Recall Insurance Seen Scarce For Foreign Products

WASHINGTON–Insurers have limited capacity to provide product recall insurance that a new Senate bill could require foreign product distributors, a broker is warning.

Tom Coughlin, director of marketing for Willis Corp., N.A., said the industry lacks the resources to provide all the coverage that would be required to comply with the legislation, which was introduced Sept. 20 by Sen. Sherrod Brown, D-Ohio, and Sen. Bob Casey, D-Pa.

He said the carriers are in a better position to provide product liability insuring the safety of products, which the measure would also require.

“The Food and Product Responsibility Act of 2007″ would require that distributors of food and consumer products demonstrate the financial capacity to cover risks associated with recalls and product safety.

The bill was introduced following a recent spate of recalls involving imported food and consumer products such as toys.

According to the bill's sponsors, the measure would require the U.S. Customs and Border Protection, working with other agencies, to develop a program ensuring distributors are able to cover the costs associated with both product recalls and all personal and property damages that may occur as a result of a defective product.

Distributors would have to demonstrate that they possess product recall and liability insurance or have sufficient financial resources to afford a recall and any subsequent damage claims, the legislators said.

Joel Wood, senior vice president, government affairs for the Council of Insurance Agents and Brokers, said Senator Brown's staff had sought his group's input “early on, and we were grateful for the opportunity and grateful for their receptivity to our ideas.”

He added that, “We think their goal here is absolutely admirable. Product liability and product recall insurance are key ingredients in mitigating risk, but they're not the only vehicles, and the Brown/Casey legislation reflects that reality.”

Mr. Wood said that “it is true that there is not much current product recall capacity, and we hope that the national focus on safety and quality will evolve new opportunities in that marketplace. “What's good about this bill is that it does underscore the need for safety, mitigation, and financial certainty in the import arena,” Mr. Wood added. “We think Congress should examine these issues carefully, and we're grateful for this first effort.”

Products covered under the proposed legislation would include auto parts, food, drugs, devices and cosmetics, biological products, consumer products, meat, meat products, poultry, poultry products, and eggs and egg products.

Mr. Coughlin at Willis said his interpretation of the bill is that it does not require insurers to provide the coverage.

There are other litmus tests of financial accountability that could be used by federal regulators to ensure compliance with the provisions of the bill if it becomes law, he said.

The agencies would have the authority to come up with a variety of methods to meet governmental financial security requirements, he said. But, since no copy of the legislation has yet been posted, Mr. Coughlin said it remains unclear what proof of financial security will be required.

He said that product recall insurance is available, but “in somewhat limited capacity.” He said Willis agrees with the comments by the Council of Insurance Agents and Brokers that product recall insurance is an “important product, but to our knowledge the industry played no role in suggesting this legislation.”

He said there are two insurance issues dealing with consumer product imports. One issue is product liability insurance, “damage to people using the product in question.”

The second issue is product recall, he said. “There is a large and robust market for product liability insurance,” Mr. Coughlin said. “But product recall insurance is a much more limited, specialty line, which is offered by far fewer underwriters, and therefore, has much less capacity available,” he said.

The reasons, he said, is that the risks are unknown in the area of consumer product recalls, “but the cost tends to be very high when they do occur, because there is the cost of physical itself, as well as the withdrawal and inspection of product.

“Depending on the nature and cost of the product, those costs alone can be huge,” he added.

Because of the growth of imports into the U.S., and the potential for problems, Willis is working with foreign manufacturers, and U.S. importers and distributors to develop specific products that cover liability issues where many tend not to buy insurance right now, Mr. Coughlin said. “We are currently developing such products and dealing with potential customers,” he said.