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PBC Addresses New Regulations in Designing C.A.R.E. Program Specific to Children’s Apparel Recall Exposure for Importers

Featuring John Butler, Practice Leader and Vice President, PBC Environmental

Posted on 15 Dec 09

Today we are featuring Storefront Program Brokerage Corporation (PBC) and a new program its environmental insurance specialty practice has developed for importers, distributors, and wholesalers of children’s apparel and footwear. The program is called C.A.R.E. (Children’s Apparel Recall Expense Program), and we spoke with John Butler of PBC Environmental about the need for this ever-important coverage for the import industry in the wake of recent regulations enacted by the Consumer Product Safety Commission (CPSC).

As of August 2009, the CPSC enacted the Consumer Product Safety Improvement Act, which in part changed the acceptable levels of lead content in children’s apparel and footwear as a result of increased awareness of the dangers inherent in lead. Children’s apparel is defined as apparel intended for those 12 years or under. The regulations dramatically reduce the allowable level of lead content that can be found in these goods and require testing for compliance. Merchandise in violation of the regulations will be subject to a recall.

Overview: New Regulations

Briefly, lead content is found in the component parts of clothing and footwear such as zippers, decorations and buttons – basically anything that goes beyond the actual textile itself. There are two different applications where lead content is included in children’s apparel/footwear, each separately regulated by the CPS Improvement Act. Lead is contained in paints and coverings that are used to coat surfaces, such as a coating to make buttons shiny. Additionally, lead may be contained in the actual content such as in metallic buttons.

“When the new regulations were enacted, there was a great deal of concern in the industry – among the importers, wholesalers and distributors – those who are on the ground bringing in the goods from manufacturers around the world,” says John. “There was confusion about compliance and also having the insurance protection should a recall take place in the event of non-compliance.”

John explains that the testing requirement of the legislation is done at the manufacturing site, prior to arriving into the United States, therefore it’s not under the importer’s control. Yet it’s the importer who would be responsible should the goods be in violation of the regulations and a recall is triggered.

What Can Go Wrong?

There are a number of things that can go awry. “Typically testing of the garments is done on a random basis. Not every piece that is being manufactured is tested,” says John. “For example, you may have a manufacturer with a run of 1,000 baby sweaters. Perhaps eight to 10 sweaters are randomly pulled and tested and indicate compliance. But this may not be reflective of the entire run. What if even a few of the sweaters’ component parts (such as buttons) were outsourced from different vendors and one of those vendor’s buttons has a higher lead content than the regulation allows? This could cause significant problems down the road. The importer thinks that the testing has been done and all is in compliance; they are unaware of the bad components that slipped through the cracks.

“When the goods come to the U.S., further testing can be done. Larger retailers, such as Wal-Mart, Sears, Target, K-Mart, will do their own random compliance testing at their facilities. If there are any goods that are non-compliant and they find something, everything is shipped back and the onus is on the importer. All the related expenses with that recall will be the responsibility of the importer under the law.”

According to John, these expenses could be significant, and for smaller importers one recall could put them out of business. “Depending on the size of the shipment and depending on the circumstances, we could be talking about a few hundred thousand dollars to millions of dollars in recall expenses that these importers are responsible [for paying].”

What’s more, in a worst-case scenario, random testing at the manufacturer may have not been done at all or it was done but merchandise with excess lead content wasn’t caught and the goods made it into the stores. “Now you have goods that are on the shelves in potentially thousands of stores,” says John. “There are public advocacy groups that visit retail outlets and purchase children’s goods to run independent random tests. If there are non-compliant goods, they will notify the retailers and a recall is instigated.

“Imagine the expenses involved at this stage if a recall is made, you are now taking back merchandise from thousands of sources which can run into millions of dollars.”

Other factors can also come into play that can cause non-compliance and ultimately a recall. The actual testing process may be defective due to bad equipment (the lead reader), or there may be operator error, or a mishandling of shipments occurs at the manufacturer’s. “One manufacturer, for example, may have various shipments that are destined for different parts of the world, including the U.S,” explains John. “A shipment meant for one region whose lead level requirements are not as stringent as the U.S. might end up shipped here in error.” Another factor involves moral hazard in which a manufacturer may cut corners to save money and does not perform the testing, or ships incorrectly to ensure all the goods meet the lead level requirements.

In each and every case, the importers are responsible for the regulation compliance. “The risk starts with the regulation, is compounded by the testing requirement, and within this process there are many factors that could go wrong. This was the incentive for us to create this program,” says John.

C.A.R.E. Steps In

As soon as the new regulations were set, the potential risk and losses associated with a recall due to non-compliance was recognized. Various members of the import industry began to reach out to the insurance sector and ask what solution, protection was available.

“There was no insurance program to address the potential significant exposures for importers, distributors and wholesalers,” say John. “Recall policies and GL policies contain pollution exclusions…lead is considered a hazardous material in the broadest sense. If you have that hazardous material present in component parts in children’s apparel/footwear you have what is known as a contamination or pollution condition, which is subject to the policy exclusion. Furthermore, some policies include a specific lead exclusion. Either way, you are subject to the exclusion under the policy.”

C.A.R.E., underwritten by Lloyd’s of London, addresses this gap in coverage. “We developed C.A.R.E. specifically for the industry, specifically for this exposure. And we are the only ones that are offering this program,” says John.

C.A.R.E. will cover all expenses in the event that the goods are recalled either voluntarily (for example, the retailer advises the importer of the non-compliant goods and the importer calls for the recall) or involuntarily (i.e., the CPSC triggers a recall). C.A.R.E covers the importer. The coverage is triggered in both cases.

Coverage, available in all 50 states and anywhere the CPSC Act applies, is for expenses incurred as a result of the recall, including the cost of shipping the goods, communications, additional staffing, warehousing, the cost of replacing or repairing the goods (for example, replacing the rivet in jeans that may have been found to be non-compliant). “Whatever the importer has to pay in terms of the recall, the policy will pay,” says John.

The C.A.R.E. program is affordable because it has been designed for the entire industry to participate…from small importers to the larger ones. “We wanted to make the program affordable so that everyone in the industry can participate,” says John, “and we have accomplished this.”

You can learn more about C.A.R.E. and providing this program to your insureds by visiting;or contact John Butler at 212.338.2941 or via e-mail at, or Jonah Lipin at 212.338.2983 or via e-mail at

About PBC and PBC Environmental

PBC is a wholesale subsidiary of Hub International Inc., and is a powerful market resource for brokers and agents that provides innovative, cost-effective programs for the insurance buyer.

PBC Environmental is a wholesale environmental insurance broker that provides agent and broker customers with the capability to offer their insured specialized environmental risk and insurance services. Its mission is to enable its retailers to offer their clients and prospects environmental insurance expertise with the confidence of knowing the coverage is there when needed and the premium is right.