Product liability - Goods in, claims out

In September, 22 brands of Chinese baby milk powder were found to contain the industrial chemical melamine, with approximately 50,000 Chinese babies reported to the Chinese health minister as falling seriously ill resulting from ingesting the contaminated products. Meanwhile, in 2007 alone, over 20 million Chinese-made toys were recalled for having excessive levels of lead-based paint on them as well as other unsafe parts, with Mattel's Fisher-price brand clocking up extensive media coverage when it was forced to make several recalls.

Primary target

These recent, highly publicised cases serve to highlight how important product liability insurance cover is to manufacturers, wholesalers and retailers that may handle defective goods. When products are found to be unsafe, "retailers are the first in line for a lawsuit liable under contract law" highlights Jamie McNab, UK liability portfolio manager at Brit.

With so many businesses to cover, product liability is an incredibly competitive market for insurers. McNab believes that, despite the offerings in product liability, there is little differentiation between the basic covers: "Anyone who writes commercial insurance seems to write product liability, as it has historically been fairly attractive. Most basic core product liability cover looks pretty much the same wherever you get it. The difference between insurers is in the handling of complex claims. Where a client has a particularly complex product, it may want their broker to help it to choose an insurer with the appropriate expertise."

Andrew Robinson, principal specialist for product liability at Cunningham Lindsey, believes that access to the product liability market is fairly open for brokers: "I don't see a lot of restrictions on the smaller brokers; people will do business with them regardless of their size if they offer the right service. I've come across large blue-chip businesses with small provincial brokers, so it is a lot to do with relationships."

Common pair

McNab believes that product liability cover can also provide valuable cross-selling opportunities for brokers to sell a one-stop-shop liability package. "Product liability cover almost always goes together with public liability," he says. "Many underwriters don't even discriminate and they come as a package. SMEs also purchase employers liability alongside these policies. It is best for the broker to raise these issues when arranging product liability cover to ensure that the client is aware of what is available."

When purchasing product liability insurance, customers are buying an aggregate limit. Regardless of the number of claims, there is a maximum payout, meaning that it is important for a broker to encourage clients to think of the worst-case scenario when choosing a limit. Businesses tend to be covered for a minimum of £2m, while approximately 80% of Brit product liability customers are covered for £5m and only a few are covered for £10m or more. Steve Browne, head of casualty insurance at Axa, believes that brokers play a vital role in the market: "You can be surprised about how quickly this limit can be reached. Brokers can add a lot of value here."

Extra

In addition to standard product liability cover, a customer may wish to purchase a financial loss extension. Robinson believes that such extensions are important: "Product liability cover will protect a business should it supply a defective product that causes injury to a person or damage to other property. However, if there is no injury or damage but the third-party business suffers a monetary loss, it will not be covered unless financial loss cover is taken out.

"Product recall cover is also recommended, particularly in light of increasing legislation. There is also a greater awareness around product quality, more expectation that manufacturers will do something to recall a product if it is creating risk and greater policing of recalls - including applying sanctions if a recall is not implemented. There is a need for greater protection."

Excesses depend on the type of cover that is required. For standard policies they are low - between £250 and £500 for property damage losses and no excess on injury claims. If a client requires a financial loss extension then it is a very different story, with minimum excesses of £5,000 being common.

According to a Lloyd's report - Directors in the dock - is business facing a liability crisis? - product recalls have become a daily occurrence, rising 50% in Europe in 2007. "There is concern about the rise of a US-style compensation culture in both Europe and Asia and the liability fallout from the current instability in the financial markets," says Karishma Jasani, solicitor at Kennedys. "All businesses, including manufacturers, are therefore facing increasing liability risks in the current climate." Robinson agrees: "For manufacturers in this country, there is certainly a temptation to reduce the cost of manufacture and with this comes a risk of compromising quality for the cost benefits."

Browne believes that the credit crunch is not solely to blame and that sub-standard goods flowing in from China have also led to an increase in claims. If a business is importing goods into the European Union then it is usually considered to be the original manufacturer under EU law and so is the first port of call for legal action. Browne believes that brokers reduce the risks of importing from China: "Brokers help where they really understand their customers and where they sit in the supply chain. They help their clients implement appropriate risk management procedures and minimise costs by ensuring good records and quality controls are in place." McNab disagrees, however: "Risk management is a tricky area. It is most effectively managed in this area through quality control systems and design, therefore it is more difficult for a broker to add value in this area because the insured is more likely to have access to the appropriate expertise."

Specialist risks

Specialist risks such as electronics come with their own set of problems. Computer viruses are being found in high numbers on new electronic products being imported from China. "In any factory where the production line is not secure, products can be infected with malware which is then activated at a later stage," explains Richard Brain, technical director at ProCheckUp.

According to Robinson, electronic manufacturers are leaving themselves open to potentially expensive legal action if they do not cover themselves against these threats: "Under contractual law, you are responsible for the quality of a product, even if it has originated from elsewhere and has been simply bought in and passed on. Regardless of having done nothing wrong yourself, if you pass a faulty product on, you can incur a contractual liability."

Most standard policies do not cover electronic viruses because they cause no physical damage, therefore it is important for brokers with technology clients to understand fully the risks that their clients are open to in order to ensure comprehensive cover. "You cannot stop technology," says McNab. "All you can do is just to try and keep up with the risks."

While specialist risks provide a minefield for all but specialist brokers, there are many smaller intermediaries offering product liability policies to their clients currently, notes Kieron Russell at Miller Insurance Services: "In the case of a broker that does not have any relationship with a specialist product liability broker, the market is still not closed to them because they can approach insurers where they have relationships and discuss enquiries on a direct basis. There is no hard-and-fast requirement to always deal with specialist London brokers."

RULES AND REGULATIONS

General Product Safety Regulations 2005

Karishma Jasani, solicitor at Kennedys advises: "The GPSR apply to all UK suppliers of products used by consumers and place obligations on producers and distributors to monitor the safety of their products and enhance the traceability of them should things go wrong. They are also required to provide relevant information and warnings to enable consumers to assess the inherent risks in a product and notify the local authority as soon as they become aware that they have put unsafe goods on the market."

Food goods

"A number of regulations relating to miscellaneous food additives have recently been enacted, including: plastic materials and articles in contact with food; food labelling - which is being pioneered by the Food Standards Agency; and declaration of origins in relation to wheat, nut or dairy intolerances," notes Andrew Robinson, principal specialist for product liability at Cunningham Lindsey.