Product Recall Written by Michael Lincoln and Donna Niblock The Liberty White Paper Series
Executive Summary The growth of the global supply chain in recent years has had a significant impact on managing product quality and safety. It has also resulted in a significant change in the type of product recalls occurring in the market. One of the significant changes has been the substitution of locally made products and components, with products and components sourced from overseas suppliers. Managing the quality of these products is challenging for importers. This shift in manufacturing from onshore to offshore does not eradicate or remove local Australian companies responsibility for product safety. If anything it can make the risk management of product safety more difficult as the sourcing and manufacturing of components and products can be geographically a long way away, making it more difficult to supervise. A company may be more likely to hear about a problem from a customer, rather than it being picked up on the production line. The aim of this whitepaper is to further investigate the legal responsibilities of importers, some of the exposures they need to consider, and the potential financial impact if things go wrong. Table of Contents What are the legal requirements of an importer? What extra responsibilities does the Australian Consumer Law impose on importers? What are some of the exposures facing importers? What are some of the challenges importers have experienced when dealing with incidents? What are some of the most common recalls? Risk Transfer What are some of the costs when a recall occurs? Summary About the Contributors
What are the legal requirements of an importer? Under the Australian Consumer Law (ACL), importers of goods must guarantee that products are of acceptable quality if the manufacturer of the goods does not have a place of business in Australia. Goods are of acceptable quality if they are: fit for all the purposes for which goods of that kind are commonly supplied; acceptable in appearance and finish; free from defects; safe; and durable. What extra responsibilities does the Australian Consumer Law impose on importers? The ACL introduced legislation in 2001 relating to consumer products safety and in particular a mandatory reporting regime that requires importers, suppliers, wholesalers and retailers to notify the Commonwealth Minister when they become aware a consumer good or product-related service they supplied has caused, or may have caused: death; serious injury; or illness. A serious injury or illness is an acute physical illness or injury requiring treatment by, or under the supervision of, a qualified doctor or nurse. The medical or surgical treatment can be provided in a hospital or clinic, or in a similar place such as a regional or rural clinic. Notification to the Commonwealth Minister in the above circumstance must be provided within two (2) days of becoming aware of the incident. What are some of the exposures facing importers? LIU s Senior Risk Engineer who works closely with LIU s Crisis Management clients, Angelo Maniatis, highlights the following four key exposures for importers: Contracts Contractual relationships are particularly important for clients dealing with overseas manufacturers. Some key issues to look for when reviewing a contract include: the responsibilities of each party and who is liable if a product safety incident occurs; the applicable jurisdiction or governing law should a dispute arise between the parties; the responsibilities of the importer under the ACL; and any requirement for the manufacturer to have Product Liability insurance or Product Recall insurance.
Quality Assurance Plan Even though an importer doesn t manufacture the product, they are still legally responsible for the safety of the product. How can the importer make sure that the product being imported is safe for sale? A good Quality Assurance Plan demonstrates how a company manages their supply chain. Some key areas of a Quality Assurance Plan include: procedures for complaints and incidents handling; who the importer has appointed to ensure procedures are being adhered to by the manufacturer (for example, importer staff or third party auditors); well-documented product specifications and quality and manufacturing standards that the manufacturer must adhere to; manufacturer s details including relationship history with the manufacturer; minimum requirements, due diligence and the selection process for new manufacturers (for example, does the importer audit the site or is an independent third party used to audit the site); whether the manufacturer is permitted to contract out any work to third parties and details of how components should be sourced by the manufacturer; how the manufacturer should test and inspect the product during the production process; and any rules or restrictions regarding the manufacturer changing component suppliers or product specifications. Testing A final check for any product is the testing procedures of the finished product. This needs to be tailored to the product considering the risk exposures and the volume of the product produced. Some key considerations include: the testing regime in place for the final product; when products need to meet an Australian Standard or equivalent the steps and procedures in place taken to confirm the standards are being met; the retention samples being retained by the importer; and the details of any third party independent testing being conducted. Traceability/ Recall In the event of an incident requiring products to be recalled, the severity of the incident will be impacted by how well an importer can trace the products. Some key drivers of a good traceability system include: the backward traceability of components in finished products. If a problem is identified in a number of different batches of finished products, the process with which the common components can be tracked and analysed is very important; the forward traceability of components. If a problem is identified in a component of a product, the process with which these components can be tracked through to the final products; tracking of product batches through the distribution process, including to retailers, distributors or final end users; and a well-documented recall plan to help the importer contact the appropriate people and respond to what will be a stressful incident.
