hb litigation conferences product recall issues...

HB Litigation Conferences

Product Recall Issues June 9, 2009

Presenters

Michael Keating, a Director in the Atlanta office of Navigant Consulting, is

responsible for the Business Continuity Management practice. His

specialty is

in enterprise‐wide business continuity programs, and he has assisted clients of

nearly every size and industry type prepare to minimize the impact of business

interruptions, corporate crises and pandemic risk.

Linda Kornfeld,

is the Managing Partner of Dickstein Shapiro’s Los Angeles

office and a partner in the Insurance Coverage Practice. She

represents insureds

in complex litigation matters. She also provides insurance risk management

advice to her clients with respect to policy procurement and renewals.

According to Chambers USA: America’s Leading Lawyers for Business, Ms.

Kornfeld and fellow partner Kirk Pasich

“are the best attorneys in California

when you have a claim against an insurance company.”

Ms. Kornfeld also has

been recognized by Business Insurance

on its list of the top 50 “Women to

Watch”

in the insurance industry. In 2009, the Daily Journal

named her as one of

California’s top 100 women litigators, and Southern California Super Lawyers

named her as one of Southern California’s top 50 women lawyers.

Brad Murlick, a Managing Director in the Chicago office of Navigant

Consulting, leads Navigant Consulting’s

Insurance Claims Accounting &

Consulting practice. He has extensive experience assisting numerous clients

with the preparation, negotiation and settlement of complex insurance claims,

as well as commercial litigation.

Strategic Operational ConsiderationsFor Product Recalls

Michael Keating, DirectorNavigant Consulting, Inc.

Strategic Considerations for Product Recalls

1.

There is no substitution for preparedness – some aspects of response cannot

work without it.

2.

Plan for the event like the enterprise crisis it could become, not what it

seems to be presently.

3.

Understand the blame game. Accept responsibility (and even apologize) if

warranted.

4.

Think through long term issues while (or before) addressing immediate

ones.

5.

Learn from the recall. Lighting can absolutely strike twice.

No substitute for preparedness

»

Many desirable capabilities are only developed in advance›

Effective team

›

Traceability tools›

Insurance coverage

›

Supplier quality control provisions»

Preparedness demonstrates concern which is a chief defense against blame

and outrage

»

Preparedness instills confidence to act boldly/quickly»

Recall preparedness helps integrate the crisis management effort


General preparedness approach

•

Develop governance addressing key

aspects of the overall program•

Perform interviews, workshops and other

data gathering to learn product recall

program requirements•

Develop effective but efficient strategy to

identify product recall exposures as they

occur and respond to outside inquiries•

Document plans with a focus on executing

them in real circumstances•

Perform exercises to train management

and develop improvement opportunities for

the future• Establish ongoing maturity expectations

Build a Basis

Maintain Maturity

Design the Detail


Classification, Scope & Depth

»

Classification: How Serious is the Recall?›

Defined/set by agency regulation

›

Determined by level of risk/impact

»

Scope: What Product Is Impacted? (“Traceback”)›

General Rule: Clean break to clean break

›

Use lot codes and frequent “breaks”

to minimize scope›

Have confidence in scope determination to avoid expanded recalls

»

Depth: To What Level Do You Recall?›

Driven by class and scope‒

Consumer

‒

Retail‒

Warehouse


Retrieval, Disposition and Effectiveness Checks Plans

»

Determine appropriate method of product retrieval and destruction, rework

or other market correction

»

Determine resources

»

Develop a method for destruction & verification

»

Effectiveness Checks:›

Verifies all consignees have received notification of the recall

and taken

the appropriate actions as directed by your company;

›

Ensure all of the above information is documented, so you can prove

the recall was effective.


