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China recall crisis underscores risks

China recall crisis underscores risks

While better risk management controls cannot prevent all product liability claims--such as those linked to U.S. companies' suppliers in China--they can help the producer whose brand reputation is at risk resolve claims faster and recover damages from culpable suppliers.

Since March, numerous U.S. producers and importers have recalled a wide range of food products and consumer goods because of contaminants or dangerous defects blamed on their suppliers in China (see chart, page 25).

The defective products include snack foods, toys, pet food, tires, toothpaste and fish. In one of the most highly publicized incidents, toymaker Mattel Inc. of El Segundo, Calif., earlier this month recalled 967,000 Fisher-Price toys that a supplier in China contaminated by using lead paint.

Individual lawsuits and litigation seeking class action status have been filed against many of the U.S. producers of those products. The lawsuits also typically name every party involved in the products' distribution chains.

In court, blaming a rogue supplier is not helpful, because producers are strictly liable for the products they introduce into the U.S. distribution stream, plaintiffs and defense attorneys agree.

Therefore, producers should take more measures before their products are distributed to protect themselves, experts said.

Plaintiffs attorney Bruce T. Clark, who has represented claimants nationwide in several major food-borne illness cases since the early 1990s, said defendants typically have not adequately sorted out beforehand the financial responsibilities of the various parties in the supply chain.

For example, parties that had contracted with business partners to be named as additional insureds on their partners' insurance policies often find out during product liability litigation that they were not included in the coverage, said Mr. Clark, a partner at Marler Clark, Attorneys at Law L.L.P. P.S. in Seattle. Mr. Clark currently represents dozens of claimants who are suing Robert's American Gourmet Food Inc. of Sea Cliff, N.Y., over a salmonella-contaminated snack food that the company recalled in June. Roberts has traced the salmonella to a spice originating with a supplier in China.

The selection of defense counsel also creates tension among co-defendants, Mr. Clark said.

He attributed the problem to "sloppy" agreements among business partners. The agreements likely are crafted by in-house counsel who write them "in a pro-forma fashion" that does not anticipate a claim actually arising or how the contract would "really work if the company got into a jam."

Those contracts also should be vetted by outside counsel, Mr. Clark advised.

Policyholder attorney Stephen Weisbrod, a partner with Gilbert Randolph L.L.P. in Washington, agreed that one key mistake is failing to ensure that the organization or its personnel are adequately insured. Mr. Weisbrod expressed concern about companies' common assumption that another party most likely would be faulted for a defective product.

But foreign suppliers often cannot obtain insurance that covers claims filed in the United States, and they sometimes shut down abruptly and with no notice after product quality problems emerge, experts noted.

Producers, therefore, should require their foreign suppliers to maintain some U.S. assets that could be attached if a product liability claim is filed, advised Joe Underwood, a senior consultant with Albert Risk Management Consultants in Needham, Mass.

In addition, coverage beyond a company's own product liability insurance might be available under various policies, including directors and officers liability and errors and omissions insurance, noted policyholder attorney Jonathan M. Cohen, also a partner with Gilbert Randolph.

Other experts stressed the importance of imposing tougher loss prevention and mitigation measures but cautioned that not all of those measures are foolproof.

For example, risk management consultant MaryAnn Sackman bemoaned the lack of quality controls over foreign suppliers that have joint venture agreements with U.S. producers.

"Typically, the biggest problem is there are no controls when these products are made overseas and sold in the U.S.," said Ms. Sackman, president of RMI Consulting Inc. of Port Washington, N.Y.

But outside of joint venture relationships, simply identifying all sources of components used in a finished product can be challenging, said defense attorney John McDonough, a partner at Cozen O'Connor P.C. in New York. While that is critically important information to producers, intermediaries often fear they will be eliminated from future transactions and refuse to identify those suppliers, Mr. McDonough said.

Mr. McDonough, who represents Robert's American, noted that the company believed it was obtaining the spice that turned out to be tainted from a U.S. supplier.

While companies often have established protocols on how to respond when a product defect is identified, too few have it codified in print, Mr. Underwood said.

"By having a written protocol, it allows you to respond more quickly" both in deciding when to issue a recall and how to conduct it, he said.