What are some of the challenges importers have experienced when dealing with incidents? There are various challenges in relation to the importation of products into Australia. The most common problem importers have reported to LIU is ensuring the manufacturer s product meets the importer s specifications. Manufacturer s materials are often changed and substituted to achieve lower manufacturing costs so if the importer is not testing the products to ensure its specifications are being adhered to there is an increased risk of the product being defective. Consumer products, including toys, need to meet Australian and/or Industry Standards so it is the importer s responsibility to ensure the product is of acceptable quality. Importers may also experience issues if they agree to a manufacturer s limitation of liability clause that only provides for the replacement of defective products. This leaves the importer out of pocket for the recall expenses including retailer recall costs and loss of profits if a defect occurs. The ACL, in relation to mandatory reporting, has also put pressure on importers to have well-documented recall procedures, however, in a lot of cases importers don t have their own recall plan. Having a well prepared recall plan means the importer can focus on managing the incident and minimising the impact to the importer s brand and reputation rather than trying to work out how to manage the incident. For most of our clients, any incident will be the first recall related incident they have been involved in. It can be a very stressful situation when a customer complaint quickly escalates into simultaneous requests from retailers, the regulator and the media. In many cases, how a client responds can have either a positive or negative impact on a client s brand and reputation, depending on how the incident is handled. The importer is likely to only have limited information about the incident and limited time to make a decision about how to handle it. In these cases it is often beneficial for the importer to get an independent party with experience in handling these type of incidents (such as Intelligent Risks who are on LIU s response panel) to sit on its Crisis Management team to provide advice on the best ways to handle the incident. In these situations, the importer must make the final decision on how it should respond to the incident, but hopefully it is a more informed choice taking into consideration the potential pros and cons of various responses. What are some of the most common recalls? The most common recalls we see are in relation to kid s products, such as kid s toys and furniture, and electrical products including small appliances, white goods and tools. The most common reason for a kid s product recall is because the product poses a choking hazard and for electrical products the most common reason for a recall is because there is the potential for electric shock and/or a fire hazard. The table below contains information obtained from the Australian Competition and Consumer Commission website regarding recalls that have occurred in Australia since 2011 of various consumer products: Product Category Total 2013 2012 2011 Electrical 115 29 55 31 Kid s Toys 89 47 29 13 Recreation 65 32 23 1 Sports and Fitness 54 12 28 14 Kid s Clothing 25 8 10 7 Garden Tools 23 6 8 9 Clothing and Sunglasses 7 5 0 2
Risk Transfer Importers of consumer products seem to be more exposed to the risks associated with manufactured goods. It s increasingly important to ensure that the insurance programme is appropriate to each company s exposures and is designed to respond with adequate cover in the event of a recall incident. The financial impact of a product recall can be highly damaging. In many cases Product Recall is excluded under standard Product Liability Insurance policies and therefore little, if any, cover is provided for a client s loss. LIU s PRplus Insurance policy may offer broader protection than recall expenses cover offered by standard Product Liability Insurance policies. In addition, LIU s PRplus cover can be varied to meet the specific needs of an organisation, including additional cover and limits to match exposures. We have seen many examples where standard recall expenses cover in Product Liability Insurance policies will cover less than 5% of a client s losses arising from a recall. The substantial differences between the coverage provided by a standard recall expenses cover in a Product Liability Insurance policy and LIU s PRplus Insurance policy are outlined below: Standard Recall Expenses in a Product Liability policy PRplus Advertising, transport and destruction Retailer Recall Costs x Replacement Product x Repair x Loss of Profits x Rehabilitation Expense x Third Party Financial Loss (via endorsement) x What are some of the costs when a recall occurs? The actual recall costs of an incident are most often the smallest costs incurred as a result of the recall. The expensive items usually include replacing the product and loss of profits. The table below sets out the typical split of losses that we see in a recall incident: Covered Loss % of cost Recall Costs (including advertising, transport and destruction) 5% Retailers Recall Costs 31% Replacement 21% Loss of Profit 37% Rehabilitation Expense 6%
