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             Product Liability
            Product Guarantee
              Product Recall
              Financial Loss

      Alexander Forbes Risk Services UK Limited
is a Member of the General Insurance Standards Council

1.     Frequently Asked Questions and Answers                     3

2.     A Summary of the Cover Provided                            8

3.     Suitable Trades                                            11

4.     Unsuitable Trades                                          12

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Q.     We have arranged a basic product liability policy for our client,
       won’t this be sufficient?

A.     Not necessarily. A basic product liability package only covers legal liability,
       costs and expenses arising from:

       -    accidental death or personal injury;
       -    loss of, or damage to, property; and
       -    obstruction, trespass or nuisance etc. ,caused by a defective product.

       It does not provide cover for:

       -    loss or damage to the actual defective product;
       -    the costs incurred in repairing, removing, replacing, re-applying,
            rectifying or reinstating a defective product;
       -    direct financial loss suffered by a third party, where no injury or
            damage is caused by the defective product;
       -    advertising, recalling or making refunds in respect of any defective

Q.     Our clients do not have product guarantee and product recall
       insurance. Why should it be of interest to them?

A.     The costs associated with product replacement can be enormous. To
       recover, repair, alter, treat or replace either a component, or indeed the
       entire product, will result in substantial costs and could cause a major
       disruption to business.

       Claims from third parties for direct financial loss, incurred following the
       failure of a product to perform its intended function, can also be substantial
       and often fall outside the scope of the financial loss cover provided by most
       UK insurers. This is because most financial loss covers in the UK will
       respond only to claims brought in tort, and not to claims in contract. Our
       policy will respond to direct financial loss claims brought by third parties
       against the insured in contract.

Q.     Can you show me an example of a typical product recall?

A.     The following example is taken from the Department of Trade and Industry
       publication “Consumer Product Recall – A Good Practice Guide”.

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       The product in question was a rattle designed for use by infants between
       the ages of 0 and 24 months. Each rattle cost £4. Three consumers in the
       Netherlands and Germany subsequently notified Lego that there was a
       problem with the rattle becoming stuck in the mouth of a baby aged
       between 6 and 7 months. Lego then made the decision to recall the
       product on the basis of the risk of danger to small children. By this time,
       over 600,000 rattles had been distributed in 70 countries, including some
       £50,000 worth placed with distributors and consumers in the UK. Lego had
       to issue a press release to news agencies and the main UK media alerting
       them of the recall. They recruited extra staff at their call centre to answer
       additional queries from concerned parents and arrangements for returning
       and destroying the toys were also made.

       The total cost of this recall exercise to Lego was £3,500,000 and a basic
       product liability policy would not have covered any of the above costs.

Q.     My client has studied the example and has decided, for
       commercial reasons, not to obtain any additional cover.

A.     This approach is not recommended, as a failure to observe their duty of
       care to the safety of customers, and the public at large, could lead to

       Such was the case in Walton v British Leyland (Case 1976W No. 2896)
       where British Leyland had information that a serious problem existed with
       one of its cars, but decided not to effect a recall as it did not want to
       “damage the product”. Since then, the legislation has been further
       reinforced with the addition of the General Product Safety Regulations
       1994. These introduced a statutory obligation for producers and distributors
       to monitor products on an on-going basis and to “take appropriate action,
       including, if necessary, withdrawing the product in question from the

       There is now a vast amount of legislation in place regarding product safety,
       including, but not limited to, the following:

       -    Consumer Protection Act 1987;
       -    Sale of Goods Act 1979;
       -    Food Safety Act 1990;
       -    Medicines Act 1968; and
       -    General Products Safety Regulations 1992 / Amendment Regulations

       Product guarantee, product recall and financial loss insurance can help your

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       client take precautions to defend against prosecution under these statutes.

Q.     How many recalls occur each year?

A.     The US Government operate a central database, from which hundreds of
       recalls are announced each year. The UK, however, has no such operation.
       There is a vast amount of information available from the DTI and ROSPA.
       In fact ROSPA alone advertised 53 product recalls during 1999. This figure
       does not represent the total number of recalls, for they only advertise food
       and drink recalls when the product has been contaminated. Other bodies
       to announce recalls in the UK are the Trading Standards Authority, the
       General Medical Council and the Ministry of Agriculture, Fisheries and Food.

