High recall rates under difficult market conditions
The current (world) market situation poses many challenges for the automotive industry, especially for supplier companies. Supply chains are stressed by pandemic measures, raw material/material/energy shortages and associated inflation. In addition, the number of recalls in Germany has risen in recent years and the number of newly registered vehicles has fallen in parallel. These developments are leading to increasing recall rates. For suppliers, this situation is problematic (also) from an insurance perspective and is threatening to get even worse.
Recall cost insurance as part of comprehensive risk protection
A recall campaign can quickly cost millions. As a rule, however, neither “general product liability insurance” nor “general business and professional liability insurance” covers the damage caused by a recall. This results if only from the respective underlying (general) terms and conditions of insurance, unless the individual agreements with the insurer stipulate otherwise. The interest in covering recall risks is therefore served by so-called “recall cost insurance”, for which the German Insurance Association (GDV) provides (non-binding) specimen terms and conditions (“General Insurance Conditions for Business and Professional Liability Insurance (AVB BHV) A5 Recall cost risk for motor vehicle parts suppliers”).
Challenges for suppliers
Particular challenges for suppliers arise from the fact that they are often in a doubly weakened position: On the one hand, OEMs pass on the costs associated with a recall to suppliers through contractual extensions of liability. Such extensions of liability are often accepted by suppliers, even if they go beyond the scope of statutory liability. On the other hand, the recall costs insurance excludes precisely those claims that exceed the scope of statutory liability based on a contractual agreement (cf. Section A5‑3.3 AVB BHV). The specific impact of such individual agreements between suppliers and OEMs on insurance coverage (in particular on any risk exclusions) is subject to a case-by-case review.
Increased recall rates and the difficult market situation further exacerbate this dilemma. Together with high and hard-to-calculate loss volumes for recall cost insurance protection, this means that insurers sometimes only offer insurance cover at all under narrow conditions. Such conditions include increased premiums, high supplier deductibles and extended risk exclusions. The trend is that the further up the supply chain they are or the closer they are to the OEM (especially for tier 1 suppliers), the more difficult and risky it becomes for suppliers.
It is becoming increasingly difficult for suppliers to obtain cost-effective insurance cover on good terms. The aforementioned liability and cost risks can only be countered through cautious, forward-looking contract design vis-à-vis the OEM and/or the use of optional insurance extensions. The latter, however, is associated with increased costs.back