Hot computer! |
This is the twenty second edition of Claim Solutions' Newsletter.
Highlighted are the world wide battery recall by Sony leading
to an article on product recalls. We also discuss stock claims.
A diverse list of possible insured events this quarter, on
page 4, includes a number of chemical spills and toxic fumes
& gas leaks along with fires, water damage, power failures
and the significant wind damage to crops in South Australia.
We specialise in the preparation of insurance claims. Please
do not hesitate to contact us if you require specific claims
assistance or simply have a general enquiry.
To see a list of recent losses, 
Sony
Lithium-ion Battery Recall
After recalls by Dell and Apple Computer in August, Sony
announced a "Global Replacement Program" for notebook
computer battery packs on September 28th. The recalls of lithium-ion
batteries used in notebook computers most notably affects
Dell, Apple and Toshiba. To date the recall exceeds 7 million
batteries (more than 4.1 million recalled by Dell).
Sony stated that the recall is to address concerns of "recent
overheating incidents". They explain that microscopic
metal particles in the battery may come into contact with
other parts of the battery cell leading to a short-circuit.
Sony advises that when this occurs a battery would normally
just power off, but in rare cases may overheat and cause flames.
Flames emitting from laptops have been the subject of news
reports spectacularly when one burst into flames at a Loss
Angeles airport. It has resulted in airlines banning their
in-flight use.
Sony has agreed to pay some of the costs of the recall advising
investors in August that Dell and Apple recalls could cost
between US$169million and US$254 million. Reuters report that
the higher figure is "about one-fourth of Sony's net
profit for the current business year to March".
Along with the potential costs, the Sony brand has been significantly
affected and the share price has dropped.
With less than a dozen actual incidents of battery incendiary,
are the costs of recall, loss of profits and market share
recoverable under any insurance policies?
In summary there would need to be appropriate Product Liability,
Product Recall, and/or Product Integrity insurance.
On page 2 we consider product recalls and insurance in Australia.
Product
Recall in Australia
To recall or not
to recall |
In the calendar year to date there have been 325 product
recalls (including all categories of products and closed recalls)
in Australia.
The largest product recall in Australia was that by Pan Pharmaceuticals
in April 2003. The Therapeutic Goods Administration recalled
1600 different products for reasons of safety.
Most commonly, products are recalled because of the failure
of a production process.
Then there are extortion attempts such as those resulting
in the recall of Panadol and Herron in June 2000 and Masterfoods'
recall of Mars & Snickers bars, in NSW only, in 2005 at
a reported cost of $10 million.
The process of recalling product may involve notifying the
public, consulting with police if it is malicious, dealing
with health authorities if it involves food and/or other government
departments for the manufacture of goods that must meet Australian
Standards.
Having the resources to cater for the return of product, additional
staff to notify wholesalers or retailers, advertising the
recall, special hotline phone numbers along with appropriately
trained staff is hugely expensive even before considering
the actual product cost, cleaning and/or re-manufacture, loss
of reputation and profits.
Historically product liability policies do not provide adequate
insurance for the events and costs outlined above and certainly
do not cover the loss of reputation and market share. In addition,
Product Recall insurance may not cover malicious acts. Specialist
liability policies are required along with broker and legal
advice to ensure the insurance is tailored to the business.
Such specialist insurance policies come under the headings
of Product Recall, Product Tampering, Product Integrity and
Extortion insurance to name a few.
The Australian Government website provides a Product Recall
Guide which identifies how to recall unsafe consumer products
and who has to be told. It also provides a list of current
products recalled. Check out www.business.gov.au (under Business
Topics and Fair Trading)
As accountants, Claim Solutions becomes involved in the quantification
of Loss of Profits associated with product recalls.
In the event of a claim or any general enquiries please do
not hesitate to call
Claim Solutions.
Odd
Spot - Where's there's Smoke……
Wheres the fire? |
Sometimes it's a tough choice for the feature article in
the odd spot each quarter. So we give you 3 this quarter.
1. There was a fire at Kirribilli House on 28 September. The
motorised front gates to the Prime Minister's residence caught
fire. Two fire engines were despatched, however, the fire
burnt out before they got there.
2. Australian Fashion Week in Melbourne in September started
with the evacuation of the St Kilda Sea Baths because of smoke
from a smoke machine. Three fire trucks attended this one.
3. A vat of chocolate became contaminated when a worker spent
2 hrs in it only being released after it was thinned with
cocoa butter!
A Fascinating Question
Fascinating! |
With the Spring Racing Carnival fast approaching Fascinating
Hats Pty Ltd's head milliner, Florian Ascot, and his team
were working around the clock, confident they were creating
a show stopping range and that this year's black is coral!
Then disaster struck. The sprinkler system in the building
housing their creations malfunctioned and water emitted for
20 minutes before being shut off.
The loss adjuster arrived to a scene of soggy ostrich feathers,
damp daisies, limp boas and curious corsages. They promptly
arranged for a clean up expert to assess the damage and advise
on treatment options.
They concluded the stock could be specially dried with no
lasting effect, the treatment would take at least 3 weeks
and the cost of this was the limit of indemnity.
However, as Florian patiently explained, the stock is damaged,
cannot be sold without identifying that it has been water
logged, cannot be replaced by external purchases and they
have lost the lucrative Spring Racing Carnival sales. Furthermore,
this year's coral will be next year's outdated orange!
The broker advised that the loss is covered under a standard
Industrial Special Risks Mark IV policy.
The loss adjuster suggests that the resultant Loss of Gross
Profit would be covered under Section 2 -Business Interruption
but the Material Damage claim is limited to cleaning the stock
only.
This is incorrect.
Fascinating Hats has incurred the cost of raw materials, labour
and other costs associated with the creation of the hats.
This cost is not recovered in the claim for Loss of Gross
Profit.
Let's go back to basics and work through the policy response.
1. Is the stock damaged?
Yes. Even though it may be completely repairable.
2. The Insured is entitled to be indemnified for the damage
in accordance with the Basis of Settlement.
3. In relation to the supplies of feathers, beads, combs and
hair pins etc, Basis of Settlement (b) provides "On raw
materials, supplies and other merchandise not manufactured
by the Insured: the replacement cost at the time and the place
of replacement or, if such property is not replaced, the value
thereof at the time and place of the damage."
4. The hats awaiting trimmings fall under Basis of Settlement
(c) "On material in process of manufacture: the replacement
value of the raw materials and the value of labour and other
overhead charges expended thereon at the time and the place
of the damage."
5. The completed hats & fascinators fall under Basis of
Settlement Clause (d) for finished goods which states that
the value of the damage is "the replacement value of
the raw materials and the value of labour and other overhead
charges expended thereon before any allowance for profit or
the cost of re-stocking such goods, whichever is the lesser".
6. Stock, whether it is raw materials, work in process or
finished goods, is not subject to the "Reinstatement
or Replacement Memoranda". This means it is not required
that the damaged stock be "repaired" or replaced
for the claim to be settled.
7. So the stock claim consists of stock that will be replaced
at replacement values and for stock not replaced the value
at the date of the damage. The claim is reduced by any value
received by the sale of the damaged stock.
All names & places have been changed to maintain privacy.
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