Stakeholder Communications Plan

»

International, National, State & Local Government and Regulatory

Agencies

»

Senior Internal Leadership»

Field Sales, Brokers, Distributors

»

Consumer and Customer Relations»

Suppliers, Co‐manufacturers, DC’s

»

Customers»

Consumers

»

Employees»

Media

Timing of communications to these stakeholders is critical

Plan for the event as an enterprise crisis

»

Many executives do not usually think of product recalls in isolation – there

is a need to integrate with the broader crisis management structure

»

This is especially true considering the consequential impacts of

a recall›

Brand damage

›

Business interruption›

Contract disputes

›

Regulatory investigations›

Legal actions

›

Board level decisions»

Product recall plans that are siloed may address the tactical recover of

suspect product well, but can totally miss the consequential impacts

Plan for the event as an enterprise crisis

»

Most recalls start small but can get worse if mishandled›

Additional blame

›

Inconsistent handling›

Failure to “connect the dots”

»

Integrated teams are the key to proper management›

Product Design

›

Media Management›

Customer/Sales Management

›

Logistics›

Technology

›

Regulatory/Legal

Understanding and Managing Blame –

Mattel Story

»

On August 1, 2007, Mattel recalled toys modeled on Sesame Streetʹs Big Bird and

Elmo, and Nickelodeonʹs Dora the Explorer because of lead levels

in the paint used.»

On August 8, 2007, 3.8 million of Cartoon Networkʹs Fosterʹs Home for Imaginary

Friends toys were removed due to the excessive amount of lead paint in the toys.

»

On August 14, 2007, additional recalled products made in China include: 7.1 million

Polly Pocket toys produced before November 2006; 600,000 Barbie and Tanner

Playsets; 1 million Doggie Daycare, Shonen Jumpʹs One Piece and thousands of

Batman Manga toys because they had exposed magnets that could fall off. The

company also recalled Sarge die cast toys from the Pixar movie Cars (movie) because

of concerns over the level of lead used in the paint on them.

»

On September 4, 2007 Mattel recalled 800,000 Barbie

doll accessories and Fisher‐Price

toys after tests showed the paint used on them contained lead.ʺ Several

subcontractors are no longer manufacturing Mattel toys. ʺWe apologize again to

everyone affected and promise that we will continue to focus on ensuring the safety

and quality of our toys,ʺ said chairman and chief executive Robert Eckert.

»

On September 21, Mattel issued an apology to China over the recall of Chinese‐made

toys, taking the blame for design flaws and acknowledging that ʺvast majority of

those products that were recalled were the result of a design flaw in Mattelʹs design,

not through a manufacturing flaw in Chinaʹs manufacturers.”

Understanding and Managing Blame

ʺResponsibility belongs to the end seller of the product, the distributor in the

U.S. The guys in the U.S. can do a lot about controlling quality.

Communication is better [between the U.S. and China] than itʹs ever been –

there are bilingual folks, travel back and forth is easier, setting up offices in

China is much easier. There is no excuse for a company not to have strong

oversight.ʺ

‐

Gordon McBean of Roth Capital, experienced surveyor of Chinese manufacturing

facilities from an investorʹs vantage point

ʺTo be shocked about conditions in Chinese factories after more than a decade

of close cooperation between Chinese toy manufacturers and American

distributors is not terribly believable.”

‐

William Kirby, a historian of modern China at Harvard

Understanding and Managing Blame

What we learned from Mattel

»CEO Front and Center»National Advertising Campaign re: recall»Changed Lead Paint and Magnet

Standards to Increase Testing / Safety»Most criticism was focused on time

between CPSC notification and consumer

notification of recall. »Possible civil fines for failure to notify

CPSC within 24 hours of realizing a safety

issue

Mattel in the long term – Long Term Impacts

»

MAT traded at $23.58 on Aug 1 2007 and $21.17 after the second recall on

Sep 7. The price dipped to $16.65 at one point.

»

Analysts consistently lowered their estimates following the recall.»

Mismanagement of their supply chain sparked new import rules which will

affect performance.

Gee, Tanner,

maybe we should

have done

something

differently.

