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Hanjin Insolvency – What Should Cargo Owners Look Out For?

Even though the actual likelihood of your product causing property damage or bodily injury is small, the recall implications to the company can be detrimental if it does happen. Product recall incidents are far more complex than those for product liability, as the latter often is confined to a certain number of occurrences whereas product recall could involve the entire batch of the particular merchandise in question. Recalling millions of items is nothing short of a nightmare scenario for most companies, especially for those in the fast-moving consumer goods space.

In order to salvage brand name, drastic and decisive action is critical. Sales are halted, launches are delayed, investigations are launched, delivered goods need to be traced, legal advice has to be sought, public announcements need to be distributed, reports have to be submitted in response to regulator inquiries, replacement units have to be made available, shipment and storage expenses are incurred, refunds need to be processed, returned parts/products have to be properly disposed of, and the list goes on. The costs involved in these activities could be astronomical.

If the product, like many consumer goods, is sold worldwide, the geographic spread and complex distribution networks further complicate the matter, especially with local regulations and parties (wholesaler, retailer and company own shops) involved. Legal costs, fines, and penalties could also pile up as certain countries have stringent laws in protecting consumer safety, well-being, and rights. Customers may also raise claims, and even class action suits.

Sometimes, replacement of goods may require approval by the local regulators, and this brings about further delays in addressing the issue. The longer the matter drags on, the more disadvantageous it is for the company, as the apparent lack of resolution invites negative media attention and speculation, making it increasingly harder to salvage the brand’s reputation.

A few points that product manufacturers should review carefully:

  • If you are the manufacturer of the finished goods, do you source for parts from suppliers outside of your organization? Do you have contractual terms that protect and indemnify you against recall costs if suppliers’ parts are discovered to be the cause of the products being found to be defective or unfit for purpose?
  • If you are a supplier, are there contractual requirements imposed by your customers? Is it only limited to product liability? What about recall costs and possible recourse rights against errors & omissions arising out of your design, production, or service?
  • If the company does have a recall plan in place, has it been tested? Poor management of the process such as confusing advice between the manufacturer, wholesaler, retailer, and regulators may be potentially disastrous. All actions need to be properly coordinated and executed.

Sometimes, product recall coverage is offered as an extension under a product liability insurance policy, however often at a sub-limit and with limited coverage. Some companies jump at this inadequate solution just so that they can check another item off their list without giving it too much thought. However, recent cases of product recalls in Asia involve costs in the hundreds of millions of US dollars, greatly exceeding product liability claims. The aftermath of loss of sales and market share can also dramatically impact the company’s share price as well as directors’ responsibility. In the worst case scenario, the sustainability of the company as an ongoing entity comes into question. Many of these exposures can be contained using a properly-designed recall plan, supplemented by a tailor-made, standalone product recall insurance policy with an appropriate insured limit.

Today, we live in a highly competitive world where companies strive for innovation and efficiency. The pressure could sometimes lead to shortened R&D cycles and hence it is even more important that the businesses adopt proper product resilience risk management. With an increased risk of things going wrong due to the time and resource constraints, as well as the higher stakes involved when things go wrong due to the ubiquitous use of social media and easy sharing of user reviews, companies are in greater need than ever to manage their product safety throughout the entire product life cycle.