(June 2020)
Equipment breakdown can result in catastrophic events that are obvious to all. However, some equipment may breakdown in less obvious manners that result in defective products. This damage can potentially be even more damaging if those defective products make it into the marketplace and result in serious bodily injury or property damage to the consuming public.
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Example: Manic Monday Cookies receives a frantic call from a supermarket client. A customer just returned a cookie that contains a metal shaving. Her mouth was cut, and she is demanding restitution. Manic’s team jumps into action and contacts the customer to obtain all labeling information. While the legal department handles the initial injured customer, Manic’s quality control and risk management use the label information to determine how a metal shaving could have gotten into the cookie. The factory line is located, immediately shut down in order for a complete review to take place, and all shipments of products from that line are halted. All clients are notified to remove products from that line from their shelves. Inspection reveals that a previously undetected worn piece has been sloughing off metal shavings into the batch. An internal review made in collaboration with the FDA determines the batches that are to be recalled. A contract is placed with a recall specialist, and a regional withdrawal program begins. Manic Monday submits a claim to Equipment Insurance Company for the breakdown and for the withdrawal expense. |
The coverage provided by this endorsement is limited to the breakdown of equipment that is located at the premises scheduled.
Only the expenses associated with the withdrawal of scheduled covered products is covered.
This endorsement pays for the cost to repair or replace the defective product. If coverage for the expenses that are part of the withdrawal process are to be covered, the Additional Expenses Are:
Covered box must be checked. A check should be shown in the Not Covered or the Covered box in order to prevent confusion.
A per product withdrawal limit and an annual withdrawal limit must be entered.
A per product withdrawal deductible must be entered.
Note: These limits and deductible are not subject to any others on the policy.
A. A specific set of events must occur in order for coverage to apply.
Step 1: A breakdown in covered equipment must occur.
Note: This may not be an obvious breakdown. It could mean that metal shavings start to shear off into the product or an inaccurate calibration of ingredient measurement takes place.
Step 2: The equipment must be located at the scheduled premises.
Step 3: The breakdown must occur and be reported to the insurance company during the policy period.
Note: There is no requirement that the product withdrawal must be started during the policy period.
Step 4: The scheduled covered product must become defective because of step 1.
Step 5: A withdrawal of the defective product takes place.
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Example: Manic’s policy is effective from 1/1/2017-1/1/2018. Scenario 1: The breakdown occurred on 12/1/16, and the carrier wasn’t notified of the breakdown until 1/5/2017. The product withdrawal is not covered. Scenario 2: The breakdown occurred on 12/31/2016, but the carrier wasn’t notified until 1/15/2017. The product withdrawal is not covered. Scenario 3: The breakdown occurred on 2/1/2017 and was reported to the carrier on 8/1/2017. The product withdrawal is covered. |
B. If the withdrawal meets the steps outlined in A. above, the following expenses are covered but only if they are directly related to the withdrawal:
· The cost to repair the product
· The cost to replace the product
· The actual expense the named insured incurred to manufacture the product I
· Notifications that a withdrawal is taking place. This involves stationery and postage but does not include the cost of taking out ads, hiring outsiders to design the announcements, etc.
· Meals, transportation, and other accommodations for employees plus overtime pay.
· Cost of computer time
· The expenses to hire independent contractors and temporary employees
Note: There is no explanation as to what services these contractors must be providing.
· Packaging, shipping and transportation
· Storage and warehouse space
· Necessary disposal cost when product is not salvageable. This item is limited to no more than the cost to manufacture the product.
C. The most paid for all product withdrawal expenses emanating from one equipment breakdown is the scheduled per withdrawal limit.
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Example: Manic is concluding its product withdrawal campaign when it is notified of a batch that was not included in the initial withdrawal. All costs associated with the second withdrawal must be added to the initial withdrawal and considered as a single occurrence. |
The most paid for the sum of all occurrences in a single policy period is the scheduled annual aggregate limit.
The scheduled deductible must be deducted from any loss settlement.
Note: This is a per product withdrawal deductible but not a per occurrence deductible. This could mean that multiple deductibles could apply even though only one occurrence limit applies.