»

Major customer began testing

Mattel products before

shipping.

»

Criticism was focused on

time between CPSC

notification and consumer

notification of recall and

Chinese apology.

»

Possible civil fines for failure

to notify CPSC within 24

hours of realizing a safety

issue.

Understanding and managing blame

Principles to Remember

»

Blame can be managed best if it is recognized as a possibility early in the

process.

»

Avoid contributing to the “blame atmosphere”

–

it only fuels the fire of

retribution›

Regulators are not necessarily overreacting

›

Consumers may not be trying to pull one over on the company›

Working with advocacy groups could produce helpful results

Think through the long term issues

»

Will customers want this product from our company ever again?»

Are the product risks such that a marketplace retreat would be superior

than a recall? If so, how would we manage the potential perception that

we’re just being cheap?

»

Can I still use the facilities and equipment involved with the recall or would

retiring them provide more long term benefit?

»

Is the product in question part of our strategic product mix, and if not

should we simply select to terminate production?

»

What supply chain issues will a recall create (both production and demand

side) and how will they be managed?

Think through the long term issues – J&J Example

Johnson & Johnson1982 – Tylenol

»

Cyanide contamination:›

7 people died

›

Wide‐spread panic occurred›

Market value fell $1B

›

70% recovery within 5 months›

Top corporation for past 5 years in Harris

Interactive/Reputation Institute 2003 Annual RQ Report

Source: http://mallenbaker.net/csr/CSRfiles/crisis02.html

and

http://www.globalethics.org/newsline/members/issue.tmpl?articleid=022304172

22495

http://mallenbaker.net/csr/CSRfiles/crisis02.html



Think through the long term issues – J&J Example

»

Took appropriate responsibility»

CEO followed company’s principles even against some advisors

»

Recalled everything even when it suspected the problem may not be

national

»

Endured significant share price hit and additional marketing expense as a

long term investment in consumer confidence

»

Immediate, sufficient call center activities activated to handle

mass inbound

and outbound calls

»

Prompted creation of first ever tamper evident seal»

Sparked Federal Anti‐Tampering Act and moved industry capsule to caplet

Central Point: J&J considered how they would be perceived in the long term, not in quarterly EPS

Learn from the recall

»

By definition, a recall indicates something did not go as planned»

Denying the obvious hurts public credibility and inhibits

quality/production improvements

»

Identifying the root cause of the recall helps many areas:›

Product design

›

Production engineering›

Sales support

›

Supply chain management›

Business continuity management

Learn from the recall – Chi Chi’s Example

»

Failed to take responsibility

quickly enough›

Outbreak Nov 3 but

admission Nov 7»

Kept stores closed too long

»

Could not isolate problem

fast enough»

Bankruptcy impacted

decision making

http://ad.doubleclick.net/jump/st.news/nation/ct_article;pos=1;ctid=17100571;tile=2;sz=88x40;ord=123456?

Learn from the recall – Chi Chi’s Example

»

Scientific certainty is not the answer›

Tests take too long

›

Public will make up its own mind›

Regulators will force your hand

»

Caution is important, but it is possible to be overcautious»

Understand any external constraints to your preferred course of action as

soon as possible

»

The media will more than likely totally overreact›

Needs to be understood and managed

Insurance IssuesFor Product Recalls

Linda Kornfeld

Why Insurance Coverage Matters

›

Important to Company Finances

›

Maximize Profitability By Offsetting Losses

›

Insurance Helps To Pay For Costs Of Defense And Any Ultimate Liabilities

›

It Involves Actually Bringing Money Into The Company

›

It Can Be Important To Investors And Other Important Market Participants

Running for Cover Rather Than Coverage

›

“With the growth of claims that have taken years to manifest themselves and the

size of the class of potential claimants, many insurance

companies faced with

such claims have run for cover rather than coverage.

The small print suddenly

has been magnified, and insurance companies can be seen scurrying about the

courts of this country in search of ways to avoid honoring their

policies. . .”

