Bamberg Higher Regional Court rules on insurance claim under vehicle recall insurance policy

Court decisions relating to industrial liability insurance are rare and decisions on vehicle recall insurance are even rarer. Surprisingly little attention has been paid to a judgment of such kind that was handed down by the Bamberg Higher Regional Court (Case ref. 1 U 79/20; BeckRS 2021, 60955) as far back as 16 December 2021 (cf. r+s 2023, 310, with criticisms from Schimikowski).

Cover provided by vehicle recall insurance

Vehicle recall insurance provides cover in three different situations: first, as the name suggests, recalls issued for product safety reasons (risk prevention); second, pre-recall measures, where no recall is necessary because the vehicles affected have not yet been delivered and, finally, installation and dismantling costs outside of emergency response. The last of the three relates to cases involving product warranties. These three coverage sections are mutually exclusive. Pre-recall measures can only be taken prior to delivery; thereafter, the vehicles may have to be recalled. Insurance coverage for installation and dismantling costs outside of emergency response, regardless of whether the manufacturer still has the vehicles or has already delivered them, is only available (cf. German Insurance Association’s Model Conditions for Professional and Business Liability Insurance (AVB BHV) A5-5.1, version May 2019) ) if no pre-recall measures have been taken or recall issued.

“Trigger madness”

The insured event that activates coverage (in insurance jargon “trigger”) becomes particularly relevant when deciding whether insurance coverage is available at all and, if so, during which insurance period, from which insurance company and on what terms.

There is no uniform definition of this trigger for all three coverage sections of vehicle recall insurance.

The trigger in the case of safety-related recalls to avoid personal injury and property damage (cf. AVB BHV A5-3.1) is the vehicle manufacturer’s observation of a statutory duty to issue a recall notice requesting the registered vehicle keeper to take the vehicle to a dealership. In these cases, the vehicle manufacturer necessarily communicates to the outside world.

On the other hand, the coverage trigger for pre-recall measures (cf. AVB BHV A5-4.2), provided vehicles “are still in the manufacturer’s yard”, and for insuring installation and dismantling costs outside of emergency response (cf. AVB BHV A5-5.2), irrespective of the vehicle’s location, is in both cases the automobile manufacturer’s internal directive to examine the parts suspected of being defective.

It is not uncommon, especially for the terms and conditions of brokers to bypass vague references to internal directives by including other definitions of insured events; as in the case of product liability insurance, this is done, for example, by referring to an earlier point in time, i.e. when the defective parts were installed or, at the other end of the timeline, to the time of dismantling. There have even occasionally been calls for the “claims-made” principle familiar from D&O insurance to be applied across the board.

Representatives of leading industrial insurance brokers have already spoken of “trigger madness” in view of the manifold approaches to trigger coverage (Grote, Zeitschrift für Versicherungswesen 2019, 212).

No final clarification from Bamberg Higher Regional Court

Put very simply, the judgment of the Bamberg Higher Regional Court was based on the following facts:

In 2014, dangerous defects in certain vehicle components became apparent. It was not until the following year, namely 2015, that the vehicle manufacturer issued recall notices to vehicle keepers requesting them to take their vehicles to a dealership. This occurred after the components supplier, which later faced substantial recourse claims for the costs of the recall campaign, had changed insurers at the end of 2014.

The component supplier’s claim for insurance coverage was directed solely against the insurance company that had been the insurer in 2014. The claim was unsuccessful if for no other reason than that Bamberg Higher Regional Court was unable to conclude that an event triggering insurance cover had occurred in 2014.

The outcome would in any event appear to be clearly correct in relation to two of the three coverage sections: the recall campaign which, if it even did take place, did not occur until 2015 when recall notices were issued to the vehicle keepers and the pre-recall measures because all of the vehicles affected were obviously already in the hands of customers.

The parties, however, also disagreed as to whether coverage of installation and dismantling costs beyond risk prevention had in fact been triggered in 2014 through the issue of a corresponding internal directive of the automobile manufacturer. The insured component supplier argued that even in 2014 the vehicle manufacturer had directed to conduct an internal review of the life expectancy of the vehicle components affected. It alleged further that, at least in the case of the vehicles affected that were in Asia, the decision to replace the components affected had also been taken in 2014, albeit not implemented until 2015.

Bamberg Higher Regional Court did not accept these arguments. According to the Court, in contrast to the mere issue of an internal directive, a recall in the form of recall notices issued to the vehicle keepers, which also served to prevent injury or damage, had occurred in 2015. Based on the manufacturer’s review of the components’ life expectancy and the expert opinions submitted during the hearing, the defects in the components could have caused “significant engine damage” and, also personal injuries. The Court concluded from this that there was no room for finding that coverage for installation and dismantling costs outside of emergency response was available.

This reasoning and the distinctions made are not convincing.

Insurance cover for installation and dismantling costs outside of emergency response exists regardless of whether the vehicles affected are still in the manufacturer’s yard or are already in the hands of customers. This insurance cover cannot be excluded simply because the vehicles affected might first have to be called to the dealerships via a notice issued to the vehicle keepers. Whether one calls this a “non-safety recall” (Nickel/Nickel-Fiedler, Rückrufkostenversicherung, KfzRückRM, no. 8, para. 1), a service campaign or something similar is irrelevant for insurance cover.

Apart from that, not every recall to avoid personal injury or property damage is automatically also a recall within the meaning of the insurance conditions. In fact, most insurance conditions as also in the present case make the existence of a corresponding statutory recall duty a prerequisite for recall coverage (Model Conditions for Professional and Business Liability Insurance A5-3.1). Ever since Germany’s Federal Court of Justice in its “nursing beds” judgment (NJW 2009, 1080) rejected, in the special circumstances of that case, the existence of a recall duty for nursing beds that were a fire hazard, it has become necessary to verify in each specific case whether the risk of personal injury and, even more so, every risk of property damage (including in the form of damages limited to the defective product itself) actually gives rise to a statutory recall duty. Moreover, it will be necessary to examine this question in relation to every jurisdiction in which affected vehicles are located and the results may be different in each case (Schimikowski, r+s 2023, 315 et seq.). The Higher Regional Court of Bamberg did not look into this and thus avoided dealing with the issue of internal directives as triggers in more detail.

Risk of gaps in coverage

It is conceivable that in one jurisdiction the earlier trigger of an internal directive in connection with installation and dismantling costs would be decisive, whereas in another a recall that occurred during a later insurance period with a different insurer would apply.

It might be possible to avoid having insurance cover fragmented or to avoid coverage gaps due to the unwillingness of subsequent insurers to accept known or emerging risks by incorporating a “serial loss” clause in the policy with the previous insurer which also covered claims for subsequent loss or by possibly adding a “notice of circumstance” provision to the policy. Neither necessarily reflects current market standards. A careful examination of the insurance conditions is recommended especially if a change of insurer is being considered.