Recently, there has been publicity about suppliers recalling
their products manufactured in China. Should insurers be
Liability policies generally purport to exclude cover for
liability for the cost of any product recall. Typically, the
policy excludes liability for:
the recall, inspection, repair, replacement or loss of use
of the Insured's Products or work completed by or for
the Insured or of any property of which such products or work
[the insured's products or work] form a part if such
products, work or property [the third party's
products, work or property] are withdrawn from the market or
from use because of any known or suspected defect or
This exclusion is probably far more limited than it would
appear on its face. Based on overseas judgments it excludes
preventative recalls only, and not recalls where damage has
Canadian Case Law
In Foodpro National Inc v General Accident Assurance Co
of Canada (1987) 33 DLR 427, the Ontario Supreme Court
considered two product recall exclusions that were
substantially identical to the exclusion referred to above. The
insured's product was defective. A third party claimed
against the insured for the cost of the insured's defective
product held by it. It also claimed for the cost of recalling
its own goods from its customers that became defective as a
result of incorporating the insured's defective product.
The insurer declined indemnity on the ground that the product
recall exclusion applied.
The Ontario Supreme Court held:
The language of the exclusions was limited to the expenses
and claims arising when the property was withdrawn from the
market or use and not the damages for the destruction or loss
of the property itself.
To confine the exclusions to expenses and claims other
than injury to the destruction of property was a reasonable
construction of the language of the exclusions in the context
of the token insurance coverage provided to the plaintiff by
the policy. It reflected the underlying principle of general
liability insurance. Just as the policy was not intended to
cover damage to the insured's product or work, it did
not cover the cost of preventive action resulting from the
failure of the insured's product. The clause,
however, had no application in the circumstances where, as
here, the use of the defective product had caused damage to
other property. (Underlining added)
In other words, if the third party's goods are damaged
as a result of defects in the insured's product, the third
party's claim for the cost of the recalling its defective
goods from its customers, will not be excluded by the product
What the exclusion is addressing is a product recall that is
a preventative measure to ascertain whether any of the goods
are damaged in the first place.
Whilst there are no New Zealand authorities on the
interpretation of a product recall exclusion that we are aware
of, a New Zealand court is likely to be guided by this Canadian
If liability insurers intend their products recall
exclusions to have wider application than this, we recommend
they are drafted very clearly to achieve this. Most of the
exclusions we have seen in the New Zealand market place are
unlikely to do so.
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reference and should not be relied on as a substitute for
professional advice. Specialist legal advice should always be
sought in relation to any particular circumstances and no
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The Sportscraft refunds and returns policy limitations went beyond consumer's rights under the Australian Consumer Law.
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