A few months ago, I was speaking with Michael Perry, a Vice President at DLD Insurance Brokers in Los Angeles. Micheal has a wealth of experience in placing international insurance policies and I was picking his brain regarding product liability policies for U.S. companies that get their product from China when I realized Michael’s knowledge would be helpful to some of our readers. So I asked Michael to write a guest post on product liability insurance for companies sourcing from China and he was kind enough to provide the following:
If you are a retailer or wholesaler sourcing product from China, it makes sense for you to secure product liability insurance to protect your company from liability if your product injures someone or is recalled. Unfortunately, this sort of insurance is becoming more difficult and expensive to obtain due to increasing publicity surrounding recalls and injuries arising from Chinese products.
The most straightforward way for an importer/retailer to secure this sort of insurance is to buy it directly for themselves. The problem with doing this, however, is that the insurance underwriters will assume they are the first and probably only line of defense in a product liability claim and that there will be no recovery from the Chinese manufacturer. Underwriters will assume that they will get stuck holding the bag for the entire loss arising from a faulty product and they will price their insurance accordingly. They will have little to no information on the Chinese manufacturer’s operations or quality assurance and they will just assume both of these are subpar.
Importers/retailers can lower the price of their product liability insurance (and oftentimes increase their protection as well) by requiring their Chinese suppliers indemnify them for costs arising from faulty products and by requiring those suppliers secure their own product liability insurance naming the importer/retailer as an additional insured on these policies. If the importer/retailer is named as an additional insured on the Chinese manufacturer’s insurance policy, the importer/retailer itself will be able to file claims against the policy.
Usually when Chinese manufacturers secure insurance, the insurance company issues a certificate of insurance to the importer/retailer showing the Chinese manufacturer’s products are covered by the policy. Due to the differing laws and realities on the ground between China and the United States, it is absolutely essential that the coverage under these policies be reviewed closely to ensure that it conforms to what is necessary for real protection in the United States. I mention the United States here for a number of reasons, with the most important one being that it is the United States where product liability risk is by far the greatest.
My company has reviewed a number of Chinese-based insurance policies to determine the level of protection the Chinese-based insurance policies give our U.S. clients and in most instances that protection has been sorely lacking. Just by way of one example, many Chinese-based product liability insurance policies cover only those claims brought within three-years of the policy’s effective date. This sort of coverage is not adequate for a United States importer/retailer since most states give an injured party two to six years after their injury to bring their claim. In other words, if you secure product from China and someone is injured by your product ten years after you sold it, you can still be sued and you can still lose and lose big. Many states permit children to wait until they are adults before having to sue for bodily injury claims.
The best way for American importers/retailers to protect themselves from product liability risk is usually to have their Chinese manufacturers secure a U.S.-based product liability policy. These policies can typically be secured if the following three requirements are met. First, the Chinese manufacturer is reputable and has appropriate ISO certifications. Second, the Chinese manufacturer can show it consistently produces a quality product. Third, the Chinese manufacturer must be able to show a five+ year favorable loss record. The goal is to make the U.S. underwriters comfortable writing a policy for a Chinese manufacturer.
Surprisingly, the overall cost to the Chinese-manufacturer/U.S.-importer-retailer for the Chinese manufacturer to carry the U.S. policy will usually be less than any other method and the coverage will usually be better for both parties as well. Doing it this way thus becomes a win-win for both parties.