Aviation Grounding Exposure, Recall, and Loss of Use

Suppose your company manufactures a mission-critical part for airplanes, such as engine mounts, or landing gear components.   At some point, after a number of your products are in the field and installed into planes, you discover a mistake of some kind, perhaps some manufacturing defect, or a mistake in the way the part was installed.   Fortunately, the mistake was discovered before any planes crashed, so nobody got hurt, and nothing was damaged.  But, now the mistake needs to be corrected, and, in the meantime, a lot of planes will be grounded, flights will be cancelled, and folks like me will be missing business meetings, vacations, and thrilling insurance conventions in far-away, exotic places.

A similar problem could ensnare a manufacturer of a critical part for a production process.  Suppose your company makes valves, or monitors, or power couplings, and your product, after it's widely installed, is discovered to have some type of defect that needs to be corrected.  The cost to correct your product could be minor, but the financial loss to your customer from a shut-down, and your potential exposure, could be mind-blowing.

How will your liability insurance program respond?  Usually, unless the policy includes extension endorsements, grounding coverage, or recall, you're not necessarily going to get a good result from your insurance program. 

The insurance issue arises from the concept of "trigger," that is, turning the policy on and making it respond to a particular event.  A typical General Liability policy will trigger with an "occurrence," normally defined as Bodily Injury or physical Property Damage of some kind.  In the absence of either injury or direct damage, the policy doesn't activate.  So, how do you trigger the Liability coverage if there's no injury or damage?

First and foremost, a key risk management consideration is to be aware of the exposure in the first place.  In other words, have you considered whether your business has such a grounding exposure, or the capacity to shut down one of your customer's operations?  Does your product have a recall potential, whether arising from a government action or from general health and safety considerations?  Do your contracts with your customers make you liable for these potential consequential losses?

Once you've established that your company has this exposure, it can be addressed through Recall Coverage, Aviation Grounding Liability, certain Commercial General Liability endorsements, or, potentially, through contractual risk transfer.  A Professional Liability policy with exceptions to the standard Property Damage exclusion might also address certain types of groundings or shut-downs.  Each company's solution varies, depending on the nature and scope of the exposure.

Regardless, all too often, traditional insurance program management becomes a renewal exercise.  Renewals are processed with too much emphasis on pricing an apples-to-apples renewal, and not enough thinking about outside-the-box exposures, non-insurance risk management solutions, company contracts, or company strategic issues.  Don't just go through a pricing exercise.  Use the occasion of your insurance renewal to re-think your exposures.