April 30, 2018
Summary: The standard CGL form excludes coverage for damages claimed for any loss, cost, or expense incurred by the named insured or others for the withdrawal of the named insured's product from the market. As a remedy for this lack of coverage, the Insurance Services Office (ISO) offers the Product Withdrawal Coverage form, CG 00 66 04 13. This form has two insuring agreements: coverage A, product withdrawal expense, and coverage B, product withdrawal liability.
Coverage A – Product Withdrawal Expense
1.Insuring Agreement
a.We will reimburse you for “product withdrawal expenses” incurred by you because of a “product withdrawal” to which this insurance applies.
The amount of such reimbursement is limited as described in Section III – Limit of Insurance. No other obligation or liability to pay sums or perform acts or services is covered.
b.This insurance applies to a “product withdrawal” only if the “product withdrawal” is initiated in the “coverage territory” during the policy period because:
(1)You determine that the “product withdrawal” is necessary; or
(2)An authorized government entity has ordered you to conduct a “product withdrawal”.
c.We will reimburse “product withdrawal expenses” only if:
(1)The expenses are incurred within one year of the date the “product withdrawal” was initiated;
(2)The expenses are reported to us within one year of the date the expenses were incurred; and
(3)The product that is the subject of the “product withdrawal” was produced after the Cut-off Date designated in the Declarations.
d.The initiation of a “product withdrawal” will be deemed to have been made only at the earliest of the following times:
(1)When you first announced, in any manner, to the general public, your vendors or to your employees (other than those employees directly involved in making the determination) your decision to conduct or participate in a “product withdrawal”. This applies regardless of whether the determination to conduct a “product withdrawal” is made by you or is requested by a third party; or
(2)When you first received, either orally or in writing, notification of an order from an authorized government entity to conduct a “product withdrawal”.
e.”Product withdrawal expenses” incurred to withdraw “your products” which contain the same or substantially similar “defects” will be deemed to have arisen out of the same “product withdrawal”.
f.With respect to products of which “your product” is a component part, we will only reimburse you the amount to replace, repair or repurchase “your product”.
Analysis
The insurer will reimburse the named insured for product withdrawal expenses under the terms of this insuring agreement. “Products withdrawal expenses” is a term that is defined in the policy and will be discussed later, but it can be noted here that the expenses must be incurred by the named insured, the expenses must be reasonable and necessary, and they must be paid and directly related to a withdrawal of the named insured's products from the market.
It is interesting to note that the insuring agreement declares that the insurer will reimburse the insured for expenses incurred. To reimburse someone means to pay that person back or to make restoration of an amount paid, and yet, the word “incurred” just means becoming liable or subject to and not necessarily being already paid. In other words, the insurer promises to repay the insured for expenses it only incurs and not necessarily already has paid. Presumably, this means the insured need only draw up a list of the reasonable and necessary expenses the insured estimates for the amount of the products withdrawal, present the list to the insurer, and the expenses will be paid.
The withdrawal expense coverage applies when the product withdrawal is initiated in the coverage territory during the policy period and when it comes about through the initiative of the named insured or an authorized government entity. The coverage territory is the world, not just the United States, Canada, and Puerto Rico. So, if the European Union or Japan demands that the named insured withdraw its product from use, CG 00 66 will pay the insured for its expenses in meeting this demand; there is no requirement in this policy for the insured's responsibility to be determined in a lawsuit filed in the United States, Canada, or Puerto Rico.
There are time limits that must be observed by the insured under this insuring agreement. The expenses must be incurred within one year of the date the withdrawal was initiated, and the expenses must be reported to the insurer within one year of the date the expenses were incurred.
As for when the initiation of a product withdrawal is deemed to have been made, CG 00 66 describes that point as either when the named insured first announces the withdrawal or when the named insured first receives an order to conduct the product withdrawal, whichever is earlier. So, for example, if the government orders the named insured to withdraw its defective product from the market on December 15, 2015, the one year time period starts to run and the insured will have its incurred withdrawal expenses from December 15, 2015, to December 15, 2016, covered by CG 00 66. In the current egg recall involving Rose Acre Farms, after the FDA advised them that the strain of salmonella currently causing illness was present at its facilities, Rose Acre Farms voluntarily recalled eggs from that particular farm. Expenses from this recall will be covered.
Note that the reporting period language does give the insured some leeway. The withdrawal expenses must be incurred within one year of the date the withdrawal was initiated, but the reporting of the incurred expenses can be done within one year of the date they were incurred. In other words, if the initiation of a product withdrawal occurs on December 15, 2015, the insured has until December 15, 2016, to incur covered withdrawal expenses, but if the insured incurs such expenses on February 14, 2015, he has until February 14, 2016, to report those incurred expenses to the insurer in order for the coverage to apply.
2.Exclusions – Coverage A
This insurance does not apply to “product withdrawal expenses” arising out of:
a.Breach of Warranty and Failure to Conform to Intended Purpose
Any “product withdrawal” initiated due to the failure of “your products” to accomplish their intended purpose, including any breach of warranty of fitness, whether written or implied. This exclusion does not apply if such failure has caused or is reasonably expected to cause “bodily injury” or physical damage to tangible property other than “your product”.
b.Infringement Of Copyright, Patent, Trade Secret, Trade Dress, Or Trademark
Any “product withdrawal” initiated due to copyright, patent, trade secret, trade dress, or trademark infringements.
c.Deterioration, Decomposition, Or Chemical Transformation
Any “product withdrawal” initiated due to the transformation of a chemical nature, deterioration, or decomposition of “your product”. This exclusion does not apply if it is caused by:
(1)An error in manufacturing, design, or processing;
(2)Transportation of “your product”; or
(3)”Product tampering”
d.Goodwill, Market Share, Revenue, Profit Or Redesign.
