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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