In the light of VW initiating a voluntary recall in December 2014, and given the progress being made on new remedial campaigns in many countries, questions arise as to whether the recall expenses of auto manufacturers might be covered under insurance policies.  It is clear that the costs associated with any recall and retrofit campaign would be substantial.

At this stage, it is not clear whether any of the motor manufacturers have first party recall insurance.  In recent years, automotive recall cover – at least in the London market – has been aimed at the numerous supply chain parties in this sector, rather than the relatively small number of OEMs, who often rely on rights of recourse against suppliers, and possibly the suppliers' recall insurers directly.  In this case, there does not yet appear to be any evidence that a supplier is implicated.  Some German news sources have suggested that a third party supplied relevant software in 2007, but with a warning that its use could be prohibited in certain circumstances.

If a claim were made under an automotive recall policy, although the full facts have not been established and wordings vary in form, there may be significant coverage issues, including the extent of any relevant knowledge within the manufacturer.  Other than obvious potential issues concerning knowledge, substantive coverage questions could include whether injury or damage would be caused, and, regardless of the likelihood of injury or damage, whether any recall required or compelled by an authority may be covered.

Stand-alone recall policies have various triggers relating to product safety, with a typical trigger responding where the insured product has caused, or would cause, injury or property damage.  In this case, there appears to be no such allegation at present.  Although emissions regulations are based at least partly on possible risks to public health, no-one is currently suggesting there be an urgent recall because of any such risk.

Another common policy trigger is an order by a competent authority to carry out a recall.  In this case, although there have been news reports to the contrary, it appears there has so far been no order for a recall in the US.  However, the Environmental Protection Agency ("EPA") has authority under the Clean Air Act to require a remedial campaign in certain circumstances. Its current stated position is that it awaits VW's proposals, and will require VW to implement an acceptable plan once agreed. Whether or not such a requirement by the EPA, or any other regulatory involvement in the US or elsewhere, would satisfy a given policy trigger is very much dependent on the precise facts and wording involved.

It is worth noting that there is precedent for the EPA proceeding against vehicle manufacturers in respect of emissions "defeat devices".  In 1998, there was settlement by consent of an action against seven companies in respect of approximately 1.3 million diesel vehicles, resulting in civil penalties of USD83.4m, various vehicle recalls, and requirements to spend at least USD850m on producing cleaner engines and USD109m on additional related projects.  Over the next few months, we should begin to see more clearly what corrective actions are to be carried out in the numerous affected jurisdictions, and how much those recall measures are likely to cost manufacturers in terms of insured and uninsured loss.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.