The costs of regaining goodwill, market share, revenue, or “profit” or the costs of redesigning “your product”.
e.Expiration of Shelf Life
Any “product withdrawal” initiated due to expiration of the designated shelf life of “your product”.
Analysis
If the insured's product is withdrawn from the market just because it fails to accomplish its intended purpose, the expenses for the withdrawal are not covered. For example, if the insured claims that its product will restore hair or make the user lose twenty pounds in one week but government tests then prove neither claim is the truth, the insured must then withdraw the product, and CG 00 66 will not pay those expenses.
The exception pertains to bodily injury or physical damage that the product may cause. For example, if a product that the insured makes and claims can lower cholesterol is found to cause heart disease in users, and the product is then ordered off the market, CG 00 66 will pay the expenses of that withdrawal. This product failure on the part of the insured may result in huge bodily injury claims and settlements, so paying to have the faulty product removed as quickly as possible from market use in order to prevent future public consumption is a reasonable exception.
Infringement of copyright, patent, trade secret, trade dress, or trademark is an action not covered by standard general liability policies (regardless of the CGL form's exception for the named insured's advertisement activity), and as a complement to this, CG 00 66 does not provide coverage for product withdrawal expenses arising out of such infringement.
The standard CGL form does not cover damage to the named insured's product, so again, as a complement to this, CG 00 66 does not apply to product withdrawal expenses arising out of damage done to the named insured's product through deterioration, decomposition, or chemical transformation. For example, if the insured produces wine but a batch deteriorates and transforms into vinegar, the product withdrawal expense will not be covered by CG 00 66. There are exceptions noted here. Using the wine-into-vinegar example, if the insured caused the transformation due to defective processing of the wine, the exclusion does not apply. The transportation exception can be used whether the named insured or another party does the transporting. As for the product tampering exception, “product tampering” is a defined term and will be discussed in the definitions section of this article.
If the insured withdraws its product from market use, this will no doubt come to the attention of the public. This will probably result in loss of revenue and market share (at least for a time) for the insured as the public reacts. Regaining market share and revenue and the goodwill of the public will cost the insured money, but CG 00 66 is not meant to provide reimbursement for such expenses.
The expiration of shelf life exclusion is meant as a reminder to the insured to keep its products current and useful. For example, if the listed shelf life of a bottle of milk is November 15, 2018, no one would want to buy that bottle on December 11, 2018. It is up to the insured to keep its products current and viable for sale. A failure of the insured in this area that causes the insured to withdraw the product from market use is a cost risk the insured must assume as part of its business practice.
f.Known Defect
A “product withdrawal” initiated due to a “defect” in “your product” known to exist by the Named Insured or the Named Insured's “executive officers”, prior to the date when this Product Withdrawal Coverage Part was first issued to you or prior to the time “your product” leaves your control or possession.
g.Governmental Ban
A recall when “your product” or a component contained within “your product” has been:
(1)Banned from the market by an authorized government entity prior to the policy period; or
(2)Distributed or sold by you subsequent to any governmental ban.
h.Defense of Claim
The defense of a claim or “suit” against you for liability arising out of a “product withdrawal”.
i.Third-party Damages, Fines, And Penalties
Any compensatory damages, fines, penalties, punitive or exemplary or other noncompensatory damages imposed upon the insured.
j.Pollution-related Expenses
Any loss, cost, or expense due to any:
(1)Request, demand, order, statutory or regulatory requirement that any insured or others test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of “pollutants”; or
(2)Claim or suit by or on behalf of a governmental authority for damages because of testing for, monitoring, cleaning up, removing, containing, treating, detoxifying or neutralizing, or in any way responding to, or assessing the effects of “pollutants”.
Analysis
The known defect exclusion is simple: if the named insured puts a product that it knows is defective out in the market, this policy will not pay expenses for the withdrawal of that defective product. If a farm knows its eggs are contaminated with salmonella and sends them to market anyway, the cost to recall those eggs is not covered. This exclusion is akin to the known loss language on the CGL form; that is, just as the general liability form will not respond to a claim if the insured knows that a loss has occurred prior to the policy period, CG 00 66 will not cover product withdrawal expenses for a product the insured knows is defective and will have to be withdrawn from use as a matter of course.
The governmental ban exclusion shows that CG 00 66 will not cover the insured's illegal activities. If the government has banned a product from the market, that means it is not to be sold, not to be used in the marketplace. If the insured ignores the ban and distributes the product anyway, that is an illegal act, and no insurance policy will cover an illegal act.
Coverage A under the product withdrawal coverage form does not pay for defense of a claim or lawsuit. That coverage is left for coverage B, which will be discussed later.
Coverage A is meant to reimburse the insured for the expenses it expends in withdrawing its product from the market. This coverage is specific in that “product withdrawal” and “product withdrawal expenses” are both defined terms on CG 00 66, and neither definition includes third party damages, fines, or penalties. The fines and penalties exclusion merely strengthens this point.
