Telematics – A Risky Business?

As consumer demand for safer, more comfortable state-of-the-art vehicles intensifies the telematics industry is gearing itself for unprecedented growth over the next few years. Industry experts predict that telematics will break out of the luxury vehicles market into the mid-range car market in the next twelve months and will become standard in smaller cars within two to three years. But as with the development of any new product, the telematics sector faces a number of challenges and none more so than the issue of product liability. As a result businesses are now more aware of their potential liability than at any time in the past.

There are several reasons for this. Firstly, tougher consumer protection laws are in place and, consequently, producers are exposed to greater risk of civil and criminal liability for harm caused by defective products. In tandem with this, consumers have become increasingly aware of their rights and have become a great deal more pro-active in pursuing these rights. Finally, and perhaps as a consequence of the first two factors, the acceptability of product recalls has grown. Over the last few years we have seen several "high-profile" recalls within the automotive industry. In August 2000, Firestone voluntarily recalled 6.5 million tyres which were mainly fitted on the Ford Explorer. In May 2001, Ford decided to recall a further 13 million tyres. The cost of the recall was approximately US $3 billion and marked the end of a 95 year old business alliance between the two companies.

If a telematics system goes wrong, there are a number of consequences. The severity will depend, to some extent, on the nature of the problem and the way it is handled. Looking at telematics systems that are "safety critical" such as those which can assist the police to "remotely" stop a stolen car. What happens if the system goes wrong and as a result death occurs? Even for systems which do not include safety critical systems, the supplier can be exposed to liability beyond simply rectifying the failure. For example, if the system performs a "business" critical function, such as tracking of delivery vehicles, a failure in the system may give rise to the business arguing that it has suffered loss as a consequence.

In terms of the telematics supply, the system will either be supplied direct to the user or to the original equipment manufacturer (OEM). The likelihood is that the supplier will also be supplying the system into a number of jurisdictions which have differing product liability regimes. Some jurisdictions give regulators the power to order product recalls without recourse to the supplier of the product. In the case of supplies to the OEM, the manufacturer is likely to approach the supply in much the same way as supplies of other component parts. It is typical within the industry for the OEM to insist on contractual terms with the supplier which will oblige them to reimburse the manufacturer or make a contribution towards product recall costs, remedial actions taken by the OEM and claims made against the manufacturer by a user.

All of this may seem a little depressing. In truth, the risk issues in the supply of a system are similar to those faced by manufacturers supplying any number of components into the automotive industry. What differs is the extent to which failures in the system can cause significant loss or damage, personal injury or even death and the ease with which any problems or potential problems can be rectified. Telematics suppliers must ensure they identify the risks and how these can be best managed as well as exploring the necessary insurance opportunities. OEM's and suppliers should work together to agree acceptable contract terms and formal statements as to how recall campaigns and costs will be managed. If only Firestone had an agreed recall policy and campaign along with an agreed publicity policy much of the damage that resulted from the episode could well have been avoided.