›

“. . . However, neither the number of claims nor their total value is a valid

consideration in determining the existence of coverage.

Indeed, in the case of

insurance companies, as compared to those that they insure, this

is the very risk

which they undertook.

It is the foundation and justification for their

existence.

The presumption should be in support of coverage, rather than its

rejection.”

Sandoz, Inc. v. Employerʹs Liab. Assur. Corp., 554 F. Supp. 257, 258‐59 (D.N.J. 1983)

(emphasis added).

Product Recall Coverage Lawsuits

› Charter Oak Fire Insurance Co. v. American Capital, Ltd., (S. D.

Md. Jan. 16, 2009)‒

Rescission Claim

› Hartford Casualty Insurance Co. v. Peanut Corporation of

America (W.D. Va. Feb. 3, 2009)‒

“Bacteria”

Exclusion

› Travelers Indemnity Co. v. Dammann & Co., No. 04‐5699 LEXIS

9759 (C.D. N.J. Feb. 11, 2008)‒

“Impaired Property”

Exclusion

› Medmarc Casualty Insurance Co. v. St. Jude Medical, Inc. (D.

Minn. 2007)‒

“Expected or Intended,”

“Your Product,”

and “Sistership”

Exclusions

CGL

Coverage

Typically cover:

›

“all sums”

which the insured shall become legally obligated to pay “as damages”

because of . . . “bodily injury”

or

“property damage”

caused by an “occurrence”

. . .

›

“the insurance company shall have the right and . . . the duty to defend any suit against the insured seeking damages on

account of such injury or property damage on account of such injury or property damage, even if any of the

allegations of the suit are groundless, false or fraudulent . . .”

CGL Coverage—What it Covers

›

“Property damage”

includes

”physical injury to tangible property”

and “loss of use of tangible property”

›

Incorporation of a defective product into an otherwise non‐ defective product can be enough to cause “property

damage“

›

“Duty to defend”

is broader than “duty to indemnify”

›

“Litigation insurance”

›

Merits of underlying claim irrelevant—”four”

or “eight” corners rule

Overarching points‐‐CGL Coverage

›

Potential coverage above and beyond policy limits

›

Possible exclusions and how to get around them

‒

“sistership”

exclusion

‒

”bacteria”

exclusion

‒

“pollution”

exclusion

‒

“business risks”

exclusion

Property/Business Interruption Coverage

»

Property

Coverage

›

Many property policies cover “all risks of physical loss or damage”

to

“personal property.“

›

If the company can show “physical injury to tangible personal

property”

then it may be entitled to recovery under different valuation

approaches.

›

What if the recalled product has not yet suffered “physical

injury”?

Are costs associated with the recall or decontamination

efforts covered?

‒

mitigation theories

‒

“sue and labor”

provisions


»

Business Interruption Coverage

›

Many policies cover lost profits

incurred because of “physical loss or damage

of the type insured”

to property

otherwise covered by the policy.

›

“Extra expense”

coverage applies to amounts spent to “temporarily continue as nearly normal as practicable the

conduct of the Insuredʹs business.”

‒

Are marketing activities to regain product reputation covered as “extra expenses”?


›

“Contingent”

business interruption coverage applies to the “actual loss sustained and extra expense incurred”

because

of “physical loss or damage”

to property at any “location of direct suppliers or customers.“

‒

This coverage could be critical with respect to lost sales because of recalled

products of others.

›

Lost profits incurred during the “period of liability”

may be recovered.

‒

The question is how long will it take with “due diligence and dispatch”

to return the business to the

same or equivalent operations as where it stood before the event.