D. The following exclusions are added for only the coverage provided by this endorsement:
1. Known Defect
There is no coverage when a withdrawal is the result of a defect of which the named insured was aware prior the product leaving its care, custody, or control. It also doesn’t apply if the named insured knew about the defect before the coverage provided by this endorsement went into effect.
2. Loss of Use of Property
There is no loss of use coverage provided by this endorsement regardless of what entity sustains the loss of use.
3. Quality Control
The named insured is expected to conduct its operations in a prescribed manner so if quality control was not handled per its own procedures, there is no product withdrawal coverage.
E. The following five conditions are added for only this endorsement:
1. The annual aggregate applies for each 12 month annual period. If a period is extended, the annual aggregate period is also extended. If the policy period is less than 12 months that policy is subject to its own aggregate.
Note: This is the same condition that is on the commercial general liability coverage form and other liability coverage forms.
2. The product withdrawal must be initiated because the named insured decides either that it is necessary or the named insured has been ordered to withdraw product by the appropriate government entity.
3. Withdrawal expenses are paid only if the product withdrawal was initiated and reported to the insurance company within one year of the breakdown, and the expenses were incurred within a year of the withdrawal being initiated.
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Example: If the product-damaging
breakdown occurred on 3/1/2017, ABC must notify its carrier no later than
2/28/18 that a product withdrawal is necessary. If ABC begins the product
withdrawal on 2/28/18, all covered expenses incurred up to 2/28/19 are
covered. The carrier having coverage on 3/1/2017 is the only carrier
responding to the product withdrawal loss. |
4. The initial product withdrawal is based on when the named insured first announced that a product withdrawal was going to take place. The date is set, whether it is a general announcement, a vendor only announcement or an employee only an announcement as long as the employees being notified are not only those deliberating on the product withdrawal.
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Example: The president of ABC really didn’t want to initiate a product withdrawal. She called in three senior vice presidents to consult on whether one was needed. She then presented the alternatives to the board of directors. After a thorough review, a decision was made to initiate the product withdrawal. She first notified her vendors so that they would be a step ahead of their customers. This announcement is the beginning of the initial product withdrawal. |
5. The named insured is not required to provide advance notice to the insurance company of an impending product withdrawal, nor is it required to receive approval. However, once the withdrawal has been initiated, the named insured must do all of the following:
· Record the details of the breakdown that caused the product defect and the date on which the withdrawal started. This recording must be done immediately.
· As practicable, provide the written notice of the product withdrawal.
· Do that which is reasonable to make sure the withdrawal expenses are appropriate and restrained.
F. The following definitions are added for only this endorsement:
1.
Covered Product
The products scheduled on this endorsement. These are not only the manufactured products themselves but also any items that are provided along with them.
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Example: Jerry’s Furniture lists Furniture as the product. When a customer receives furniture from Jerry he or she also receives a kit to be used in repair and maintenance of the furniture. That kit, when provided with the furniture, would be considered product. Any kit that might be sold separately from the furniture would not be considered product unless specifically scheduled. |
2.
Defect
a. Defect must meet all of the following conditions:
· The covered product fails to meet the purpose for which it was made.
· That failure must cause the product to be considered either inadequate or deficient.
· The reason for the first item is due to an equipment breakdown occurring while that product was being manufactured.
b. However, a defect does not include any of the following, even if it might otherwise meet item a. term above:
· Poor workmanship
· Materials that were not appropriate
· Any warranty fitness breach
· The failure on the part of the named insured to provide any type of instruction.
The only exception is if any of the above b. items resulted from the defect-rendering equipment breakdown.
3.
One Occurrence
All of the expenses that are incurred from a product withdrawal that is the result of a single breakdown is considered one occurrence. If multiple withdrawal events occur from the same product withdrawal, all of the expenses are added together as one occurrence.
4.
Product Withdrawal
A product withdrawal starts with a defective covered product. There is no withdrawal if the product is not defective. There is also no withdrawal if the defective product does not meet the definition of covered product.
The withdrawal part of this definition means that the defective product or a product containing the defective product is removed from the market or its use by any entity is stopped.