China litigation risks. Still relatively low.
Got an email the other day from an executive with a big international insurance company — the kind that puts out a yearly Worldwide Risk Index measuring global risk aimed at global risk managers. This person sought my take on China litigation risks via the below email (modified to hide any identifiers and to better fit this blog post):
I hear quite often from clients / companies predominantly working with Chinese-owned companies is that certain legal/risk mitigation measures are not as important (such as professional indemnity) as their own clients do not place as much importance on their personnel or the duty of care. I also am curious about Chinese employee lawsuits for personal injuries as I have heard that those are not as common as in other countries as well.
I am finding it hard to get figures on the litigious nature of China and/or case studies to see if these claims are justified.
I responded with the following:
I don’t have any figures but here is what I can tell you. Our international dispute resolution lawyers view Chinese as overall being litigious in the sense that if someone dies or gets hurt or gets fired, there will be a claim made. But the difference is that the employer company (or a third party company) can usually strike a deal fairly quickly and so lawsuits do not necessarily result. And here is the key: the settlements are low by Western standards. Really low. Paying a family $100,000 for someone’s death is still a very high amount in China and if you hear of an amount like that it usually means the person who died had a high level job and a family to support. Death of a worker outside a big city might mean $35,000 in settlement or in a judgment.
The same holds true for professional indemnity, only more so. It’s extremely rare for anyone to get sued for that and even if they did, the damages would be low since Chinese courts are generally not comfortable awarding damages for lost profits, and certainly not large amounts.
What I see as critical on the insurance side are the risks that leave China, like product liability, and what always amazes me is how so many insurance companies are willing to write massive product liability insurance policies for companies that have completely worthless contracts with their Chinese manufacturers, when having a good contract can reduce product liability risks. I touched on this in an article I wrote for Above the Law a few years ago: How To Prevent “Made In China” Product Labels From Leading To Lawsuits Made In The U.S.A. It certainly would not hurt for your insureds to have good employer-employee contracts as well, which probably few of them do. Without exaggeration, 90 percent of the product and employee litigation type problems we see would never have been problems with better contracts.
This executive then responded with the following (again changed just a bit):
As a follow-up to your response, a couple years ago I was advised that western companies should be on the lookout for an increase in lawsuits brought in Western Courts by Chinese companies given China’s slowing economies. I was told that Chinese companies were more savvy to the fact that litigation was a means for them to recover funds. Do you foresee this trend increasing as the Chinese economy goes further into recession?
To which I responded as follows:
It’s already happened. But Chinese companies are generally both unwilling to pay for good Western lawyers when they are litigation plaintiffs in Western Countries and then generally unwilling to pay enough to see the case through to trial either. Our litigators refer to this phenomenon as the “imploding Chinese plaintiff” and we act accordingly when faced with one. We have found that we can usually just wear them down until they take a lowball settlement or just give up entirely. This is slowly starting to change, but until there is more change, Chinese companies as plaintiffs are a relatively low risk.
What are you seeing out there by way of China litigation risks?