Children's Apparel: How Can You Be Protected if You Are Caught Lead-Handed?
Insuring importers against the cost of a CPSIA recall
You might not be designing or manufacturing childrenswear, but if you are shipping in or just distributing childrenswear and it is found to contain lead, then you have a huge liability.
The Consumer Product Safety Commission (CPSC) has stated it clearly in its Consumer Product Safety Improvement Act (CPSIA): It is the children’s apparel importer—not the manufacturer—that is solely responsible for any lead-content recalls. Testing errors, manufacturer moral hazards, defective components, mishandled shipments and countless other mishaps could trigger a recall for which the U.S.–based importer could pay countless dollars.
Fortunately in business, where there is a risk to be had, someone else is willing to take it—for a price. In this case, the “transfer of risk” comes in the form of a specialized insurance contract known as the Children’s Apparel Recall Expense Program (C.A.R.E.). This unique coverage was crafted in response to a critical industry need that insures against the catastrophic financial loss that could be caused by a lead-content recall. While the C.A.R.E. program was specifically created to insure against financial loss resulting from recall of children’s apparel and footwear caused by non-compliance with CPSC’s lead-content regulations, the coverage does have certain restrictions.
The insured must be an importer, distributor and/or wholesaler. Coverage is not available for manufacturers or retailers.
Goods covered by the policy are only those intended for use by children 12 and younger.
For coverage to apply, the product must have been manufactured in accordance with the CPSC rules for lead content, effective Aug. 14, 2009.
Notwithstanding the CPSC one-year stay to the testing requirement, all products must have been tested in accordance with CPSC rules in order to qualify for coverage.
It is also important to note that this insurance coverage is limited only to products shipped after the inception date of the policy.
The non-compliance must be confirmed by an accredited laboratory, and although a CPSC-ordered recall is covered by this policy, it is not required for coverage to be triggered. Stated another way, the recall could qualify for coverage whether it be government-mandated or voluntary.
As with all specialized insurance contracts, coverage exclusions can be frustrating or overlooked by the insured—or an inexperienced insurance broker. However, if the products do qualify for the coverage, that coverage is relatively broad. For example, recall expenses, including replacement cost, incurred because of lead-content violations are reimbursable.
The C.A.R.E. policy pays for recall expenses including:
bull; Shipping costsbull; Additional labor costsbull; Warehousingbull; Communicationsbull; Repair of recalled productbull; Replacement of recalled product
Typically, the policy is written with annual aggregate limits of $1 million or $2 million, although higher caps are available if the business case warrants it. Deductibles can range from $10,000 to $50,000, although higher retentions can be negotiated, as well.
The cost for this coverage, considering the huge downside risk, is affordable to most importers, regardless of size. The premium is calculated on the basis of gross annual sales of children’s apparel only, with a $7,500 minimum annual premium threshold for a policy to incept.
Revenues generated from a company’s products other than apparel intended for children ages 12 and younger are not included in the pricing of the policy. And, as a boon to a rapidly expanding organization, the policy is “non-auditable,” meaning that if sales come in higher than projected, additional premium will not be due. Ultimately, the annual premium charged becomes a function of the limits selected and deductible option chosen.
The C.A.R.E. program is still only accessible to your insurance broker via the program’s master general agent in New York, who has the exclusive authority from Lloyd’s of London underwriters to quote and bind insurance coverage.
Robert S. Mahl is vice president and apparel practice leader at USI Insurance Services Inc. USI is a Goldman Sachs Capital Partners Company and a privately held, full-service insurance broker catering to an apparel-industry clientele. Inquiries and questions can be addressed to the author at robert.mahl@usi.biz.
