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Product liability coverage remains competitive


U.S. food and consumer goods makers can expect the product liability insurance market to remain competitive despite a spate of product recalls and import bans linked to Chinese suppliers, market experts say.

The profitability of the liability insurance market should ensure that insurers will remain eager to write coverage, they say.

Meanwhile, companies increasingly are looking at trade disruption coverage, which can help defray the cost of replacing foreign suppliers that fold unexpectedly after product quality problems emerge, brokers say.

Lawsuits by individuals as well as suits seeking class action status have been filed against many food processors and consumer products manufacturers that in recent months have sold products that have been contaminated or rendered defective by suppliers in China, attorneys say.

Still, market experts say, companies with suppliers in China should not face problems when buying product liability coverage.

The liability market in general remains highly competitive due to property/casualty insurers' record profits in 2006 (BI, March 26).

Product liability losses stemming from suppliers in China "are not enough to turn the casualty market around," said Carol Murphy, managing director for the casualty central region at Aon Corp. in Chicago.

Risk managers, however, should expect greater scrutiny of product liability risks. Underwriters likely will ask more questions about operations and outsourcing, in an effort to remain comfortable with their aggressive pricing, Ms. Murphy said.

Underwriters, especially excess insurers, likely will pay special attention to pharmaceutical companies and tire manufacturers--companies with "batch exposures"--that have had recent product defect problems, she said.

For food companies, underwriters likely will not impose more requirements on top of the Food and Drug Administration's, she said. And most other producers have had few product defect problems that would concern insurers, she said.

Insurer attorney Joseph F. Bermudez agrees an insurance market pullback on product liability coverage, especially for food processors, is unlikely. "At this time, I don't see that," said Mr. Bermudez, a partner with Cozen O'Connor P.C. in Denver and chairman of its food contamination coverage practice area.

Risk managers' greater concern should be ensuring that their companies have adequate coverage, suitable quality controls and a crisis management plan in place to respond if a product defect is discovered, Mr. Bermudez said.

Aon's Ms. Murphy and Joe Underwood, a senior consultant with Albert Risk Management Consultants in Needham, Mass., also cautioned risk managers to fully understand their coverage in light of the common policy exclusions that bar coverage for losses resulting from contaminants and lead.

But plaintiffs' attorney Bruce T. