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.
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
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
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
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.
The Articles which appear in this Newsletter are not intended to be a substitute for specific technical advice.