Viewpoint: Tesla’s Product Recall Underlines Importance of Specialty Coverage for Fast Growing EV Market

Tesla’s recent product recall has cast a spotlight on the essential role of specialty insurance coverage in the rapidly evolving automotive industry. With the electric vehicle market’s rapid growth, the risks inherent in such advanced technologies become increasingly apparent, as evidenced by Tesla’s recall last week of over two million vehicles due to issues with its Autopilot system.

The recall followed a detailed two-year investigation by US regulators into accidents that occurred while the autopilot technology was in use. The Autopilot feature, particularly the Autosteer component, is designed to keep the car in its lane and adjust speed based on surrounding traffic conditions, working in harmony with the traffic-aware cruise control.

Despite the advanced nature of this system, drivers are reminded to stay vigilant, keeping their hands on the wheel and ready to take control if the situation demands it.

Internal systems in the vehicle monitor driver engagement and issue warnings if it detects a lapse in attention or misuse of the Autosteer function. The National Highway Traffic Safety Administration announced that a forthcoming over-the-air (OTA) software update will introduce additional alerts and monitoring to reinforce the driver’s active role when Autosteer is operational.

This recall is not only significant due to the number of vehicles involved but also because it is one of the largest to be addressed via an OTA update. The integration of sophisticated software in vehicles has increased over recent years, bringing about more OTA updates as a remedy for safety-related recalls. This shift offers the automotive industry a chance to conduct repairs more economically, as OTA updates can be executed swiftly and without the need for dealership visits, causing minimal disruption to the vehicle owner.

With the EV sector poised for further growth and with advanced technology use in non-EV’s, it’s expected that more recalls involving software and new tech systems will occur. These systems, while innovative, can present unforeseen risks such as certain street conditions, malfunctions or incorrect usage, which may not have been fully anticipated by the designers.

From an insurance standpoint, recalls of this magnitude could lead to substantial claims. Even an OTA software update, a less costly solution compared to physical repairs, can accrue significant expenses when implemented across two million vehicles. If a component or software supplier is found to be at fault, they could face financial pressure from the original equipment manufacturers (OEMs) for reimbursement. This scenario underlines the growing need for suppliers to carry specialized automotive recall insurance including recall liability or financial loss coverage to address the contractual liabilities stemming from such recalls. As more OEMs require their suppliers to possess adequate insurance for these events as arising from use of innovative technologies, the demand for specialty coverage will likely grow.

Specialty insurance policies offer coverages for component suppliers, protecting them against claims from OEMs arising from product defects. These policies can cover the economic impact of a recall, which most often includes repair costs and associated expenses. Occasionally, they also engage to protect component suppliers from OEM brand damage, i.e. loss of sales which can be attributed to a recall event. Standard property and casualty (P&C) policies typically do not include such coverages, highlighting the importance for component suppliers to secure specialty insurance to safeguard against supply chain liabilities, OEMs’ economic losses as well as the component suppliers’ own replacement costs and associate expenses.

As the automotive market continues to innovate with systems such as ADAS and with the march of EVs, the insurance industry will no doubt adapt to provide comprehensive coverage solutions that address the unique challenges posed by advanced automotive technologies. Specialty insurance coverage will be instrumental in mitigating the financial risks associated with product recalls in this dynamic sector, ensuring both consumer protection and industry sustainability.