The pollution-related expenses exclusion is fairly clear. Just as the standard general liability form does not pay for pollution clean-up expenses, so too does the product withdrawal coverage form exclude such costs. Pollution clean-up costs are a specialty type coverage and could run into a huge sum of money; the premium charged for product withdrawal expense coverage is not calculated to cover such an exposure.
Coverage B – Product Withdrawal Liability
1.Insuring Agreement
a.We will pay those sums that the insured becomes legally obligated to pay as damages for “product withdrawal expenses” incurred because of a “product withdrawal” to which this insurance applies. We will have the right and duty to defend the insured against any “suit” seeking those damages. However, we will have no duty to defend the insured against any “suit” seeking damages to which this insurance does not apply. We may, at our discretion, investigate any “product withdrawal” and settle any claim or “suit” that may result. But:
(1)The amount we will pay for damages is limited as described in Section III – Limits Of Insurance; and
(2)Our right and duty to defend end when we have used up the applicable limit of insurance in the payment of judgments or settlements under Coverage B.
No other obligation or liability to pay sums or perform acts or services is covered unless explicitly provided for under Supplementary Payments – Coverage B.
b.This insurance applies to damages for “product withdrawal expenses” incurred because of a “product withdrawal” only if the “product withdrawal” is initiated in the “coverage territory” during the policy period and the product that is the subject of the “product withdrawal” was produced after the Cut-off Date designated in the Declarations.
c.The initiation of a “product withdrawal” will be deemed to have been made only at the earliest of the following times:
(1)When a third party conducts or participates in a “product withdrawal”; or
(2)When a third party first announces, in any manner, to the general public, their decision to conduct or participate in a “product withdrawal”.
d.Damages incurred due to the withdrawal of “your products” which contain the same or substantially similar “defects” will be deemed to have arisen out of the same “product withdrawal”.
Analysis
The coverage B insuring agreement provides liability coverage for the insured when another party has paid expenses for the withdrawal of the insured's product and then demands reimbursement from the named insured. The insurer agrees to pay those sums the insured becomes legally obligated to pay as damages and to defend the insured in any lawsuit against it seeking those damages. The insurer reserves (at its own discretion) the right to investigate and settle any claim or lawsuit. And, the duty to defend ends when the insurer has used up the applicable limit of insurance in the payment of judgments or settlements.
The coverage under this insuring agreement applies only if the product withdrawal is initiated in the (defined) coverage territory during the policy period, and as long as the product withdrawn was produced after the cut-off date designated in the declarations. Note that this cut-off date is also mentioned in the coverage A insuring agreement. This date serves as something like a retroactive date in a claims-made policy, in that coverage applies only when the product that is the subject of the withdrawal was produced after that designated date. However, CG 00 66 contains no definition of or clarification about this cut-off date, so there is no set information about what this date may be or who can choose it. Is it supposed to be the same as the policy inception date? May it be an earlier date? Is a cut-off date required? Presumably, the insured and the insurer can agree on a date in order to give the insured the insurance protection it needs at a premium acceptable to both.
Under coverage B, the initiation of a product withdrawal depends on the action of a third party, as opposed to coverage A which leans more toward first party action. This is appropriate since coverage B is liability coverage.
The exclusions under coverage B number fifteen in total. The following are the same as appear under coverage A: breach of warranty and failure to conform; infringement of copyright, patent, trade secret, or trademark; deterioration, decomposition, or chemical transformation; goodwill, market share, revenue, profit, or redesign; expiration of shelf life; known defect; governmental ban; fines and penalties; and pollution-related expenses. These will not be discussed again in this section of the article. The following are the rest of the coverage B exclusions.
2.Exclusions – Coverage B
This insurance does not apply to “product withdrawal expenses” arising out of:
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i.Intercompany Suits
Any claim for damages by any Named Insured against another Named Insured.
j.Contractual Liability
Any “product withdrawal” expense or cost for which the insured has assumed liability in a contract or agreement. This exclusion does not apply to liability for damages that the insured would have in the absence of the contract or agreement.
k.Pollution
The actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of “pollutants” at any time.
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m.War
Any loss, cost or expense due to:
(1)War, including undeclared or civil war;
(2)Warlike action by a military force, including action in hindering or defending against an actual or expected attack, by any government, sovereign, or other authority using military personnel or other agents; or
(3)Insurrection, rebellion, revolution, usurped power, or action taken by governmental authority in hindering or defending against any of these.
n.Loss Of Use Of Property
Loss of use of other property due to:
(1)A “defect”, deficiency, inadequacy, or dangerous condition in “your product”; or
(2)A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms.
o.Bodily Injury Or Property Damage
“Bodily injury” or “property damage”.
Analysis
The standard CGL form contains the separation of insureds clause so that each insured is treated as a separate insured; this would allow one insured to sue another if the need arose. However, CG 00 66 has an exclusion to prevent coverage for one named insured suing another. Product withdrawal liability coverage is for third-party claims against the insured, and fellow named insureds are not considered to be in this category.
Coverage for contractual liability and pollution liability are both excluded under CG 00 66. There is no exception in this policy for insured contracts and there are no exceptions to the pollution exclusion such as exist in the CGL form.
