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Product recall and liability insurance: How automotive businesses can limit their exposure to losses

Learn how Marsh's automotive product recall and liability insurance and integrated risk management led to better coverage and claims outcomes.
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By Ichiro Seino , 

Marsh Japan

08/27/2023 · 6 minute read

As Asia’s automotive industry outpaces competition in innovation and technology, the risks of product recall and liability have never been greater. Recently, regulators in China ordered a massive recall of 1.1 million vehicles from an automaker over a braking defect.1

Meanwhile, securing adequate product recall and liability insurance capacity and/or coverage pose additional challenges to automotive companies. For original equipment manufacturers (OEMs) and parts suppliers, there is a considerable gap between the product recall insurance limit they can obtain (up to US$10 million in most cases) versus the costs of a recall event, which typically exceeds the limit by ten times or greater.

Parts suppliers face further stress as they typically bear most of the product recall liability in their contracts with OEMs. For instance, a Korean battery manufacturer bore 70% of the costs of a US$890 million recall, which lowered its operating profit for the year by nearly 24%.2 

Combined, these factors can have a severe impact on the automotive company’s balance sheet following a recall. In Japan, a company’s defective airbags led to its bankruptcy following the recall of about 122 million vehicles worldwide at the cost of US$12 billion,3  with legal liabilities estimated at US$15 billion (including US$850 million for automaker compensation).4

How do automotive companies respond to the existential threat of product recalls beyond their insurance coverage? These three case studies reveal how an established risk advisor and insurance broker with local industry and claims expertise across the globe, powered by proprietary data and analytics, can play a key role.

Uncovering critical coverage gaps in existing product recall policies

Regular risk profile updates through risk analysis can help uncover potential exposure ‘blind spots’. With the help of insurance placement experts, automotive parts suppliers can also obtain optimal insurance limits covering both local and global markets:

Case study #1: Securing more comprehensive coverage at the same cost for a major EV battery manufacturer

Having suffered a sizeable claim that their product recall insurance policy might not fully cover, a major EV battery manufacturer in Asia approached Marsh to review their existing coverage and ensure its solidity.

Marsh’s regional casualty team first conducted an in-depth analysis of their existing policy wording and highlighted the gaps and deficiencies in relation to the client’s risk exposure. Based on the analysis, Marsh presented the client’s risk to insurers with an updated risk profile and managed to obtain more comprehensive coverage at the same premium and deductibles as the previous policy. The coverage obtained was also at the full capacity required to cover the client’s exposure globally and comply with their OEM partners’ requirements.

Additionally, Marsh set up a recall workshop to help the client understand the complexity of the product and its exposures. From start to finish, Marsh played an integral role in helping the client identify risk gaps, key issues and obtaining a more comprehensive insurance coverage to enhance their protection against potential loss.

When data-driven effort and industry expertise are put towards improving the automotive company’s risk profile, insurers may potentially be more open to providing additional capacity with preferential terms and conditions.

Fulfilling automotive businesses’ growth ambitions with seamless cross-border service

Automotive companies aspire to grow their business and establish a client base outside their local market, where product recall and liability regulations may differ. This case study shows how these companies can safeguard their interests while seizing new business opportunities — enabled by automotive risk management and insurance broking expertise that coordinate seamlessly worldwide:

Case study #2: Facilitating a major Asian auto OEM’s expansion into US and Europe

Intending to expand its operations into North America and Europe, a major Asian EV OEM was unsure of the regulatory risk exposures in these jurisdictions and the appropriate risk management and insurance approach. 

Marsh offered an end-to-end solution to identify and manage the client’s liability risk exposures. First, Marsh organised a workshop covering claims, exposure analysis, legal frameworks in different countries, coverage options, global program structures and functions, contractual analysis, methodologies to reduce risk exposure contractually, and industry practices to aid the client in understanding their risks. 

Following that, Marsh conducted benchmarking and risk analysis to establish the client’s maximum possible loss, as well as adequate insurance limit and retention. With clarity on their risk picture and the coverage and capacity required, Marsh helped source sizeable capacity from Asian and London markets to structure and place a Global General Liability Program with a US$100 million limit.

Throughout the process, the OEM client benefitted from the seamless cross-border coordination of Marsh teams, which helped them obtain the coverage to meet the client’s needs at an optimised cost of risk, and established a global program with full in-country support across all jurisdictions.

Supporting automotive businesses with claims expertise

When a product recall claim occurs, automotive parts suppliers may face severe challenges and disputes arising from the determination of liability. This case study shows how an EV battery manufacturer called upon Marsh to conduct an in-depth investigation with a root-cause analysis to fairly attribute liability:

Case study #3: Helping an EV battery manufacturer limit losses in the determination of liability dispute

Customers of an automaker’s electric vehicle (EV) experienced battery fires, resulting in a government regulator ordering a full product recall of affected EV models. A dispute arose on which party was liable for the defect. 

Marsh’s Claims Solutions team provided an expert to conduct a full root-cause analysis. This established potential issues in the battery manufacturing processes that could have caused thermal runaway and resulted in the battery fires. Marsh’s Claims Solutions team then used this information to establish that liability was an issue for the client, requiring coverage above full policy limits or in excess of US$35 million. 

In this instance, Marsh’s claims expertise was vital to attributing liability for the recall and establishing the quantum above policy limits through additional root-cause analysis, demonstrating entitlement to full policy limits.

Mitigate your product recall risk with an integrated approach

An effective risk management strategy for product recall is vital in reducing an incident's negative financial and reputational impacts on your company. As the above case studies show, safeguarding automotive businesses from potentially catastrophic product recall and liability losses requires risk advisory expertise backed by proprietary data and analytics capabilities, encompassing the following:

  • Business continuity management: Robust operational processes and verified quality control backed by a product recall plan that is independently reviewed and regularly tested, incorporating process and governance, information management, stakeholder management and resourcing.
  • Enterprise risk management and risk quantification: Financial impact modelling and supply chain analysis (e.g. due diligence, supplier selection and traceability, contractual reviews and risk allocation) to identify and accurately quantify product recall risk exposures.
  • Crisis management: Incorporating planning, training key staff, establishing key roles and responsibilities for recall scenarios, and facilitating realistic recall scenario-based exercises. Implementing a crisis communications and response plan that can be effectively operationalised, with or without Marsh’s support, according to the client’s needs.

Limit your exposure from automotive product recall and liability losses with Marsh’s risk advisory and insurance broking expertise.

Schedule a chat with a Marsh Automotive and EV representative today.

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1Engadget. (2023). Tesla recalls over 1.1 million cars in China over braking flaw
2Nikkei Asia. (6 March, 2021.) LG Chem agrees to cover most of Hyundai's $900m EV recall
3Eurofenix. (Winter 2016/2017). Takata: The unfortunate recall
4Reuters. (Jun 2017). Japanese airbag maker Takata files for bankruptcy, gets Chinese backing

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