Insu­red event in auto­mo­ti­ve pro­duct recall insurance

Judgment of 16 Decem­ber 2021 of the Hig­her Regio­nal Court of Bam­berg, Case No.  1 U 79/20

Facts of the case

The case befo­re the Hig­her Regio­nal Court of Bam­berg invol­ved a dis­pu­te bet­ween an auto­mo­ti­ve sup­pli­er and its insurer as to whe­ther a loss cover­ed by their lia­bi­li­ty insu­rance poli­cy (par­ti­cu­lar­ly the pro­duct recall com­po­nent of the poli­cy) occur­red within the term of the poli­cy or only after the term had expi­red. The term of the poli­cy which had been agreed upon bet­ween the sup­pli­er and the insurer expi­red on 1 Janu­ary 2015 (at 12:00 PM CET).

In 2014, the sup­pli­er sup­pli­ed its cus­to­mer (an auto­mo­ti­ve manu­fac­tu­rer) with defec­ti­ve cams­haft adjus­ters, which were then instal­led in the engi­nes. When the cams­haft adjus­ters began to cau­se break­downs in the end cus­to­mers’ vehic­les, the customer’s pro­duct safe­ty com­mit­tee deci­ded to replace them in 2014 and orde­red a fati­gue ana­ly­sis. In March 2015, the cus­to­mer began to launch “recall” and repair shop campaigns.

The ques­ti­on befo­re the court was, in par­ti­cu­lar, whe­ther and at what point in time a loss occur­red with respect to the supplier’s pro­duct recall insu­rance poli­cy. In accordance with the under­ly­ing terms and con­di­ti­ons, the poli­cy was to cover not only a “recall” but “inter­nal ins­truc­tions” as well.

Grounds for the ruling

The court denied the supplier’s cla­im against the insurer becau­se no loss occur­red during the term of the policy.

The court found that, while a “recall” in terms of the poli­cy did occur in March 2015, this recall occur­red only after the term of the poli­cy had expi­red (i.e. after 1 Janu­ary 2015) and was the­r­e­fo­re not covered. 

The court found that neither the pro­duct safe­ty committee’s decis­i­on nor the orde­ring of a fati­gue ana­ly­sis in 2014 con­sti­tu­ted a loss in terms of the policy.

The court ruled that an event does not qua­li­fy as a “recall” in terms of the poli­cy if the cir­cum­s­tances are limi­t­ed to “inter­nal decision-making pro­ces­ses and inter­nal reso­lu­ti­ons within the manufacturer’s com­pa­ny.” Rather, such an event requi­res a call to vehic­le owners out­side the company.

The court also rejec­ted the argu­ment that the mea­su­res taken in this case qua­li­fied as “inter­nal ins­truc­tions” (which would have been cover­ed by the poli­cy). It noted that a loss resul­ting from inter­nal ins­truc­tions may be assu­med in case of “mea­su­res and cos­ts in advan­ce of aver­ting a dan­ger” and “dis­as­sem­bly and assem­bly cos­ts out­side of aver­ting a hazard.” The court found that “mea­su­res and cos­ts in advan­ce of aver­ting a dan­ger” in terms of the poli­cy can only be assu­med if “the defect in the supplier’s pro­duct is noted pri­or to deli­very of the final pro­duct (the vehic­le) from the vehic­le manufacturer’s plant.” But the defect was found only after the vehic­les were deli­ver­ed to the end cus­to­mers. The court ruled that the insurer is also not requi­red to pro­vi­de covera­ge for “dis­as­sem­bly and assem­bly cos­ts out­side of aver­ting a hazard” sin­ce the text of the poli­cy cle­ar­ly sta­tes that the­se cos­ts are to cover­ed only if the­re is no sub­se­quent recall. But in this case, the cams­haft adjus­ters were recal­led in March 2015.

Con­se­quen­ces in practice

This ruling demons­tra­tes once again how important it is to moni­tor and review insu­rance poli­ci­es and con­tracts, not only with respect to their mate­ri­al pro­vi­si­ons, but with regard to timing as well. This is all the more the case if the affec­ted com­pa­ny has swit­ched insu­r­ers or is plan­ning to do so. Fai­ling to con­sider con­se­quen­ces and to con­duct a detail­ed review of a company’s con­tracts with both insu­r­ers and cus­to­mers may result in unex­pec­ted gaps in covera­ge, as demons­tra­ted in the pre­sent case. The wide varie­ty of lia­bi­li­ty and cost risks can be pre­ven­ted by for­mu­la­ting con­tracts in a careful and forward-looking man­ner. Accor­din­gly, com­pa­nies would gene­ral­ly be well-advised to careful­ly review their insu­rance poli­ci­es as well as their (cus­to­mer) contracts.


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