The war exclusion on CG 00 66 parallels the war exclusion as it is written on the current version of the CGL form. The war exclusion has been expanded to relate to warlike acts such as terrorism. So, if for example, a terrorist group poisoned a food product, someone was injured, and the insured had to withdraw that product from the market, CG 00 66 will not pay for the loss, cost, or expense due to this action. Any liability the insured may be deemed to have in such a matter will not be covered by CG 00 66. Note however, CG 00 66 does not exclude coverage for a voluntary withdrawal that would be covered under coverage A of this form. In other words, if a terrorist group claimed it had poisoned a food product made by the insured and the insured voluntarily withdrew the product from the market, such expenses would be paid under coverage A of CG 00 66.
The loss of use of other property exclusion is similar to the impaired property exclusion found on the CGL form and can be just as complicated. This exclusion applies to loss of use of other property due to a defect, deficiency, or dangerous condition in the named insured's product. This would prevent coverage for a third-party claim that its product has been rendered useless or less useful because of the named insured's product. However, coverage B applies to liability claims of third-party product withdrawal expenses, which include the withdrawal of products that contain the named insured's product. So, it appears that CG 00 66 will respond to a claim by a third party for its costs to withdraw its products from the market because its products contain the named insured's product; however, CG 00 66 will not respond to a loss of use third-party claim, that is, a claim by a third party that its products have been rendered useless due to a defect in the named insured's product. For example, the insured makes flavoring that is used in a number of baked goods. If a batch of flavoring is bad and the baked goods are harmful to others as a result, the cost to withdraw those baked goods will be covered. The claim by the baker that the goods are now worthless and he should be compensated for those useless goods will not be covered. Where to draw the line between withdrawal expenses and lost earnings from useless products can be a challenge and will probably be a subject for future court debates.
Bodily injury and property damage claims are excluded. If the named insured's products harm someone or damage another's property, that is a subject for a general liability policy or a products/completed operations policy. The product withdrawal coverage form is meant to apply only to the product withdrawal expenses of the named insured and of others for which the named insured is liable.
We will pay, with respect to any claim we investigate or settle, or any “suit” against an insured we defend:
1.All expenses we incur.
2.All reasonable expenses incurred by the insured at our request to assist us in the investigation or defense of the claim or “suit”, including actual loss of earnings up to $250 a day because of time off from work.
3.All court costs taxed against the insured in the “suit”. However, these payments do not include attorneys' fees or attorneys' expenses taxed against the insured.
4.Prejudgment interest awarded against the insured on that part of the judgment we pay. If we make an offer to pay the applicable limit of insurance, we will not pay any prejudgment interest based on that period of time after the offer.
5.All interest on the full amount of any judgment that accrues after entry of the judgment and before we have paid, offered to pay, or deposited in court the part of the judgment that is within the applicable limit of insurance.
These payments will not reduce the limits of insurance.
Analysis
These supplementary payments are typical of those offered under standard liability policies. Note, though, that there is no mention of bail bonds or the cost of bonds to release attachments as is found on the standard CGL form. And, as is usual practice, these supplementary payments do not reduce the limits of insurance available to the insured for a claim or lawsuit against it.
1.If you are designated in the Declarations as:
a.An individual, you and your spouse are insureds, but only with respect to the conduct of a business of which you are the sole owner.
b.A partnership or joint venture, you are an insured. Your members, your partners, and their spouses are also insureds, but only with respect to the conduct of your business.
c.A limited liability company, you are an insured. Your members are also insureds, but only with respect to the conduct of your business. Your managers are insureds, but only with respect to their duties as your managers.
d.An organization other than a partnership, joint venture or limited liability company, you are an insured. Your “executive officers” and directors are insureds, but only with respect to their duties as your officers and directors. Your stockholders are also insureds, but only with respect to their liability as stockholders.
e.A trust, you are an insured. Your trustees are also insureds, but only with respect to their duties as trustees.
2.Each of the following is also an insured:
a.Any person or organization having proper temporary custody of your property if you die, but only until your legal representative has been appointed.
b.Your legal representative if you die, but only with respect to duties as such. That representative will have all your rights and duties under this Coverage Part.
3.Any organization you newly acquire or form, other than a partnership, joint venture or limited liability company, and over which you maintain ownership or majority interest, will qualify as a Named Insured if there is no other similar insurance available to that organization. However:
a.Coverage under this provision is afforded only until the 90th day after you acquire or form the organization or the end of the policy period, whichever is earlier; and
b.Coverages A and B do not apply to “product withdrawals” that were initiated before you acquired or formed the organization.
No person or organization is an insured with respect to any “product withdrawal” arising out of any current or past partnership or joint venture that is not shown as a Named Insured in the Declarations.
Analysis
As with the supplementary payments, these clauses are standard. The clauses describe the type of businesses that a named insured may be—sole ownership, partnership or joint venture, limited liability company, and the catchall, any other type organization. Trusts can also be an insured under the terms of this policy. Coverage is extended to spouses under certain circumstances, as well as to managers and stockholders. Executive officers and directors are considered as insureds but employees (or volunteers) are not. This makes sense under CG 00 66 in that employees or volunteers are not going to be making decisions about product withdrawal.
Newly acquired or formed organizations (other than partnerships, joint ventures, or limited liability companies) qualify as a named insured as long as there is no other similar insurance available to that organization. For example, if company A acquires company B, the insurance provided to company A under CG 00 66 will apply to company B unless company B already has product withdrawal insurance; in that case, company B's insurance takes precedence. Indeed, this clause specifically states that coverages A and B under CG 00 66 do not apply in circumstances where an acquired company had already begun a product withdrawal before the acquisition.
