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Cheating Emissions Tests

Volkswagen, the German Car Giant has admitted cheating emissions tests in the U. S. According to the Environmental Protection Agency (EPA), some cars being sold in America had devices in diesel engines that could detect when they were being tested. This therefore changed the performance accordingly to improve results.

VW has had a major push to sell diesel cars in the U. S..  This was backed by a huge marketing campaign trumpeting its cars’ low emissions. The EPA’s findings cover 482,000 cars in the U. S. only. This included the VW manufactured Audi A3 and the VW brands Jetta, Beetle, Golf and Passat. However VW has admitted that about 11 million cars worldwide are fitted with the so-called “defect device”.

Full details of how it worked are sketchy. The EPA has said that the engines had computer software that could sense test scenarios by monitoring speed, engine operation, air pressure and even the position of the steering wheel.

In addition the cars were operating under controlled laboratory conditions. This involved putting them on a stationary test rig.  The device appears to have put the vehicle into a sort of safety mode.  The engine then ran below normal power and performance. Once on the road, the engine switched from this test mode. The result? The engines as a result emitted nitrogen oxide pollutants up to 40 times above what is allowed in the U. S.

With VW recalling almost 500, 000 cars in the U. S. alone, it has set aside €6.5 billion to cover costs. However that is unlikely to be the end of the financial impact. The EPA has the power to fine a company up to $37, 500 for each vehicle that breaches standards – a maximum fine of about $18 bn.

At this time, only cars in the U. S. named by the EPA are being recalled.  Owners elsewhere need take no action. About 11 million VW diesel cars are potentially affected by this cheating.  Of this 2.8 million cars are in Germany itself.  Further costly recalls and refits are possible.

California’s Air Resources Board is now looking into other manufacturer’s testing results. Ford, BMW and Renault said they did not use  cheating”defeat devices”.   Other firms had yet to respond or simply stated they had complied with the laws.

A legal source says it is unlikely that the company will be able to turn for product liability or product recall insurance to cover losses related to the scandal. Insurance industry insiders say Directors and Officers Liability insurance (D & O) are likely to see the biggest damage claims.

It stems from an unfolding scandal around Volkswagen’s cheating of U. S. emissions tests.  This situation has therefore prompted the German car maker’s chief to resign.

D & O insurance is taken out by companies to cover claims against senior executives for the decisions and actions they take as part of their management duties. While insurers and brokers as per industry custom declined to give details about Volkswagen specifically, they said a German blue chip manufacturer of its size would typically buy around 500 million euros ($560 million) in D & O cover each year.

That money would be used to pay claims against VW executives from shareholders. There has been a 30 percent drop in VW’s share price, as well as legal expenses.  The the cost would typically be spread among more than a dozen insurers and reinsurers, industry officials said.

Volkswagen would thus have to foot the bill once the limit is reached on the D and O insurance.  This does not normally cover fines and penalties.

Insurers would be off the hook for costs related to any recall of the cars affected. Any cover would likely be negated by their own knowledge or cause, as it is just for accidental or negligent damage.

As a result, the implications for D and O insurers are potentially wide:

VW and its executives can be expected to face criminal and/or regulatory investigations for cheating in the U. S., Europe and in other jurisdictions.

VW and its executives can be expected to face myriad civil claims globally.  This would be class action claims by investors alleging that a failure to disclose the cheating emissions tests led investors to buy or to hold onto VW shares.

Companies that VW may have used to design, manufacture and/or install the devices behind the alleged deception, and their directors, may also find that they are the subject of similar investigations and civil claims.