More U.S. manufacturers and retailers are trying to reduce costs by partnering with foreign suppliers, but experts say just one recall or significant injury claim could wipe out the financial benefits of importing raw materials, components or finished goods from overseas.

“If you're buying and incorporating a foreign product and it fails, one of the biggest problems you run into is recovering losses from the foreign manufacturer,” said William Shelley, chair of Cozen O'Connor P.C.'s global insurance group in Philadelphia.

Unfortunately, experts say, many U.S. companies fail to perform the recommended due diligence to ensure that a foreign supplier has adequate finances and sufficient local product liability insurance to respond to claims brought in the United States and abroad.

“There are a lot of companies, especially in the midsized range, who don't have the resources to fully vet some of their foreign partners,” said Anthony Upshaw, a Miami-based partner at McDermott Will & Emery L.L.P. “Materials or products might be cheaper from a foreign location, but not having the opportunity to locate someone there full time or at least visit on a regular basis can create a big risk for a company.”

If not limited by its own size, a U.S.-based importer's efforts to obtain loss recovery assurance from overseas suppliers could be frustrated by its foreign partners' size or location, experts said. Many smaller foreign suppliers may not be able to provide detailed accounting information to demonstrate long-term financial solvency or, if they even have the coverage, product liability documentation beyond a simple proof of insurance.

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Additionally, corporate laws can differ greatly by nation, particularly those governing product-related liability. Even if a foreign supplier is determined to be the source of a defective or contaminated product, U.S.-based firms may receive little if any help from overseas governments in recovering losses attributable to a supplier's product.

“If it's a fairly small supplier, for instance, and they cause a really major problem for a company here in the United States, the sad reality is that they could just elect to close their doors if the claims are going to bankrupt them,” said Dave Skiljan, a Cleveland-based vp and casualty practice leader at Hylant Group Inc. “In some countries, you can complain all you want to the local government, but they're not likely to do anything about it.”

As more U.S. companies turn to foreign suppliers, experts said the push for tighter scrutiny of loss recovery protections could be less voluntary and more of a mandate from domestic insurers as a condition of coverage.

“You could have an insurer say they want to know who your foreign suppliers are and what their degree of reliability is,” Mr. Shelley said. “We haven't seen too much of that yet, but I think as globalization continues, you're going to see it more.”

One popular method among a growing number of U.S.-based firms of ensuring some measure of protection is through contractual agreements. U.S. companies with enough leverage over their prospective foreign partners have had some success requiring certain product liability insurance limits, terms and conditions that a supplier otherwise would be unlikely to purchase.

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“Local insurers and insurance products vary greatly from country to country and may not include things that we would typically see in U.S. like additional insured provisions and waivers of subrogation,” said Michael Rodgers, New York-based senior vp and international casualty practice leader at Marsh Inc.

In addition to comparatively low limits, overseas product liability policies often include certain jurisdictional exclusions—many policies specifically exclude claims made in the United States, if not all outside nations—that can be addressed through contractual agreements. Some firms also have been able to mandate through contracts coverage for brand and reputational harm, experts said.

“You really have to do that on a country-by-country basis because markets can differ greatly even within the same region,” Mr. Rodgers said.

In cases where adequate insurance is not available in a supplier's local market, U.S.-based firms can establish domestically written insurance programs for their foreign partners and require participation as a condition of their business contract.

“Often, our clients in the retail and manufacturing sectors are able to get very low premium for their own product liability policy because they have such an effective and tightly controlled risk transfer program,” said Pam Ferrandino, New York-based executive vp and casualty practice leader for Willis North America Inc. “While they still stand the risk of being named as part of a product liability claim, a vendor program is one way for companies to obtain sufficient and valid insurance and indemnification.”

However, some experts warned that overseas provider insurance programs can be difficult to place due to the kinds of overseas firms they attract.

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“The larger vendors and suppliers are able to meet the contractual requirements on their own,” Mr. Rodgers said. “So you end up with the smaller or higher-risk suppliers being the only vendors willing to participate in the program.”

Even with a watertight contractual risk transfer agreement in place, a company based in the United States could still be forced into litigation with a foreign supplier if it refuses to honor the contract when a claim arises. Success in those cases would depend largely on the nature of the supplier, its insurer and its country, making advance evaluation of potential overseas partners all the more crucial, experts said.

“You might get a supplier that's a great partner and you might not, but you're not going to know that unless you audit the company and the manufacturing process,” said Bill Harrison, a Princeton, N.J.-based product liability practice leader at Marsh Inc. “If you're not willing to do that, you better manufacture the product yourself in a plant that you can monitor.”