For any current or past partnership or joint venture to have coverage under CG 00 66, these entities must be shown as named insureds in the declarations. Newly acquired or formed partnerships or joint ventures do not have automatic insured status under this coverage form, so the insured needs to be aware of this point.
1.The Aggregate Limit of Insurance shown in the Declarations and the rules below fix the most we will pay regardless of the number of:
a.Insureds;
b.”Product withdrawals” initiated;
c.Number of “your products” withdrawn;
d.Claims made or “suits” brought; or
e.Persons or organizations making claims or bringing “suits”.
2.The Aggregate Limit is the most we will pay for the sum of all:
a.”Product withdrawal expenses” under Coverage A; and
b.Damages because of “product withdrawal expenses” under Coverage B.
3.Deductible And Participation Percentage Provisions
a.Deductible
We will only pay for the amount of:
(1)”Product withdrawal expenses” under Coverage A; and
(2)Damages because of “product withdrawal expenses” under Coverage B;
which are in excess of the deductible amount, if any, shown in the Declarations. The deductible applies separately to each “product withdrawal”. The limits of insurance will not be reduced by the amount of this deductible.
We may, or will if required by law, pay all or any part of any deductible amount, if applicable, to effect settlement of any claim or “suit”. Upon notice of our payment of a deductible amount, you shall promptly reimburse us for the part of the deductible amount we paid.
b.Participation Percentage
If a Participation Percentage is indicated in the Declarations, the following provision applies:
You agree to participate in the payment of:
(1)”Product withdrawal expenses” under Coverage A; and
(2)Damages because of “product withdrawal expenses under Coverage B;
which are in excess of the deductible, to the extent of the Participation Percentage indicated in the Declarations. The Participation Percentage applies separately to each “product withdrawal”.
You also agree that the cost of your participation in the loss will be borne entirely by you when due and you will not obtain insurance to cover it.
The Limit of Insurance of this Coverage Part applies separately to each consecutive annual period and to any remaining period of less than 12 months, starting with the beginning of the policy period shown in the Declarations, unless the policy period is extended after issuance for an additional period of less than 12 months. In that case, the additional period will be deemed part of the last preceding period for purposes of determining the Limit of Insurance.
Analysis
The aggregate limit of insurance chosen by the insured is the most that the insurer will pay for the sum of all claims under both coverages A and B; there is no separate limit of insurance for each coverage, no split limits. This is something like combined single limits that may appear on an auto policy.
CG 00 66 contains a deductible provision, and the deductible that the insured chooses must be met before the insurer will begin to pay the policy's limit of insurance. The coverage form declares that the deductible applies separately to each product withdrawal. So, if the insured has a product withdrawal event three times during the policy period, the deductible will be applied three times. What is not clear here is whether this deductible language refers only to the number of product withdrawals the insured may have during the policy period or whether it also applies to the number of products that the insured may have to withdraw during the policy period. For example, if the insured has two separate products that it has to withdraw from the market, with the withdrawals occurring at the same time, does the deductible apply separately to the expenses for withdrawing both products? Or is this one withdrawal with one deductible applying? This may be one possible area of dispute that future litigation will have to settle.
CG 00 66 also has a participation percentage clause wherein the insured agrees to participate in the payment of product withdrawal expenses and damages. For example, if the insured agrees to a 25 percent participation, it will pay not only its deductible but also 25 percent of the amount of withdrawal expenses that are over the deductible. The insured agrees to participate in the loss payment, agrees to become, in effect, a coinsurer with the insurance company. This participation percentage—like the deductible—applies separately to each product withdrawal. Presumably, since the insured is agreeing to pay part of its own covered loss (over and above the deductible), the premium is affected, especially since the policy requires the insured to bear the cost of the participation entirely and not obtain other insurance to cover this expenditure.
1.Bankruptcy
Bankruptcy or insolvency of the insured or of the insured's estate will not relieve us of our obligations under this Coverage Part.
2.Duties In The Event Of A Claim Or Suit Or A Defect Or Product Withdrawal.
a.You must see to it that we are notified as soon as practicable of any actual, suspected or threatened “defect” in “your product”, or any governmental investigation, that may result in a “product withdrawal” or a claim. To the extent possible, notice should include:
(1)How, when and where the “defect” was discovered;
(2)The names and addresses of any injured persons and witnesses; and
(3)The nature, location and circumstances of any injury or damage arising out of use or consumption of “your product”.
b.If a “product withdrawal” is initiated, you must:
(1)Immediately record the specifics of the “product withdrawal” and the date it was initiated; and
(2)Notify us as soon as practicable.
You must see to it that we receive written notice of the “product withdrawal” as soon as practicable.
c.You must promptly take all reasonable steps to mitigate the expenses associated with a “product withdrawal”. Any “profit” that you receive from mitigating the expenses will be deducted from the amount of reimbursement that you will receive for “product withdrawal expenses”.
d.If a claim is made or “suit” is brought against any insured, you must:
(1)Immediately record the specifics of the claim or “suit” and the date received; and
(2)Notify us as soon as practicable.
