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When products come back to haunt

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CNBC22052012 114Wednesday  05 June 2013 Dangerous products are in the public eye again after a spate of motor related recalls                 (source: Lloyd’s of London)

The news in May that carmaker Nissan plans to recall approximately 841, 000 vehicles worldwide due to a faulty steering wheel is the latest in a string of similar incidents. Just weeks before, Nissan recalled 500, 000 vehicles globally over a defect in passenger airbags.

In the latest case Nissan said that a bolt used in the steering wheel was not screwed on properly, but that there was no danger of sudden failure. The carmaker said that it will fix the issue by tightening the bolts or replacing steering wheels entirely.

Such cases seem to be increasingly common around the world. In April Hyundai and Kia recalled nearly 2 million cars in the US to fix a faulty switch; in January Toyota recalled some models that had faulty airbags and last year BMW recalled around 1.3 million cars over a problem with a battery cable in the boot.

Product recall isn’t necessarily happening more frequently, however, according to Kieron Russell, an underwriter with Kiln who specialises in reputational harm. He says that product recall is a recurring problem for businesses

High profile recalls

“The recalls over the last 12 months have involved higher profile names. That’s why they’ve been hitting the headlines. Some, like Toyota, have experienced multiple recalls and each time the general public is thinking, ‘Oh no not again!’” Russell told Lloyd’s.

“In the context of claims coming through the market, it has actually been fairly steady… there are hundreds of recalls and they don’t always get into the media. You only see the household names getting the column inches and airtime – especially if there is a perceived public health or safety issue, ” he said.

The full extent of product recalls is visible in the monthly reports compiled by RAPEX, the EU rapid alert system that aims to prevent or restrict the marketing or use of products posing a serious risk to the health and safety of consumers. As well as numerous car recalls, the latest report includes notices for items of children’s clothing, various dangerous toys, an LED tube, a trampoline and a table mat.

Recalling products is an expensive exercise and many companies take out insurance at Lloyd’s to cover the associated physical costs. It is also possible to buy insurance that covers the loss of profits or loss of revenue associated with a recall. Food and beverage companies are the biggest buyers of cover, but makers of finished goods, such as electronics and cars, increasingly want to buy cover.

Suppliers need cover too

There is growing interest in obtaining supplier-related coverage as well, from both food and non-food product makers. “A producer that has bought an ingredient in good faith wants to indemnify itself against the risk of conducting a recall because a supplier has supplied a defective product, ” Russell said.

In many cases of product recall in the automotive business, the problem lies with a faulty component. Mark Colgate, head of product recall at R K Harrison Insurance Brokers, says car manufacturers increasingly try to offset their recall expenses by pushing the cost of the recall on to the supplier of a defective part. “As the car manufacturing companies have been hit by the economic downturn in recent years, we’ve seen product recall insurance increasingly become part of the contractual obligations placed on parts suppliers, ” Colgate told lloyds.com.

In response to this trend, RK Harrison can provide recall cover, written at Lloyd’s, that is tailored to the parts suppliers or to a specific contract. It covers first and third party recall expenses, costs associated with advertising and communication, disposal, extra staff and transportation requirements as well as replacement expenses, including reinstallation.

“Increased awareness is feeding into the demand. As more senior management become aware of the available insurance products we are getting more interest in our product offerings, ” Colgate said.

Fashion for recalls 

Lululemon, makers of the stretchy “Luon” black ladies leggings, had to recall 17% of its yoga pants after it was discovered that some of the material was too revealing. In a statement, the group said there was “a level of sheerness in some of our women’s black Luon bottoms that falls short of our very high standards”. Shares in the Canadian company dropped following the announcement, and quarterly revenue fell to $343m, down from a previous estimate of $355m. 

British online fashion retailer Asos withdrew a batch of brass-studded belts from sale earlier this year after they were found to be radioactive. The leather belts could cause injury if worn for over 500 hours, according to an internal report by the retailer, cited in The Guardian newspaper. The belts are being held in a radioactive storage facility after testing positive for Cobalt-60, the newspaper said.

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