A host of recalls by auto companies and legal action against Indian pharma companies overseas has made insurers tread with caution. Insurance companies are having concerns over selling product liability to the two sectors.
A leading pharma company which had a product liability cover of Rs 25 crore is understood to have used up the entire amount in legal charges in respect of a product liability claim. In the auto sector, General Motors had recalled 1.14 lakh Tavera multi-purpose vehicles and Yamaha had recalled 56,000 Ray scooters after detecting manufacturing defects. Insurers have been selling product liability cover up to $20 million (Rs 120 crore) and recall covers ranging from $3 million (Rs 18 crore) to $5 million (Rs 30 crore).
“Insurers have always been cautious about auto and pharma when it comes to product liability. Recent incidents will add to their concerns,” said G Srinivasan, chairman, New India Assurance. Product liability insurance is a popular cover among manufacturers to protect themselves against legal claim for damages for any deficiency in their products. The ‘product recall’ cover is an add-on to the product liability policy and is purchased largely by auto and auto component manufacturers. “We have had recall claims, but none of the recent events are covered by us,” said Srinivasan.
T A Ramalingam, head, underwriting, Bajaj Allianz General Insurance, said, “The insurance industry sees product recall as a loss minimization measure aimed at reducing a bigger loss arising out of product liability. In the cover we offer, there has to be material damage or loss of life caused by manufacturing defect for the claim to be triggered.”
There are, however, international policies which cover proactive recalls but the underwriting procedure is very stringent and insurers go through all the quality control processes followed by the company before issuing the cover. Insurers believe that GeM India has a product cover as part of an international ‘umbrella cover’ which covers operations across geographies.
What makes the recall cover expensive is the total cost of the process. In most cases, the process ends up being more expensive than the spare part itself. Besides arranging for transportation of the vehicle, workshop costs and costs of spares, there is the cost of publicity. Some of the international policies, besides covering the cost of media announcements, also cover the cost of hiring public relations firms to reduce the reputation damage.
In the case of pharma companies, product liabilities are expensive because of the huge penalties and fines imposed by the government. Earlier this year, Ranbaxy paid close to $500 million in penalties to US regulators to settle a case of substandard manufacturing practices and falsifying data.
Source :The Times of India.
Date : 06/08/2013
Writer: Mayur Shetty TNN