You must see to it that we receive written notice of the claim or “suit” as soon as practicable.
e.You and any other involved insured must:
(1)Immediately send us copies of any pertinent correspondence received in connection with the “product withdrawal”, claim or “suit”;
(2)Authorize us to obtain records and other information;
(3)Cooperate with us in the investigation of the “product withdrawal”;
(4)Cooperate with us in the investigation or settlement of the claim or defense against the “suit”; and
(5)Assist us, upon our request, in the enforcement of any right against any person or organization which may be liable to the insured because of a “product withdrawal” to which this insurance may also apply.
3.Suit Outside Of United States, Canada Or Puerto Rico
a.If a “suit” is brought in a part of the “coverage territory” that is outside the United States of America (including its territories and possessions), Puerto Rico or Canada, and we are prevented by law, or otherwise, from defending the insured, the insured will initiate a defense of the “suit”. We will reimburse the insured, under Supplementary Payments, for any reasonable and necessary expenses incurred for the defense of a “suit” seeking damages to which this insurance applies, that we would have paid had we been able to exercise our right and duty to defend.
If the insured becomes legally obligated to pay sums because of damages to which this insurance applies in a part of the “coverage territory” that is outside the United States of America (including its territories and possessions), Puerto Rico or Canada, and we are prevented by law, or otherwise, from paying such sums on the insured's behalf, we will reimburse the insured for such sums.
b.All payments or reimbursements we make for damages because of judgments or settlements will be made in U.S. currency at the prevailing exchange rate at the time the insured became legally obligated to pay such sums. All payments or reimbursements we make for expenses under Supplementary Payments will be made in U.S. currency at the prevailing exchange rate at the time the expenses were incurred.
4.Legal Action Against Us
No person or organization has a right under this Coverage Part:
a.To join us as a party or otherwise bring us into a “suit” asking for damages from an insured; or
b.To sue us on this Coverage Part unless all of its terms have been fully complied with.
A person or organization may sue us to recover on an agreed settlement or on a final judgment against an insured; but we will not be liable for damages that are not payable under the terms of this Coverage Part or that are in excess of the applicable limit of insurance. An agreed settlement means a settlement and release of liability signed by us, the insured and the claimant or the claimant's legal representative.
Analysis
Most of these conditions are standard ones that are found on most insurance policies. The bankruptcy clause simply reinforces the duty of the insurer to pay the amounts it has contractually agreed to pay, regardless of the financial status of the insured. The duties of the insured clauses detail how the insured is supposed to react in the event a product withdrawal situation should arise or threaten to arise. Obviously, the insurer wants to be notified of a possible product withdrawal, claim, or lawsuit as soon as possible with all the information the insured can provide. The insured not only has the duty to notify the insurer of product withdrawal situations, but the insured must also take reasonable steps to mitigate the product withdrawal expenses. These clauses do not define what the phrase “as soon as practicable” means or what “reasonable steps” include, so the insured should do what it believes is right and if the insurer has a problem with the insured's response to its listed duties, that dispute would have to be settled in court.
Since the coverage territory of CG 00 66 is anywhere in the world, a lawsuit against the insured may be filed anywhere in the world. If this happens and the insured has to pay for its own defense or pay liability claims because the insurer is prevented by law from acting, the conditions clauses of CG 00 66 bind the insurer to reimburse the insured. This reimbursement will be made in the currency of the United States at the prevailing rate of exchange.
5.Other Insurance
If other valid and collectible insurance is available to the insured for a loss we cover under Coverages A or B of this Coverage Part, our obligations are limited as follows:
a.Primary Insurance
This insurance is primary. Our obligations are not affected unless any of the other insurance is also primary. Then, we will share with all that other insurance by the method described in Paragraph b. below.
b.Method Of Sharing
If all of the other insurance permits contribution by equal shares, we will follow this method also. Under this approach, each insurer contributes equal amounts until it has paid its applicable limit of insurance or none of the loss remains, whichever comes first.
If any of the other insurance does not permit contribution by equal shares, we will contribute by limits. Under this method, each insurer's share is based on the ratio of its applicable limit of insurance to the total applicable limits of insurance of all insurers.
6.Premium Audit
a.We will compute all premiums for this Coverage Part in accordance with our rules and rates.
b.Premium shown in this Coverage Part as advance premium is a deposit premium only. At the close of each audit period we will compute the earned premium for that period and send notice to the first Named Insured. The due date for audit and retrospective premiums is the date shown as the due date on the bill. If the sum of the advance and audit premiums paid for the policy period is greater than the earned premium, we will return the excess to the first Named Insured.
c.The first Named Insured must keep records of the information we need for premium computation, and send us copies at such times as we may request.
7.Representations
By accepting this policy, you agree:
a.The statements in the Declarations are accurate and complete;
b.Those statements are based upon representations you made to us; and
c.We have issued this policy in reliance upon your representations.
8.Concealment Or Fraud
We will not provide coverage under Coverage A of this Coverage Part to you, or any other insured, who at any time:
a.Engaged in fraudulent conduct; or
b.Intentionally concealed or misrepresented a material fact concerning a “product withdrawal” or “product withdrawal expenses” incurred by you under Coverage A of this Coverage Part.
9.Transfer Of Rights Of Recovery Against Others To Us
If the insured has rights to recover all or part of any payment we have made under this Coverage Part, those rights are transferred to us. The insured must do nothing after loss to impair them. At our request, the insured will bring “suit” or transfer those rights to us and help us to enforce them.
10.When We Do Not Renew
If we decide not to renew this Coverage Part, we will mail or deliver to the first Named Insured shown in the Declarations written notice of the nonrenewal not less than 30 days before the expiration date.
