Under CGL policies, insurers are only required to "…pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury' or 'property damage,'" and have the "duty to defend the insured against any 'suit' seeking those damages." Specifically, the standard recall exclusion, also known as the "sistership" exclusion, provides that the policy will not cover: 

Damages claimed for any loss, cost or expense incurred by you or others for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of:

(1) "Your Product";

(2) "Your Work"; or

(3) "Impaired Property";

if such product, work, or property is withdrawn or recalled from the market or from use by any person or organization because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it.

The exclusion typically precludes coverage for costs incurred when the named insured's product is withdrawn from the market as a preventive measure. It is intended to apply where the insured's products are recalled because it is suspected that they may contain a defect. Courts have interpreted the sistership exclusion to preclude coverage for claims for damage when, based on the failure of similar products, the insured's products are withdrawn from the market out of concern that they may contain a defect or may cause bodily injury or property damage. In  Centillium Communs Inc. v. Atlantic Mut. Ins. Co., 528 F. Supp.2d 940 (N.D.Cal., 2007, the underlying complaint against insured semiconductor chip manufacturer Centillium by a customer alleged physical injury to routers caused by defective chips and sought coverage under the CGL property damage. The insurer declined the insured's defense, but the court rejected the insurer's contentions that the underlying suit did not allege "property damage" and that the suit fell within a number of coverage exclusions. When a complaint seeks to recover damages of that are strictly economic losses such as lost profits, loss of goodwill, loss of the anticipated benefit of a bargain, and loss of an investment, these damages fall within the scope of the insurance coverage only where these intangible economic losses provide a measure of damages to physical property which is within the policy's coverage. When the possibility of insurance coverage does exist and the insured tenders defense of the action, the insurer must assume it.The duty to defend may exist even where insurance coverage is in doubt and ultimately does not develop.

Where coverage otherwise exists, the sistership exclusion will not affect recovery of costs incurred attempting to remedy the actual products that have already caused actual bodily injury or property damage. On the other hand, the sistership exclusion will prevent a manufacturer from recouping its costs and expenses if, after learning that some of its products are defective, the manufacturer issues a general recall for all of its products without regard to whether the products are defective. For example, in Atlantic Mut. Ins. Co. v. Hillside Bottling Co. Inc., 903 A.2d 513 (N.J.Super., 2006), the court held that coverage for Hillside's liability to beverage companies for contamination of carbonated beverages was barred by the sistership exclusion in the insured's policy. The recall in this case was general and extending to all beverages that bore the bottling company's plant code, whether they were actually contaminated or not. The court explained that the sistership exclusion excluded the cost of recalling apparently undamaged products to search for damaged components otherwise not yet discovered.

The sistership exclusion will generally be held to apply regardless of whether the manufacturer's products are recalled voluntarily or involuntarily. Thus, under the standard CGL policy, a manufacturer typically will not be able to recoup costs and expenses arising out of a preventive or cautionary recall.

Product Withdrawal Coverage Form

ISO does offer a Product Withdrawal Coverage Form, CG 00 66 04 13. It is noted however that the form contains certain exclusions, one of which is the exclusion for breach of warranty and failure to conform to intended purpose. 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. However, there is an exception within the exclusion for bodily injury or physical damage that the product may cause. So, with this form if the Ferrari's brakes fail resulting in the vehicle driving into a person or property and causing injury or damage, the exclusion would not apply.

An exclusion f. also exists for Known Defect in the product, if the defect was known by the insured prior to the date when the Product Withdrawal Coverage Part was first issued; or prior to the time the product left the insured's control or possession. 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. As such, if Ferrari installed the caps knowing that there was a venting problem with some of the caps, this exclusion would preclude coverage. 

Product Recall

Product recall insurance is often offered separately, and can unexpectedly become necessary for the survival of a business. It is likely that most vehicle manufacturers have such insurance in place.

In the case of the Ferrari recall, the company thinks that only about 1% of cars are affected, but are being prudent and replacing them all. Owners should be notified toward the end of September about when to bring their cars in to be fixed. Owners can also go to NHTSA's recall website and enter the Ferrari's VIN number, or call either the NHTSA hotline at 1-888-327-4236 (TTY 1-800-424-9153), or Ferrari customer service at 1-201-816-2668.

The reference number for this Ferrari recall number is RC 80, an expansion of NHTSA recall number 21V-833.