or storage space.
•The cost to hire additional persons other than your regular employees to assist
in the process of communication, shipping and other ancillary responsibilities
arising out of a recall, removal, recovery or disposal of a product.
•Product Recall Expense Liability: Legal liability to pay as compensatory
damages arising out of the recall.
•Consultants Cost: Cost of his expertise
Product Recall Expenses can be extended to include the following:

•The total amount of refunds given to purchasers, not to exceed cost of

goods sold.
• The cost to repair the Product, including the cost to return the Product
to the purchaser, and the cost to repair unsold finished stock.
• If the Product is replaced, the cost to produce or acquire a like
replacement product, including the cost to return the Product to the
purchaser, not to exceed the cost of goods sold.
• If the Product cannot be repaired, reconditioned, decontaminated or
otherwise treated so as to render it marketable, the cost of unsold
finished stock.

This insurance applies only when physical possession of the product has
been released by the insured to others.
Exclusions under Product Recall Insurance:

• A decrease in product sales realized subsequent to the announcement of a

Recall and due to loss of customer faith or approval, as well as costs incurred
to attempt an increase in product sales or to regain customer approval.
Expenses incurred because your product is similar to, or has the same trade
or brand name but is of a different batch than, the product which has been
recalled.
• The cost or expense to repair, recondition, decontaminate or otherwise
treat the recalled products so as to render them marketable.
• Natural deterioration, decomposition or transformation of chemical
structure except as a result of error or omission in the manufacture of the
products.
• Failure of the Product to accomplish their intended purpose.
• Breach of warranties of fitness, quality, efficacy or efficiency.
• An intentional act or omission that was known or should have known to lead
to a Recall.
• Sale of the Product that had been banned or declared unsafe by any
governmental authority
Case Studies:

1977:
Glaxo had a unit at Aligarh (U.P) to make Baby powder/foods like Farex This
brand is now with Wochardt.
Due to some problem in composition of powder then in some batches , the
product was recalled from market. The staff, due to smaller sales volumes,
had a tough time to contact various drug stores and other stores that
marketed baby food and allied items. There were no faxes, TVs in small cities
and emails (internet); phones were only in D.O.T monopoly and sluggish.
The Glaxo brand made deep impression as a socially responsible, ethical and
professionally managed company.
Remember there were no Consumer Protection laws then and concept of
Corporate Social Responsibility and Corporate Governance did not exist in
India, at least.
August 2007- USA.
Mattel Inc. toys, manufactured for them by a Foshan based Chinese
company (the owner, Zhang Shuhong had already committed suicide
(August 14, 2007 news item) for small detachable and swallow-able
magnet in toys and lead (in paint) health hazards allegedly in some
other toys. The recall ran into millions of toys.

The U.S. Consumer Product Safety Commission had issued more

warnings, this time recalling thousands of SpongeBob SquarePants
journals, various spinning tops and children's jewelery, following Mattel
episode.

A class-action lawsuit had been filed against Mattel related to its recall
of more than 1 million lead-tainted toys.
Nokia- Mobile phone batteries BL-5C (manufactured in China but for
Matsushita, Japan) have been recalled for getting overheated and
bursting during charging.
Although most of mobile sets heat up while in use for a longer period
continuously-this is yet to be addressed by mobile manufacturers who are
busy reducing instrument size.

Another issue related to safety in Mobile hand sets is micro/radio wave

emissions that emanate from handsets and being doubted as health hazard
(no conclusive studies are yet available).

In perhaps the largest product recall in India, mobile giant Nokia recalled
46 million batteries pursuant to customer complaints across the globe.
In another case Toyota (Japanese) had to recall 500 thousand Tundra light
trucks for some steering system defect that caused serious accidents.

Cadbury was recently fined $2 Million in Salmonella case (a Typhoid

bacterium and potential bio weapon).

Atico International (USA) recalled about 392,000 coffeemakers sold

exclusively at Walgreen because they posed a fire hazard. The manufacturer
said it has received 14 reports of electrical failure and six reports in which the
coffeemaker ignited.

IBM and computer maker Lenovo announced in September 2006, a recall of

526,000 laptop batteries worldwide made by Sony Corp. because of a fire risk.
The recall affects the lithium-ion batteries found on the ThinkPad Notebook
line of laptops, which were sold by both IBM and Lenovo.

In 1994 Maruti Udyog recalled Maruti 800 cars due to some problem in front
axle components which endangered customer safety on road ( for axle
replacement only, of course).
Thank you