If notice is mailed, proof of mailing will be sufficient proof of notice.
Analysis
The other insurance clause of CG 00 66 makes the point that this insurance is primary only and not excess. If other valid and collectible insurance exists, the coverage payments are either shared equally or pro-rated.
The premium audit clause notes that the premium shown in the declarations is a deposit premium only. The audit will determine whether this deposit premium is correct or needs to be adjusted one way or the other. The first named insured will receive the bill if more premium is required to adequately cover the insured's exposures, or will receive a refund if the premium charged is too high.
The representations condition and the concealment or fraud condition are attempts by the insurer to prevent or limit fraud on the part of the insured. The insured is required to truthfully present its exposures and engage in good faith dealing with the insurer or the insurer can try to deny coverage. A legal enforcement of this denial of coverage depends on state laws and court decisions pertaining to possible prejudice suffered by the insurer because of the insured's actions, but these clauses do give the insurer contractual language to support its denial of coverage.
Note that the concealment or fraud condition pertains only to coverage A, product withdrawal expense coverage; coverage B, product withdrawal liability coverage, is not mentioned in this condition. Also, the concealment or fraud condition applies to the conduct of an insured, not just the named insured. However, the wording of the clause would allow for coverage to extend to the named insured if the fraud was perpetrated by some other insured. For example, the named insured is a partnership; all the partners are insureds; one of the partners engages in fraudulent conduct. That particular partner is subject to a denial of coverage by the insurer, but the other partners and the named insured partnership itself would have coverage for the claim.
The transfer of rights of recovery clause is the subrogation clause. If the insured has rights to recover all or part of any payments the insurer has made under CG 00 66, the insurer is subrogated to those rights. The insured must do nothing to impair that subrogation and, indeed, is required to assist the insurer in enforcing it. Of course, the subrogation rights are not to be impaired after a loss has occurred; if the insured has given up its rights of recovery prior to a loss or claim, this subrogation condition is not applicable.
The nonrenewal condition requires the insurer to mail or deliver a written notice of the nonrenewal not less than thirty days before the expiration date. However, this is subject to state law that may require a longer notice period.
1.”Bodily injury” means bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time.
2.”Coverage territory” means anywhere in the world with the exception of any country or jurisdiction which is subject to trade or other economic sanction or embargo by the United States of America.
3.”Defect” means a defect, deficiency or inadequacy that creates a dangerous condition.
4.”Electronic data” means information, facts or programs stored as or on, created or used on, or transmitted to or from computer software, hard or floppy disks, CD-ROMS, tapes, drives, cells, data processing devices or any other media which are used with electronically controlled equipment.
5.”Executive officer” means a person holding any of the officer positions created by your charter, constitution, bylaws or any other similar governing document.
6.”Occurrence” means an accident, including continuous or repeated exposure to substantially the same general harmful conditions.
7.”Pollutants” mean any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.
Analysis
Most of these definitions are standard ones found on liability policies. They find their relevance here in the insuring agreements and the exclusions found in CG 00 66. However, some of the definitions are worth comment.
The coverage territory is anywhere in the world. The insuring agreements of coverages A and B both require the product withdrawal to initiate in the coverage territory. Since this is anywhere in the world, that requirement should not pose any issue or problem for the insured. The only exception here is any country that is subject to a trade embargo or other economic sanctions imposed by the U.S., for example, North Korea. The insured should keep up with which countries are on the sanctions list in order to prevent this exception from blocking coverage.
The definition of “defect” pertains to a problem with the insured's product. If the product has a defect, that is what can lead to a withdrawal from use. The problem is, though, this definition indicates that a defect creates a dangerous condition. What is a dangerous condition? Does the danger have to be immediate or can it be remote? If the product does not pose a danger and is being withdrawn from the market simply because it does not work properly or tastes bad, is the coverage provided by CG 00 66 not applicable? No doubt, the definition and scope of “defect” will be one of the issues over which legal battles are raised.
The definitions of “electronic data,” “executive officer,” “occurrence,” and “pollutants” are standard. “Electronic data” is defined here because the insurer wants to emphasize that since electronic data is not considered tangible property, there is no mistake as to what electronic data includes.
8.”Product tampering” is an act of intentional alteration of “your product” which has caused or is reasonably expected to cause “bodily injury” or physical injury to tangible property other than “your product”.
When “product tampering” is known, suspected or threatened, a “product withdrawal” will be limited to those batches of “your product” which are known or suspected to have been tampered with.
For the purposes of this insurance, electronic data is not tangible property.
9.”Product withdrawal” means the recall or withdrawal:
a.From the market; or
b.From use by any other person or organization;
of “your products”, or products which contain “your products”, because of known or suspected “defects” in “your product”, or known or suspected “product tampering”, which has caused or is reasonably expected to cause “bodily injury” or physical injury to tangible property other than “your product”.
For the purposes of this insurance, electronic data is not tangible property.
10.”Product withdrawal expenses” means those reasonable and necessary extra expenses, listed below, paid and directly related to a “product withdrawal”:
a.Cost of replacing “your product”, repairing the “defect” in “your product” or repurchasing “your product” for your initial purchase price, whichever is less;
b.Costs of notification;
c.Costs of stationery, envelopes, production of announcements and postage or facsimiles;
d.Costs of overtime paid to regular nonsalaried employees and costs incurred by such employees, including costs of transportation and accommodations;
e.Costs of computer time;
f.Costs of hiring independent contractors and other temporary employees;
g.Costs of transportation, shipping or packaging;
h.Costs of warehouse or storage space; or
i.Costs of proper disposal of “your products”, or products that contain “your products”, that cannot be reused, not exceeding your initial purchase price or your cost to produce the products.
