The defence based on a lack of testing is one of the most significant defences raised by insurers in product liability and recall cases. The basis for this is the so-called testing clause. It is regularly found in the General Terms and Conditions of Insurance (AVB) for product liability and recall cost insurance.
What Does the Testing Clause State, and What Is Its Purpose?
The standard wording according to the Association of German Insurers: “Claims for costs arising from products whose use or effect, in relation to their specific intended purpose, have not been sufficiently tested in accordance with the state of the art or in any other manner are not covered.”
The aim of the clause is to avoid negative incentives. The policyholder should not be tempted to cut short costly and time-consuming development and testing phases simply because they can pass the remaining liability risk on to the insurer.
Is the Clause Always Valid?
This is not entirely clear. In legal literature, the testing clause is considered invalid for various reasons – in particular due to a lack of transparency. In the context of general product liability insurance, case law has consistently rather held the clause to be valid. In motor vehicle recall cost insurance, the legal situation is less clear-cut. In this respect, it can be argued that the clause would effectively undermine the insurance cover expected by the policyholder – resulting in its invalidity under Section 307 of the German Civil Code (BGB).
Is the Clause a Risk Exclusion or a (Disguised) Obligation?
This, too, has not been fully clarified, although this formal legal question is of considerable practical significance. In some cases, the testing clause is interpreted not as a risk exclusion but as a so-called disguised obligation. This is significantly more favourable for the policyholder: in the event of a breach of an obligation, insurance cover is only withdrawn if fault on the part of the policyholder can be proven. However, case law has so far tended to classify testing clauses as genuine risk exclusions. This means that neither intent nor negligence is a relevant factor. If the testing objectively falls short of the required standard, the exclusion applies.
How Should the Testing Clause Be Interpreted?
If the testing clause is classified as a risk exclusion, the policyholder is nevertheless aided by the general principle that risk exclusion clauses must be interpreted narrowly. The average policyholder should not have to expect gaps in their insurance cover to be held against them unless the clause makes this sufficiently clear. Any remaining doubt therefore falls on the insurer.
Who Must Prove What?
The burden of proof lies with the insurer. It must present specific facts which can be regarded as conclusive evidence of insufficient testing. Mere reference to a product fault that has occurred is not sufficient.
The insurer often argues that a faulty product cannot, by definition, have been sufficiently tested – in short: what is faulty cannot have been properly tested. This line of reasoning is not convincing. It assumes what would first need to be proven, and fails to recognise that even carefully tested products can fail in individual cases.
Only once the insurer has put forward a substantiated case does a secondary burden of proof fall on the policyholder. The policyholder must then demonstrate why the evidence presented does not justify the conclusion that testing was inadequate.
What Constitutes Adequate Testing?
Testing must be systematic and tailored to the specific intended use of the product. Arbitrary trial and error is not sufficient. Practical testing procedures are required – whether through application tests under real-world operating conditions, test bench tests, or simulation procedures that replicate the relevant parameters of the product’s use.
The decisive point in time is the date of placing on the market – not the occurrence of the damage. If it only becomes apparent after market entry that the test methods used at the time were inadequate, this has no bearing on insurance cover, provided that the testing corresponded to the state of the art at that time. The term “state of the art” does not require the scientifically optimal solution, but rather that which is established and proven in practice.
For companies in the automotive industry, the following applies: the PPF procedure in accordance with VDA Volume 2 regularly goes beyond a mere inspection of the production process. There are therefore strong arguments to suggest that a properly conducted PPF procedure – as well as a PPAP procedure in accordance with AIAG – satisfies the requirements for adequate testing. Certifications in accordance with DIN ISO 9001 can also be cited as evidence of adequate testing.
Does the Clause Apply Only to New Products?
The testing clause does not apply solely to new products. The exclusion also applies to further-developed or modified products if the changes have not been retested. Even minor modifications to materials, design, or formulation can trigger a new testing requirement.
For further information, please contact:
Dr. Jonas Baier LL.M., Partner, Bird & Bird
jonas.baier@twobirds.com
