Commentary From Counsel - Product Recalls - Issue Spotting in Commercial Lines

This month, I thought I would take a break from Covid-19 updates (fatigue, anyone?), employment issues, legislative prognostication and even insurance regulatory concerns, and highlight some issues you may encounter on the commercial lines side of your agency with clients who experience product recall, retrofit and field campaign situations. As many of you know from our discussions over the years, a substantial portion of my practice is devoted to product safety and product liability issues, including both counseling and litigation. On the counseling side, we regularly assist with hazard communications (e.g., warnings, manuals, instructions and advertising), regulatory scenarios (e.g., consumer products and automotive) and post-sale remedies, such as recalls.

One of our initial questions when it comes to recalls is whether the company has recall insurance. I am sure you are aware that recall insurance is not as common as product liability insurance, and the terms of recall policies vary greatly. I will save commentary on recall insurance for another day. Even where there is no recall insurance (or in the quest to find out if there is), as a trusted advisor, the insurance agent or broker with whom the company works will often be a first contact when a potential recall scenario pops up. In this column, I am going to provide some general overview of concerns and issues you may hear and spot that should ordinarily send the client to experienced recall counsel.

As a threshold matter, many regulated products (i.e., products where one or more government agencies have jurisdiction over their safe use, like consumer products with the U.S. Consumer Product Safety Commission (CPSC), or automotive products, including vehicle accessories, with the National Highway Traffic Safety Administration (NHTSA), to name a few) are subject to strict reporting obligations when manufacturers, distributors or retailers learn of potential product safety issues. Note that I said potential safety issues—the final conclusion on the issue may be in doubt, but a reporting obligation may already be triggered.

The reporting regimes are too lengthy to be summarized in this column, but be aware that time is of the essence, and many companies have incurred substantial fines for late reporting. It is also important to understand that not every report leads to a recall, as the agencies will work with the company to determine whether corrective action is needed and, if so, what the scope of the corrective action needs to be.

Regulated products, as discussed above, have statutory and regulatory thresholds, definitions and agencies devoted to determining whether a company needs to take action with products already in the field. Again, entire seminars are devoted to these thresholds and requirements, but for purposes of spotting the issue when a client calls, if there are reports from end-users (or warranty or service data) that product problems may be leading to safety risks, then it is time to promptly investigate and get legal advice. Earlystage companies may not fully appreciate where the line is in terms of regulated products and which agency they may be dealing with, which can lead to the kind of reporting delay and penalties discussed above.

Outside regulated products, the same triggering facts, data and reports from the field should lead to a similar investigation, but that investigation will be driven more by industry standards, expertise and outside consultants, all of which will be used to inform the judgment of the company and its counsel on taking action.

Regardless of industry, field campaigns and recalls take on a number of common characteristics: a public notification to product users that explains the problem and the solution; a means to implement the solution (return product, repair, replace, refund, etc.); and tracking the success of the corrective action to ensure that the campaign is successful in reaching as many users as possible.

In addition to lawyers, there are a number of consulting firms that assist with recall logistics, which can greatly benefit smaller companies whose internal resources may be stretched thin.

Another common question from companies considering a recall is whether the recall will hurt them in future litigation over the product. The first response to this question is simple: it does not matter, because the first priority is to ensure your product is being used safely. The second (more reassuring) response is that generally a recall cannot be used against a company in product liability litigation involving incidents that occurred before the recall. Sparing you too much legalese, the recall is considered a “subsequent remedial measure” which, under most jurisdictions’ rules of evidence, is not admissible in court.

The decision whether to report and recall a product is never simple, but it is always time-sensitive and critically important. Brushing off the possibility, or burying one’s head in the sand, is almost always a recipe for disaster. If your clients come to you with product safety concerns, ensure that they deal with them seriously and with competent counsel by their side.