The types of liability issues faced by automakers vary, but are always costly, making insurance a necessary concern.
Product Recall Insurance
Automobile recalls are expensive, as evidenced by the worldwide recall by the Toyota Motor Corporation where some estimates top Toyota’s exposure at more than $4 billion. Given the enormous costs of an automobile recall, product recall insurance can be an important consideration for manufacturers. Coverage varies, but may cover some or all of these expenses: (1) the costs of inspecting, destroying and replacing the recalled product and the costs of publicizing the recall; (2) lost profits; (3) the costs of reestablishing the reputation of the brand and associated market share; and, (4) response expenses.
Comprehensive General Liability Insurance
Most Comprehensive General Liability (CGL) policies exclude costs associated with product recalls. The “sistership” coverage exclusion was developed in 1966 in the wake of insurance claims for losses arising from the grounding of “sister” aircraft when one plane was found to have a defect and other planes were grounded just in case they had the same defect. The standard language of the sistership exclusion was altered in 1985 to clarify the scope of coverage available for “third-party recalls,” meaning recalls initiated by entities other than the insured manufacturer; that language has been construed against insureds seeking coverage for losses stemming from a product recall. Generally, under a CGL policy, if a product has been recalled because of an incorporated defective component, a court might look to the definition of “property damage” in the policy to assess coverage. Courts have generally agreed that incorporating a defective component into a larger structure or system does not constitute insured injury to tangible property unless the defective component physically injures some other part of the larger system.
Applied to automobiles, for example, if a car is recalled due to potentially defective tires and a tire-caused crash occurs, the defective tire can be deemed to have caused property damage to the finished product; however, if the automaker withdraws its cars from the market because some tires have been found to be defective and may cause a crash, there has generally not been “injury to tangible property” under the terms of the CGL policy.
Self-driving Cars
One area that merits close attention from insurers is driverless, or “autonomous,” cars. Even though driverless cars are not yet in widespread use, automakers are already grappling with the issue of whether the liability for accidents lies with the manufacturer or with the human driver. Some industry-watchers have posited that certain new technologies appearing in cars pose risks for drivers rather than increasing their safety.In March 2018 a self-driving vehicle hit and killed a pedestrian in Arizona, the first accident up to this time resulting in a fatality and involving a fully self-driving vehicle. The accident is likely to present a test of who might be legally responsible for an event in which a human driver is not at the wheel. The car was a Volvo traveling in autonomous mode. Technology suppliers, Volvo and others could be sued. The human “safety driver” who was behind the wheel appeared to not have been operating the vehicle at the time of the accident and might also be subject to litigation. Volvo, which said in 2015 that it would accept full liability if one of its vehicles was involved in an accident while in autonomous mode, stated that the software controlling the car was not its product. A lawsuit involving an autonomous vehicle might highlight the question of possible design defects, while on-board monitoring systems would be examined to determine if all the control systems were functioning properly.