The Galaxy Note7 and product recall

The recent tale of the Samsung Galaxy Note7 raises numerous points of interest for product manufacturers, risk managers and their insurers. Soon after the Samsung Galaxy Note7 launched in August 2016, there were reports of devices overheating, in some cases allegedly causing personal injury or property damage. Samsung initially announced that batteries from one of its suppliers were an issue. It commenced a recall campaign apparently before notifying authorities, including the US Consumer Product Safety Commission (CPSC). The corrective measures included issuing replacement devices containing batteries made by a different supplier. However, further reports came to light, allegedly involving replacement products. Soon afterwards, Samsung decided to discontinue the model entirely and recall approximately 2.5 million shipped devices. Last month, following detailed investigations by Samsung and independent parties, the electronic giant published a number of conclusions on the incident. The reports and implications deserve detailed consideration but multiple contributory factors have been identified, with some root causes still to be determined. The first issue involved battery electrode assemblies suffering from deformation and inadequate separation. The second supplier’s batteries appear to have been affected by a different separation issue and some of those batteries also suffered from inadequate insulation material. Samsung has taken the opportunity to announce new and enhanced quality assurance measures to improve the safety of batteries and devices. This kind of scenario raises a number of issues. As a matter of risk, lithium-ion batteries have been noted in a number of recent issues affecting devices from laptops through to hoverboards and Boeing 787s. Lithium-ion batteries are now high on the agenda at the CPSC. Battery technology will continue to pose challenges, particularly in relation to small devices that are expected to deliver high performance over a long life. As far as the risk of injury and damage is concerned, it is worth noting that a US university paper was published in January 2017 on the development of a new lithium-ion battery component with flame-retardant properties. Regarding loss of products themselves, the available remedial options will vary from case to case. For example, it was suggested that Samsung’s design, specifically the way in which adhesives were used in the device, meant that simply substituting new batteries into affected devices might not have been possible. The recall is thought to have cost Samsung $5.3bn, as well as damage to its reputation. Recall expenses may be insured in various ways, including standalone product recall policies and mitigation expense cover under product liability. Cover for some heads of loss may be subject to sub-limits. Various triggers can be found, but some policies will not respond to design errors. Where cover is triggered, there may be issues such as when the insured had first knowledge of the potential defect and whether there were timely notifications to insurers and others. In Samsung’s case, the CPSC stated that it should have been informed sooner and before the first recall commenced. In quantifying covered recall claims, there may be questions such as whether certain expenses were necessary to prevent injury or damage and whether any loss of business was caused solely and directly by the relevant defect. Understandably, there are many examples of manufacturers looking to protect their reputation taking measures that are costlier than necessary to prevent injury or damage. There have also been many cases where certain response measures have unintentionally caused ultimate loss to be significantly greater than it could reasonably otherwise have been. Other large-scale consumer ‘refunds’ have made recent headlines. For example, the US courts have approved multi-billion-dollar settlements for Volkswagens involved in the emissions scandal. In addition to individual claims for injury or damage, there have been many consumer class actions alleging breach of warranty, injury or damage. There have also been investor class actions alleging, for example, that company statements about risk, reserves and product controls were misleading and caused loss of share value. It is less common to see allegations that a company’s handling of a recall has caused loss of share value, but this may also be possible. Whether insurance policies provide any relevant cover, such as defence costs, will of course depend on the claims and the policy concerned. Although insurance may not be greatly relevant to these specific cases, they are high profile reminders of the wide spectrum of loss and claims that can arise from product safety issues.

The Galaxy Note7 and product recall

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