Product Recall Coverages

»

Narrow And Expensive Coverages

»

Cover Expenses and Liabilities Related To A Recall

»

Does Not Cover Property Damage, Bodily Injury, or Business Interruption

»

May Pay For Media Outreach

Procedural Pitfalls – Don’t Lose Your Coverage Because You Did Not Dot Your “I’s”

or Cross Your “T’s”

»

Notice›

“As Soon As Practicable”

or Within A Certain Number

Of Days»

“Cooperation Clause”›

Includes “Examination Under Oath”

»

Proof of Loss›

Failure To Comply With Policy Timing And

Requirements Could Blow Your Coverage»

Check with Policy Contractual Limitation

Provisions›

These Are Strictly Construed, But May Be “Tolled”

While Insurer Is Considering The Claim

Insurance Quantum Issues

Brad Murlick, Managing DirectorNavigant Consulting, Inc.

Analysis of Damages

Product recall expenses–

Direct & contingent

(customer) costs

–

Costs to investigate, inspect,

analyze, withdraw and

destroy

–

Incremental cost of

replacement

–

Other reasonable costs as may

be incurred

Product restoration expense–

Costs incurred re‐establishing

pre‐incident market sales

levels (advertising, public

relations, customer retention,

etc.)

Analysis of Damages

Other Costs –

Changes in economic conditions, demographics or customer

taste–

Intentional violations of laws or regulations

–

Deterioration or transformation of product unless caused by

product tampering or accidental contamination–

Bodily injury, sickness or death of any person or animal

–

Damage to property–

Liabilities to third parties (other than recall expenses)

–

Cost of product redesign–

Employee lay‐offs

Analysis of Damages

How do we determine damages ?›

Property damage / inventory losses‒

Actual out of pocket expenses incurred to investigate and

remedy the issue›

Time element‒

3‐column approach

‒

Projected results of insured had no loss occurred‒

Compared to actual results during indemnity period

‒

Difference = claim

Analysis of Damages

$ 6,000,000 $ (2,500,000)$ 3,500,000 Net Profit

$ -$ (2,500,000)$ (2,500,000)Less Fixed Overhead Expenses

$ 6,000,000 $ -$ 6,000,000 Contribution Margin

$ (4,000,000)$ -$ (4,000,000)Less Variable Operating Expenses

$ 10,000,000 $ -$ 10,000,000 Net Revenue

LossActualProjected

$ 6,000,000 $ (2,500,000)$ 3,500,000 Net Profit

$ -$ (2,500,000)$ (2,500,000)Less Fixed Overhead Expenses

$ 6,000,000 $ -$ 6,000,000 Contribution Margin

$ (4,000,000)$ -$ (4,000,000)Less Variable Operating Expenses

$ 10,000,000 $ -$ 10,000,000 Net Revenue

LossActualProjected

Analysis of Damages

Steps in quantifying the loss ›

Preliminary estimate of loss for insurance / reserve setting

process›

Develop claim team and identify initial claim issues (coverage,

limits, exclusions, endorsements, etc.)›

Communicate internally and externally

›

Prepare detailed and well supported claim analysis›

Understand your claim’s strengths and weaknesses

Analysis of Damages

Pre‐loss strategies

Formation of team to address potential issues–

Public relations

–

In‐house or outside counsel–

Contact with appropriate regulatory authorities

–

Insurers–

Risk manager

–

Product loss consultants–

Other expertise

Questions & Answers

Questions?

Contact Information

Michael Keating, DirectorNavigant Consulting, Inc.

1180 Peachtree Street, N.E., Suite 1900Atlanta, Georgia 30309

404‐575‐[email protected]

Linda KornfeldManaging Partner, Los Angeles Office

Dickstein Shapiro LLP

2049 Century Park East, Suite 700

Los Angeles, CA

90067

310‐772‐8306

[email protected]

Brad Murlick, Managing DirectorNavigant Consulting, Inc.

30 South Wacker Drive, Suite 3100Chicago, IL 60606

312‐583‐[email protected]

Thank You

Navigant Consulting – turn to us for direction[s].

www.navigantconsulting.com

mailto:[email protected]

http://www.navigantconsulting.com/

hb litigation conferences product recall issues...

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