Export of battery packs to Texas: territorial limits, unauthorised goodwill payments and subrogation
A Bengaluru manufacturer of lithium-ion battery packs for e-scooters insures its products liability under a policy with a limit of ₹5 crore per occurrence and in the aggregate, territorial limits India, and jurisdiction India. It exports a consignment of 800 packs to a distributor in Texas in February. In July the distributor reports that 12 packs caught fire while charging in customers' garages, causing one house fire with $340,000 of damage and one serious burn injury. A US class action is threatened on behalf of all purchasers. The manufacturer denies that the packs are defective and blames the charger supplied by a third-party vendor. Without telling the insurer, it has already paid $25,000 to two affected customers, describing the payment in its letter as compensation for a defective product, and has posted about the incidents on its website. The policy requires written notice of any occurrence, forbids any admission of liability, and prohibits settlement without the insurer's consent.
1. Does the policy respond to the Texas claims? Set out the reasoning and what the insurer should do with the notice.
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On the policy as written, no. Two limits bite and both are fatal to the claim as presented.
Territorial limit. The policy covers occurrences within India. The fires happened in customers' garages in Texas, the property damage and the injury were suffered in the United States, and the suits will be brought there. The situs of the injury, not the place of manufacture, governs a liability policy's territorial operation, so these occurrences fall outside the cover.
Jurisdiction clause. The policy requires suits to be brought in Indian courts. A US class action is outside that, and the insurer has neither a duty to defend it nor the ability to control it.
The insurer should nonetheless respond to the notice in writing rather than ignore it. It should acknowledge receipt, state clearly that it is not declining cover on the basis of the facts related to the loss but that the claim falls outside the territorial and jurisdictional scope, and reserve all rights, since the insured has already breached the notice, no-admission and no-settlement conditions. It should ask for the export documentation, the charger vendor's identity, and any test reports.
The insured's real options are narrow: seek a mid-term endorsement extending the territorial limit to worldwide, or at least to the United States and Canada, which most Indian insurers will grant only with an adequate limit, an increased premium and a strict products-completed-operations definition; or arrange standalone export products liability cover, often through a surplus-lines or overseas market. None of that helps retrospectively, but a properly worded endorsement from inception of the next policy period prevents a recurrence. Flag the export programme to underwriting immediately.
2. What is the effect of the $25,000 goodwill payment and the website post, and can the insurer recover them?
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The payment and the post are both serious, and for different reasons.
The payment. Settling with two claimants without consent breaches the no-settlement condition. More damaging than the money is the wording: the letter described the payment as compensation for a defective product. That is a written admission of the very fact the manufacturer is now denying in its defence, and it will be disclosable in the US litigation. The insurer's position is that the $25,000 is not an insured loss: it was a voluntary payment, it was not a legal liability established against the insured, and it was made in breach of a condition. It is therefore not recoverable under the policy even if the territorial objection were overcome.
The website post. Public statements about the incidents may amount to an admission and will be used by the claimants. It also prejudices the insurer's subrogation and defence position and is a breach of the cooperation and no-admission conditions.
The insurer cannot, however, use these breaches to avoid the whole policy for unrelated future claims unless the wording makes them conditions precedent and the breach is material to the particular claim. The proportionate approach is to reserve rights specifically on the $25,000 and on any claim tainted by the admissions, while keeping the policy alive for other occurrences.
The practical lesson to put to the insured in writing: agreed-upon procedures for notification, a single point of contact for product incidents, and a rule that no customer communication describing a product as defective goes out without legal review.
3. Assuming cover had applied, how would subrogation against the charger supplier work, and what should the insurer do about the threatened class action?
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Subrogation would arise only on payment. On payment of an indemnity, the insurer steps into the insured's rights against the party legally responsible for the loss. In India, for non-marine insurance, that right is statutorily recognised in section 135A of the Transfer of Property Act 1882, and it is supplemented by the subrogation clause in the policy, which also obliges the insured to preserve and assign its rights.
Against the charger vendor, the claim would be in contract (breach of the supply agreement and any quality warranty) and in tort (negligent design or manufacture). Two practical constraints apply. First, the insurer can recover only what it has paid and only up to the insured's loss; the manufacturer's own uninsured exposure, such as the deductible and any excess of loss above the limit, remains the manufacturer's to pursue. Second, the insurer takes the rights as they stand, including any limitation already running and any contractual exclusion or cap in the supply agreement, so the file must be reviewed before payment, not after.
The class action requires action even though there is no cover. The insurer should: state in writing that it is not assuming the defence; advise the insured to appoint US counsel immediately, since a default judgment would be catastrophic; obtain a stay or extension of any response deadline while jurisdiction is contested; and put the insured on notice that any settlement or admission will be at its own risk. If the insured later buys worldwide cover, the new insurer will want the prior incidents disclosed, so a written record of what was known and when is essential.