Liability Insurance from Factory to Store
Companies need to be more aware than ever of global product liability risks
This is not an abstract discussion. Globalization offers untold opportunities for multinationals to expand into and source from new markets—but it can also present significant challenges around product liability.
Diverse insurance and regulatory requirements, coupled with supply chain challenges, often make managing product liability risk on a global scale more complex. Businesses can face a long list of risks, from regulatory fines to costly litigation, product recalls, and reputational damage in the event of a product failure or contamination. It’s essential that a product liability insurance program consider the interplay of policies and regulations in all countries where an organization operates. This must work alongside rigorous planning and preparation to help businesses stay compliant and best manage their global product liability risks.
For companies that manufacture or sell tangible products—from automakers to technology firms, from food manufacturers to retailers—the equation is simple. The cost of production in emerging markets is far lower than it is in Canada, the United States and other developed economies. Aside from potential savings in production costs, the large populations in developing countries—including Brazil, China and India—represent an opportunity to reach new consumers.
But product quality procedures and standards in emerging markets often don’t match those found in developed countries, raising potential production issues. The situation is often exacerbated by limited visibility in complex global supply chains, including second- and third-tier suppliers in emerging markets.
The challenges associated with globalization can contribute to product failures and contamination incidents. The costs of recalls, litigation, falling stock prices and damaged reputations can extend into the millions, or even billions, and can sometimes put a company out of business.
Regulatory scrutiny is also increasing, both at home and abroad. From 2009 to 2013, the U.S. Consumer Product Safety Commission (CPSC) imposed more than $31 million in penalties for corporate violations of product safety standards, many of which involved foreign suppliers or manufacturers. Fewer companies were penalized in 2012 and 2013 compared to the previous three years, but those that were got hit harder: the average penalty imposed by the agency increased from $436,000 in 2009 to more than $1.5 million in 2013.
The costs associated with product failures are likely to increase as businesses expand into new markets and regulators strengthen consumer protections globally. Among the new restrictions:
• The U.S. Consumer Product Safety Improvement Act of 2008 increased the maximum penalty that the CPSC can impose for a related series of violations from $1.8 million to $15 million.
• In January 2011, the Food Safety Modernization Act, requiring the Food and Drug Administration to focus on preventing food-borne contamination from occurring instead of simply responding to food-borne illness after it hurts consumers, was passed into law in the United States. This law places an impetus on the food industry (including foreign companies that export into the U.S.) to implement top-level safety programs that will protect consumers.
• In February 2013, the European Commission proposed reforms of its General Product Safety Directive. Among other changes, the proposal would introduce new labeling requirements and impose greater scrutiny in the event of a product contamination or failure.
• In October 2013, China introduced new consumer protection laws that increase corporate fines for product failures leading to injuries.
• In November 2013, the CPSC proposed a rule that would make the voluntary recall agreements that it negotiates with companies legally binding. This could open manufacturers, retailers, and others to new litigation from the CPSC.
Regulators have also demonstrated a commitment to enforcing rules and requirements governing insurance programs and tax structures. Canada, Australia, Germany, the Netherlands and the U.S. have bolstered audit and enforcement activities to collect the premium taxes they are due.
Some industries also have unique challenges that can affect product liability risk management. For example, life sciences companies that want to conduct clinical trials must produce insurance certificates required by local ethics committees. Failure to produce such certificates— which are often required to be issued in local languages by locally admitted insurers—on time can lead to delays and other challenges. Food processors, automakers and some large retailers often require their suppliers to purchase product recall insurance. Obligations can vary by country; German auto manufacturers, for example, are known for imposing particularly strict requirements. Suppliers that are not willing to purchase such coverage risk losing valuable business.
This complex risk landscape underscores the importance of having an effective global insurance program. Multinationals need to carefully consider a number of factors beyond whether to purchase insurance on an admitted or non-admitted basis. For example, businesses should review the need for local claims support and other expertise, the tax implications of claims payments and premium allocations for subsidiaries, and cash-before-cover requirements and other terms of premium payments.
A multinational company can consider several global insurance program structures, including a controlled master program (CMP). This is a uniform program typically placed with a single global lead insurer, with locally admitted policies issued where applicable. They might also think about a series of non-centralized policies purchased locally in each country where the business operates. Such policies would be issued by locally admitted insurers and tailored to the regulatory requirements of each country. They might also want a single global policy with no locally admitted policies, which yields cost savings and makes program administration simpler, but it can present regulatory and tax risks, claims uncertainty, and the inability to provide evidence of insurance in most countries.
Controlled Master Programs have grown more attractive as regulators have focused more on insurance and tax compliance in recent years. Under a CMP, “local” admitted policies mirror the terms and conditions of a “master” non-admitted policy as much as possible. The master policy is typically structured as a difference-in-
conditions and difference-in-limits contract (DIC/DIL). This means that any differences in conditions or limits between the master and underlying local policies are provided by the global master policy, albeit on a non-admitted basis. Underlying locally admitted policies typically conform to certain local laws, regulations and customs in the specific country, helping the business stay compliant.
A CMP also gives buyers centralized control of their global insurance portfolios and a mechanism for better communication between all parties, including insurers, brokers and other risk advisors. Additionally, working with an insurer with a global network may simplify the claims process.
Businesses can also manage product risk through effective planning and preparation. This begins with an assessment of product liability risks tied to individual products and geographies, and the modeling of potential loss scenarios. This information can be used to develop new strategies — from product design and manufacturing to marketing and product recall planning — to minimize or mitigate liability risk.
Organizations should also seek to better understand their supply chains, including second- and third-tier suppliers. Businesses should investigate all suppliers’ quality control and risk management plans and procedures and also consider adding compliance language, indemnification and financial penalties to their supplier contracts.
Finally, businesses should be ready to act in the event of a product failure or contamination event. A crisis plan should clearly define roles and processes governing all aspects of a recall. This should include communications via multiple channels with customers, regulators, employees, suppliers and news media. Businesses should also be prepared to trace products and components throughout their supply chain, be ready to execute a recall as necessary, and be able to account for all related costs for claims purposes. Having the right infrastructure in place ahead of time can help organizations to quickly initiate a recall and recover from it. For example, they should have the ability to launch websites and staff call centers in multiple languages, as well as a plan to collect unsafe products and redistribute safe products.
But responding well to a crisis won’t stop the next one. As more companies expand overseas, brokers need to stay on top of developments in the already complex global product liability risk market—and make sure the pharma client doing trials in India has the right forms.
Amanda Rudnicki is a client executive within Marsh Canada Limited’s Risk Management practice.
Copyright 2014 Rogers Publishing Ltd. This article first appeared in the August 2014 edition of Canadian Insurance Top Broker magazine