Germany: The insured event in the automotive product recall cost insurance

Insurance for automotive recalls significantly contributes to making the cost risks of field actions more calculable for automotive suppliers. The standard model differentiates between recalls for hazard prevention, preliminary measures and field measures outside of hazard prevention and defines different insured events. The insurer not only provides support in the form of a detailed examination of the liability issue, but also provides defence cover if required. In one of the few court decisions on this important insurance product, the Bamberg Higher Regional Court (OLG Bamberg) clarified a few things, but also left an interesting question unanswered (case no. 1 U 79/20, judgement dated 16.12.2021). This decision highlights the crucial need for suppliers to seek qualified advice at an early stage when facing a recall or other field actions, to ensure the support of the insurer. In this case, it appears that both the insured event was misinterpreted and the notification to the insurer was made very late. Both are aspects that could easily have been avoided.

I. Why is the automotive product recall cost insurance important for automotive suppliers?

The German automotive product recall cost insurance model is important for automotive suppliers, not only because car manufacturers often require it, but also because it significantly mitigates the risks of a recall for the supplier. There are two reasons for this: On the one hand, the German car recall cost insurance model follows the general provisions for liability insurance. This means that, according to the policy, the insurer is obliged to examine the insured event and decide whether the insured event should be defended or whether the insurer should indemnify the policyholder against third-party claims.

If the insurer decides to defend the insured event, it will reimburse the costs of the legal defence, i.e. the fees for lawyers, experts and court proceedings (depending on the policy, this may also cover the costs of arbitration proceedings). This applies not only to the question of whether a "defect" occurred, but also to the often-difficult discussion about the value of the damage.

Even though the German automotive product recall cost insurance model does not follow an "all claims" principle, it significantly mitigates the consequences of a recall through indemnification or participation in a settlement. The benefits under the standard model of the German automotive product recall cost insurance model differ depending on whether the recall is to avert hazards, a so-called preliminary measure or is unrelated to a safety hazard.

II. Why is the insured event of central importance for the insurance contract?

The insured event is one of the central provisions of every policy and is defined by the insurance contract and its interpretation. Not only is the insurance event central to the question of whether it falls within the contractually agreed insurance policy period, the law also refers to the insured event in many places. This relates to the duty of disclosure (§§ 28, 30, 31 VVG), the exclusion in the case of retroactive insurance (§ 2 para. 2 VVG (Law on the Insurance Contract)), advance payment (§ 14 para. 2 VVG), default in payment (§§ 37, 38 VVG) and obligations to minimise damage (§§ 82, 83 VVG).

III. How is the insured event defined in the standard model of motor vehicle recall cost insurance?

The standard motor vehicle model contains several definitions of insured events:

• For the ("genuine") recall to avert danger, the insured event is the recall that takes place during the validity of the insurance. A recall is deemed to have occurred if the motor vehicle manufacturer or the competent authorities request the motor vehicle owner to take his vehicle to the manufacturer's factory, an authorised workshop or another workshop in order to check it for the specified defects and to rectify any defects found or to carry out other specified measures. The so-called "silent recall" is also deemed to be a recall, i.e. the notification of dealers, authorised workshops or other workshops not directly addressed to the owner, who are to check the vehicles for the specified defects and rectify them if necessary.
• In the case of a preliminary measure (where the vehicles are still at the original equipment manufacturer (OEM)), the insured event is the internal instruction of the OEM or the company processing the policyholder's product to inspect the policyholder's products during the insurance’s period of validity.
• For a field measure outside of hazard prevention, the insured event is also the internal instruction of the motor vehicle manufacturer or a company processing the policyholder's product to inspect the policyholder's products during the insurance’s period of validity.

IV. What makes the OLG Bamberg’s decision dated 16 December 2021 particularly noteworthy?

The decision of the Bamberg Higher Regional Court is one of the few higher court decisions on motor vehicle recall cost insurance.

Essentially, it deals with the important question of the interpretation of the "insured event" and the relationship between the various "insured events". Against the background of the comparatively clear wording of the German standard terms and conditions, the OLG Bamberg ruled on recall as follows:

"The definitions of the term 'recall' used in the relevant terms and conditions focus on a request to the motor vehicle owners or dealers, authorised and other workshops, but not on the internal decision-making processes preceding this and the internal decision-making in the manufacturing company."

And on the relationship between the various insurance cases:

"An internal instruction is considered an insured event of the so-called 'yard replacement costs' under the motor vehicle recall cost insurance exclusively in the event that the defect of the supplier's product is noticed after delivery to the manufacturer but before delivery of the end product (motor vehicle) to the end customer."

In addition to the core question, the OLG Bamberg dealt in particular with the following points:

(a) The OLG Bamberg clarifies that the insurer has to provide the examination of the liability issue, the defence coverage and the indemnification in accordance with the classification of the motor vehicle recall cost insurance as liability insurance (para. 56 of the judgment).

b) Unfortunately, the OLG Bamberg meanders on the question of whether the law of the state ordering the respective recall is relevant for the insured event in the case of a genuine recall or whether German law alone is to be applied on the coverage side in this respect.