Summary Australian companies supplying consumer goods face many challenges, one of which is the increased risks associated with the distribution of products made up of components sourced from overseas suppliers. With increased legal regulation of product safety resting with Australian importers, ensuring protection against the costs and potential damage of a product recall incident is paramount. The cost of a product recall can be debilitating and these costs are made up of more than just the recall of the product. There are many other costs to be considered, such as replacement, loss of profits and rehabilitation expenses. Each Australian company supplying consumer goods is responsible for notifying the Commonwealth Minister of any consumer product or product-related service which has caused injury, illness or death. They are also responsible for testing the products they distribute in Australia, no matter where the parts of the product are sourced. Consumer products need to meet Australian and/ or Industry Standards and each importer should have welldocumented recall procedures. As product recalls continue to rise in Australia, appropriate insurance programmes will help to reduce and transfer the risks associated with this exposure and help minimise the impact to the company.
About the contributors Donna Niblock Michael Lincoln Michael is the Underwriting Manager for LIU Asia Pacific Crisis Management team and has been in this role since the inception of Crisis Management team at LIU Asia Pacific in late December 2008. Michael has helped position LIU as a leading recall market in the Asia Pacific region, working with international and regional brokers to deliver solutions for a wide range of diverse clients. Prior to this Michael was at a leading multinational insurer for 8 years holding various Crisis Management roles, with the final role held being Manager for Crisis Management Australasia. Michael holds a Bachelor of Economics from Macquarie University and has over 19 years experience in the insurance industry, with 12 of these in Crisis Management. Donna joined LIU Asia Pacific in 2008, bringing with her five years of Crisis Management insurance experience. Donna launched LIU Asia Pacific s Crisis Management product suite and is responsible for new business development and enhancing the existing product suite. Donna has extensive underwriting experience in specialist insurance areas including Contaminated Products, Kidnap, Ransom and Extortion and Product Recall. Her insurance resume spans over ten years and includes four years in Commercial Property insurance with a leading Australian insurer followed by a similar period with an international insurer. Donna is a Senior Associate with ANZIIF. Angelo Maniatis Angelo is the Assistant Vice President for Risk Engineering services in Asia Pacific. He is a Civil Engineer with seventeen years of practical experience, with more than ten of these being in the insurance industry. Prior to joining LIU Angelo worked in the insurance industry as a Risk Engineer with involvement across all insurance product lines, specialising in Product Liability and Life Science risks. In his role as Risk Engineer Angelo has worked with clients across a range of industries, including electrical appliances, food manufacturing, pharmaceuticals and medical devices, transportation and oil and gas. Angelo gained his Civil Engineering qualifications with Honours from the Royal Melbourne Institute of Technology, and also holds a Graduate Diploma in Business Management from Deakin University. LIU DISCLAIMER The information in this document is presented by Liberty International Underwriters (a trading name of Liberty Mutual Insurance Company ABN 61 086 083 605 Incorporated in Massachusetts, U.S.A. The liability of members is limited). The information contained herein should not be considered legal advice or loss control or prevention advice. This information is intended to provide general information only. You should not act on the basis of information contained within this communication without first obtaining specific professional advice. Insurance coverage is subject to the terms and conditions of the policies as issued. Whether or to what extent a particular loss is covered depends on the facts and circumstances of the loss and the terms and conditions of the policy as issued and the risks involved. This information is current as at December 2013.