The recent recall of Cadbury chocolate bars after a salmonella scare illustrates the difficulties in dealing with a potential safety problem with a product. A product recall can be expensive and a manufacturer may well look to pass that cost on to third parties and their recall or liability insurers if they can. This article examines the general duty on a manufacturer to undertake a recall and discusses whether insurers might have to pick up the tab.
Deciding whether the recall of an ‘unsafe’ product is necessary can be a difficult process. In situations where there is a risk to health, the decision will be ‘how to’, rather than ‘whether to’, recall. In other cases the safe option from a risk management and a public relations perspective is to recall, however, the merits of whether a recall is legally necessary may be more finely balanced.
Certainly if the reports that the salmonella in Cadbury bars was detected some months prior to the recall are true, the assumption must be that the risk to health was deemed too unlikely to necessitate a recall. It appears that the Food Standards Agency subsequently disagreed. As this potential difference of opinion highlights: when is the likely injury or damage from the product too minor or too remote? When is the potential efficacy of the recall too poor to justify it? If the number of unsafe products in circulation is small, is not recalling the product justified? Although the question may not be phrased so explicitly, when is it too expensive?
Product recalls are becoming more common with some reports seeing a doubling or tripling in reported recalls over the last couple of years. However, despite the General Product Safety Regulations 2005 (‘the GPSR’), and leaving aside sectoralspecific regulations, the legal requirements are still unclear. Manufacturers are obliged to place ‘safe’ products on the market. A safe product is one which presents no risk or the minimum risk compatible with its use and which provides a high level of protection for consumers. If an unsafe product is placed on the market the manufacturer is obliged to notify the enforcement authority and advise them of the steps they plan to alleviate the issue. The GPSR fails to define ‘the acceptable level of risk’ either in quantitative terms or in terms of a balance between risks and costs or what is reasonably practicable. Instead manufacturers are left with an obligation to take steps ‘commensurate with the characteristics’ of the product. The DTI accepts that ‘the nature and extent of action necessary will vary considerably depending on the product, the risks inherent in its use and the type of consumer’. The most serious breaches of the general safety requirement can lead to up to 12 months imprisonment or a £20,000 fine.
Prior to the GPSR there was common law authority for a duty to recall unsafe products. In Walton v British Leyland (1978) despite ‘mounting and horrific evidence’ of wheels coming adrift from Allegro cars, British Leyland decided that a recall campaign of £300,000 was not justified and instead mounted an educational campaign for their franchised outlets. The information supplied did not stress the urgency or seriousness of the problem. While accepting that manufacturers ‘have to steer a course between alarming the public unnecessarily and … observing their duty of care towards those whom they are in a position to protect’ the judge held the duty was to ‘make a clean breast of the problem and recall all cars’. Likewise in E Hobbs (Farms) v The Baxenden Chemical Co (1992), the Court held that a duty to warn can be a continuing one saying ‘a manufacturer’s duty of care does not end when the goods are sold. A manufacturer who realises that omitting to warn past customers about something which might result in injury to them must take reasonable steps to attempt to warn them, however lacking in negligence he may have been at the time the goods were sold.’
A manufacturer who gets the decision to recall wrong can find himself with both civil and criminal liability. With such penalties in prospect, the tendency to recall is strong.
Who will pay for the recall?
Where there is risk, there is insurance and certainly it is expected that the product recall market will expand as the trend for recalls increase. Beazley, QBE and AIG, traditionally strong in product recall, are being joined by new comers such as Catlin. However it is still true that relatively few manufacturers will have recall insurance. If the product is unsafe because of a component supplied by a third party it is more than possible, and indeed we have seen on several occasions, that the liability insurer of the supplier will pay for the recall.
Will a liability policy respond?
Whether there is liability cover will depend on several factors. First, imminent injury or damage is generally not sufficient to trigger a product liability policy. Second, liabilities are generally limited to those incurred ‘in respect of property damage or personal injury’. Considered in cases such as Rodan v Commercial Union (1999), this phrase requires that the liability must be in consequence of the physical loss or damage and not something else such as the breach of contract. Some of the costs associated with a recall may not have sufficient causal connection to fall within that qualifying phrase. Third, most product liability policies will have some form of exclusion for the costs or expenses of recalling the insured product. The general intention of such exclusions is to make it clear that the policy relates to physical consequences not mere financial consequences. However where the product being recalled is not the component itself but the product it is a part of, that exclusion is less likely to exclude the costs of the manufacturer’s recall. Finally, liability policies respond to legal liability: a supplier may like his insurer to pay for the recall for commercial reasons, however, to establish legal liability, the insurer will need to be satisfied that the decision to recall and the manner of the recall were necessary. The extent of the legal liability may of course depend on the manufacturer’s duty both under common law and under the GPSR to actually undertake the recall in the first place.
Conclusion
The decision to recall can be a costly one both for manufacturers/suppliers and their insurers. With the introduction of the GPSR, recalls will become more common. Manufacturers or their recall insurers will look to pass the costs of those recalls onto a third party if they can. Product liability insurers may want to review exactly what costs they want to cover in this regard and whether those costs are factored into the premium.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