Q.     What cover is Alexander Forbes Risk Services able to offer?

A.     Policies are available in the following defined areas:

(1)    Product Guarantee/Financial Loss
(2)    Product Recall ( inc. Deliberate Contamination )
(3)    Product Liability

Q. Do my clients have to take out cover in all areas?

A.     No, although cover for financial loss is not available without either product
       liability or product guarantee cover alongside.           Otherwise various
       combinations of cover and limits are possible to meet the needs of your
       individual clients. Product recall can be bought separately.

       We would strongly advise the majority of clients to obtain a combined
       policy covering product guarantee, product recall and financial loss. There
       are also benefits associated with the inclusion of product liability cover in
       the same complete package, as this results in virtually all of the insurable
       risks associated with your client‟s products being covered under one policy
       with one insurer.

Q.     Do my clients have to take out insurance for all of their product

A.     Generally yes. However, in certain circumstances underwriters will provide
       cover limited to specific products. This option is, of course, viewed as
       selecting against them so premiums may tend to be loaded as a result.

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Q.     What limits of indemnity are available?

A.     In respect of product guarantee, product recall and financial loss, the
       primary Insurers‟ maximum limit of indemnity is £ 10,000,000 each claim as
       a combined single limit, and in the aggregate for any one period of

Excess of loss cover for all policy sections can be arranged upon request.

Q.     How much is the deductible?

A.     There is no standard deductible. However, underwriters will usually expect
       an "each and every" deductible of at least £5,000 and deductibles in excess
       of £250,000 are not unusual for large organisations. There are attractive
       premium savings available for larger deductibles, and we are happy to
       provide a range of alternative quotes.

Q.     Do my clients have to have a product recall plan in place in order
       to obtain product recall insurance cover?

A.     No. However, we would strongly recommend that a plan is put in place as a
       „best practice‟ procedure. If your client does not have a recall plan, we can
       provide information on the type of procedures that will be suitable and, if
       necessary, put them in contact with specialists in this field.

Q.     What is the purpose of the retroactive date?

A.     Normally, cover will be subject to a retroactive date of inception. This
       means that insurers will only be liable in respect of products supplied or
       work undertaken after that date. Up to 3 years retroactive cover is
       generally available, covering past products or works, for an additional

Q.     Can our clients use this insurance as a marketing tool, advertising,
       for example, "Insurance Backed Guarantees"?

A.     No. It is a condition precedent to liability that the existence of this
       insurance is not disclosed by the insured on any advertising material,
       information or data sheets or similar descriptive material, or in any
       guarantee or similar documentation supplied by the insured. Disclosure by
       the insured of the existence of this insurance would void the policy.

       “Insurance Backed Guarantees” are usually solvency guarantees, rather

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       than product guarantees. For more information please contact either the
       Insurance Guarantee Association on 01959 540506 or the Independent
       Warranty Association on 01604 604 511

Q.     What would be the usual minimum premium for this insurance?

A.     For low-risk trades with good underwriting features, a minimum premium of
       £2,500 may apply. Otherwise minimum premiums are likely to be at least
       £5,000 and for very large concerns premiums can be substantial.

Q.     Can you arrange a period of insurance in excess of 12 months?

A.     Certain of our selected carriers will offer individual policy periods excess of
       twelve months upon request. This offers the benefit of reduced
       administration costs, in addition to protecting your clients from increases in
       insurance premium tax. The premium can be paid in two instalments, the
       first within thirty days of inception and the second within 30 days of the
       commencement of the second year of cover.

Q.     What commission will we receive as sub-brokers?

A.     Commission is negotiable but usually paid at a rate of 10%, on agreement
       that the premium is paid to ourselves within 30 days of inception.

Q.     What information do you need to quote?

A.     You will find a simple proposal form enclosed with this pack. The questions
       are very straightforward, and all we ask is that you arrange for your client
       to complete the proposal in full and then forward it back to us for a quote
       to be issued. If you have any further questions then please do not hesitate
       to contact us at any time.