11.”Profit” means the positive gain from business operation after subtracting for all expenses.
12.”Property damage” means:
a.Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or
b.Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it.
For the purpose of this insurance, “electronic data” is not tangible property.
13.”Suit” means a civil proceeding in which damages because of “bodily injury” or physical damage to tangible property arising out of a “product withdrawal” to which this insurance applies are alleged. “Suit” includes:
a.An arbitration proceeding in which such damages are claimed and to which the insured must submit or does submit with our consent; or
b.Any other alternative dispute resolution proceeding in which such damages are claimed and to which the insured submits with our consent.
14.”Your product” means:
a.Any goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by:
(1)You;
(2)Others trading under your name; or
(3)A person or organization whose business or assets you have acquired; and
b.Containers (other than vehicles), materials, parts or equipment furnished in connection with such goods or products.
Analysis
This part of the definitions section of CG 00 66 contains the main words and phrases that convey the intent of the product withdrawal coverage form.
“Product tampering” is defined since it is an integral part of the definition of “product withdrawal,” which is recalling or withdrawing the insured's product from the market because of a defect in the product or because of known or suspected product tampering. A good example of product tampering is the Tylenol scare of years ago. There was an intentional alteration of an entity's product and that alteration definitely caused (and no doubt was expected to cause) bodily injury to someone. The phrase in this definition about limiting the withdrawal to those batches known or suspected to have been tampered with acts to limit the duty of the insurer. Using the Tylenol example again, if a batch of the medicine shipped to Chicago is known or suspected to be tampered with, that batch will be subject to product withdrawal, but another, and completely different batch sent to Los Angeles would not be included in the withdrawal. This way, the cost of this coverage to the insurer is limited to the actual product that is needed to be withdrawn and not every similar product that may exist throughout the entire country.
Product withdrawal is the recall or withdrawal from the market or from use by any other person or organization of the named insured's products. Since both coverage A and coverage B apply to product withdrawal, the insured should be aware of this definition and its requirements. The withdrawal must be due to a known or suspected defect in the product or due to known or suspected product tampering. And, these actions must have caused or will reasonably be expected to cause bodily injury (although the actual bodily injury would not be covered by CG 00 66) or physical injury to tangible property (also not covered by CG 00 66). This definition is the crux of the insuring agreements in CG 00 66, and it can be expected to be at the center of any future coverage disputes.
The definition of “product withdrawal” expenses contains a list of the particular expenses that CG 00 66 is meant to cover. The list is extensive but whether it is an all-inclusive list is not known yet. The expenses must be reasonable and necessary and must be paid and directly related to a product withdrawal. What is a reasonable and necessary expense can be a subjective item. “Paid and directly related to a product withdrawal” is a phrase intended to prevent coverage under this form for a consequential loss or claim.
Note the two specific attempts to limit expenses. The insurer agrees to pay the lesser of the cost of replacing the product, the cost of repairing the defect in the product, or the cost of repurchasing the product at the initial purchase price. And, the insurer agrees to pay the costs of proper disposal but not exceeding the initial purchase price or the cost to produce the product. In both instances, it would seem logical that the cost of the product at the initial purchase price to the insured would always be the lowest amount to be paid. This would then complement the exclusion under both coverage A and coverage B that applies to profit.
Consider also the phrase about repairing the defect in the product. Compare this with the exclusion applying to the costs of redesigning the product. What happens if repairing the product means redesigning the product? Again, it would seem that the lowest amount payable would be the initial purchase price of the product. Perhaps this is the intent of the coverage form, and it will probably be one of the issues pertaining to this new form on which courts will have to rule.
“Profit” as defined here is excluded from coverage under both insuring agreements A and B.
The definitions of “property damage,” “suit,” and the “your product” are all standard ones for insurance policies.
There are three endorsements applicable to the Product Withdrawal Coverage form: CG 31 68 12 07; CG 31 69 12 04; and CG 31 74 12 04.
CG 31 68, Exclusion – Coverage A – Product Withdrawal Expense, modifies CG 00 66 by deleting coverage A and all references to it. If the insured does not want reimbursement for product withdrawal expenses it incurs because of a product withdrawal or if the insurer does not want to provide this coverage, then CG 31 68 should be attached to the product withdrawal coverage form.
CG 31 69, Exclusion – Coverage B – Product Withdrawal Liability, deletes coverage B from CG 00 66. If the insured becomes legally obligated to pay as damages the product withdrawal expenses of a third party and CG 31 69 is attached to the product withdrawal coverage form, the insured has no coverage for that liability.
CG 31 74, Exclusion Of Newly Acquired Organizations As Insureds, deletes any coverage under CG 00 66 for newly acquired organizations. Such organizations are designated automatically as insureds under the who is an insured clause of the policy, but this endorsement overrides that clause. It should be noted that newly formed organizations are also affected by this endorsement despite the fact that they are not mentioned in the endorsement's title. The wording on CG 31 74 indicates that paragraph three of the who is an insured clause in its entirety does not apply.