China Manufacturing and Product Insurance

Insurance is often an issue in the manufacturing contracts we write with Chinese manufacturers. Our clients often tell us they want a provision in their contract with their Chinese manufacturer that makes clear the Chinese manufacturer must secure X dollars in insurance protecting our client from any harm the Chinese manufactured product might cause. Our clients then mention that they want this insurance to name them as a third party beneficiary. More than anything, our clients want protection if the product they buy from China ends up injuring people or damaging property in the United States and/or Europe or Australia or Canada.

Our lawyers’ standard response is that we are happy to put such a provision in the contract, but it is dangerous to rely on it and it will increase the cost of the products our client buys.

We then explain how Insurance in China is a somewhat wild and wooly industry and many (most?) Chinese manufacturers have little to no insurance on the products they sell. We also tell them of how our China lawyers have seen many instances where Chinese companies agreed to purchase insurance but never did and even instances where Chinese companies sent out fake certificates of insurance to “prove” what they had purchased. We then explain the high cost and great difficulty of ensuring the Chinese manufacturer has secured the insurance it contractually promises to secure. Lastly, we mention how in the end the Chinese manufacturer will add its insurance costs to the products it sells.

We then mention how even if the Chinese company really does buys insurance (using our client’s money via increased product pricing), it will likely be really difficult to collect on that insurance from a Chinese insurance company if ever there is actually a problem. And though it is conceivable that a US or EU insurance company would write the policy for the Chinese manufacturer, the chances of this happening are exceedingly low.

We then strongly suggest how it might be easier/cheaper/safer for our client to secure its own insurance, rather than rely on its Chinese counterpart. Virtually without exception, they agree. Why pay someone else (through increased product pricing) to buy Chinese insurance that you probably can never be certain exists and will be difficult if not impossible ever to collect against? Why not just buy and pay for the insurance yourself?

Our clients almost invariably end up agreeing with us.

The takeaways from all of this are the following:

  • Insurance does matter.
  • Insurance you have gotten yourself, through people you know, is usually a much safer bet than relying on your Chinese counterpart.
  • Even foreign companies doing business in China may have less insurance than one would tend to believe.