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Product Guarantee - indemnifies the insured where they are legally liable for
the cost of removal, recovery, repair, alteration, treatment or replacement of any
product or works which fails to perform its intended function.

It does not cover:

(i)    the costs incurred in recalling, replacing or reworking other products, which
       may prove to be defective, which have already been supplied. (This is
       Product Recall cover)

(ii)   any costs that relate to products which have been manufactured but have
       not yet been supplied, i.e., they are still on your client's premises;

(iii) financial loss incurred by your client's customers or third parties as a result
      of any product or works which fails to perform its intended function.

(iv) products prior to their unqualified acceptance by the insured‟s customer.

Product Recall - covers the insured's costs incurred for the recall of the
products or work supplied because their use or consumption may lead to the
insured incurring a legal liability either in terms of product liability, product
guarantee or financial loss.

Costs will include:

(i)    the reasonable and necessary expenses of correspondence, newspaper and
       magazine advertising, radio and television announcements;

(ii)   the transportation costs incurred in returning the products;

(iii) the cost of examining the products;

(iv)     the costs incurred in replacing or re-working the products;

(v)      the cost of delivery to the customer.

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Cover will not include:

(i)    products which have not been distributed by the insured and which remain
       in the care, custody or control of the insured;

(ii)   products prior to their unqualified acceptance by the insured‟s customer.

The product guarantee and product recall covers fit together well as a package,
although the risks insured under each head will vary depending on the type,
volume and cost per item of the product your client "manufactures".

Generally the cover should be viewed as a package, and there are usually risks
associated in selecting to insure for only some areas. Such selection also results
in only a very small percentage saving in terms of premium.

Product Liability - our policy follows the general format of most standard
policy wordings, other than it is issued on a claims made basis.

The policy covers claims or circumstances, notified by the insured in writing to
the insurers, within the current year of insurance. Any event which the insured
becomes aware of after the period of insurance has expired, would need to be
dealt with by a subsequent policy.

This basis gives the insured the opportunity to increase their limit of indemnity
from year to year to cope with as yet unreported claims, no matter when the
product was manufactured or supplied. It also provides the insured with an anti-
inflationary safeguard, as there is a possibility that an event giving rise to a claim
could have occurred some years ago but the insured will only become aware of it
during the current period of insurance. By reviewing the limit of indemnity
annually, the insured can cater for trends in their business and trends in claims
settlement, and ensure that they have adequate protection at all times.

All product guarantee and product recall policies are written in this way, although
many insurers issue product liability policies on an "occurrence" basis.

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Financial Loss - indemnifies the insured where they are legally liable for any
financial loss incurred by their customers, or by third parties, as a result of any
product or works which fail to perform their intended functions, where such
financial loss is not embraced within the scope of the product liability or product
guarantee cover.

For example, the insured supplies a machine to their customer which turns out to
be defective, although no physical damage is inflicted. Product guarantee will
pay for the costs of repairing or replacing the defective machine but financial loss
will cover the insured's legal liability for financial losses caused by the defective
machine, e.g. the customers lost profits through a break in production.

As mentioned earlier, this policy will respond to financial loss claims brought in
contract as well as those brought in tort and, as such, provides an unusually
wide breadth of cover.


Check that ALL your clients who buy Financial Loss insurance are
covered for claims brought in CONTRACT AS WELL AS IN TORT. If not

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 General factory manufactured goods

 Building Products (manufactured and raw materials)

 Engineering Products and Components, including Automotive components

 Toys

 Packaging materials/products

 Plastics

 Rubber Products

 Curtain walling/Cladding/Roofing materials

 Surface Coatings ( inc. powder coating )

 Adhesives

 Safety and Security Products

 Electrical Components, including “brown/white” goods

 Food & Drink. (Note. Please contact us for details of our Contaminated
    Product Insurance facility)

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    General construction, contractor related and on-site risks.

    Computer software

    Buildings

    Complete Motor Vehicles and Garages ( although individual vehicle
     components are acceptable)

    Anti corrosion products

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