CHAPTER § 5.03 Insurance Coverages for First-Party Losses

• Jurisdiction: United States

§ 5.03 Insurance Coverages for First-Party Losses

[1] Product Recall

Product-recall insurance is an insurance product that is relatively new to manufacturers outside of the food and beverage industry,⁶² and it generally provides coverage for financial losses that a company incurs as a result of withdrawing a product from the market.⁶³ The policies are often occurrence policies, with coverage trigged by the occurrence of a recall or market withdrawal of a product, caused by any number of issues such as, among other things, unintentional contamination, product defect, intentional tampering. This line of insurance typically includes coverages for direct expenses associated with the withdrawal, such as notification costs, mailings, packaging costs for returning the withdrawn product, and disposal costs for the defective product.⁶⁴ Some product-recall insurance policies may also cover business-interruption losses or lost sales, as well as costs for crisis management and public relations, as well as legal and investigation expenses.⁶⁵ Finally, some product-recall policies may provide coverage for certain third-party expenses such as personal-injury claims and Legal costs associated with regulatory and governmental investigations. Typically, however, these policies do not provide coverage for the actual replacement of the product.⁶⁶

The terms of product-recall insurance policies vary greatly among the industry. One key difference among policies is what constitutes an occurrence (or "Insured Event," as it is often referred to). By way of example, some policies may include language that the relevant withdrawal or recall must be ordered by a government entity in order to trigger coverage,⁶⁷ while others will recognize a voluntary withdrawal as a triggering event. Other policies may include language that any contamination must be the result of the negligence of the insured, rather than some downstream supplier.⁶⁸

Definitions of "Insured Product" also differ across insurers and can significantly impact the scope of coverage. Some policies require that the affected product be "among the categories of items covered by the policies," while others will only cover products specifically listed and/or described within the policy.⁶⁹ Still other policies "limit the covered products to those items manufactured, distributed, or handled by the insured which are being sold or will be sold to the public."⁷⁰ On the other hand, some policies will "cover the entire range of the insured's products . . . , including their ingredients or components, provided the insured's goods or products are or will be available for sale."⁷¹

Industry Application: Abbott Laboratories sought coverage under its productrecall insurance after recall of one of its medications. Specifically, in 2002, the Italian Ministry of Health suspended sales and marketing of a medication known as sibutramine.⁷² Abbott submitted a claim under its recall policies for Meridia (its sibutramine product).⁷³ Abbott's insurers sued Abbott to rescind the policies, claiming that Abbott had "made material misrepresentations in its insurance application regarding potential risks created when it acquired Knoll Pharmaceutical Company."⁷⁴ Knoll's products included Meridia and Synthroid.⁷⁵ Abbott counterclaimed for a declaratory judgment, breach of contract, and "vexatious delay damages."⁷⁶

The insurers argued that Abbott had not sufficiently disclosed the "regulatory situation" of Synthroid (about which a Wall Street Journal article was written and press release was issued), and therefore, Abbott could not recover for losses arising from suspension of Meridia sales.⁷⁷ The trial court rejected the insurers' rescission claim, but also rejected Abbott's vexatious-delay counterclaim based on the insurers' unreasonable conduct, "finding that a bona fide coverage dispute existed with respect to Synthroid which, if proved, would have voided the contract and excluded coverage for the Italian government-related Meridia claim."⁷⁸ After cross appeals, the appellate court affirmed the trial court.⁷⁹

[2] Cyber

Cyber insurance provides coverage for losses arising from the loss of data or a malicious data breach, including coverage for unauthorized access of computer systems, ransomware, and viruses. This type of insurance often provides broad coverage for a wide variety of first- and third-party losses arising from a cyber incident. Examples of first-party costs that cyber insurance policies often cover include those arising from:

• forensic investigation of the incident;
• crisis-management and public-relations firms;
• legal advice relating to the cyber incident;
• restoration or remediation of systems;
• cyber extortion;
• business interruption;
• expediting and/or extra expenses for restoring systems or continuing to operate a business; and
• providing legal notice to consumers and setting up call centers.

Examples of third-party costs that cyber insurance policies may cover include those arising from:

• regulatory investigations by state and/or federal agencies;
• fines and penalties; and
• consumer lawsuits alleging violations of privacy.

Cyber-insurance policies are relatively new products on the market; nevertheless as of 2018, approximately 528 U.S. insurers reported writing cyber insurance.⁸⁰ Given this reality, there is no single standardized cyber-insurance form⁸¹—as there are with other types of insurance coverages—resulting in widely varying coverages, exclusions, sublimits, and premiums. There is also no single policy that provides coverage for all losses associated with a cyber incident. The industry is continually learning about the ever-evolving landscape of cyber risk and how new technologies affect those risks.⁸² Given this reality, underwriting business interruption arising from a cyber incident is particularly difficult.⁸³

In a similar vein, and given the relative newness of cyber insurance, there is little case law...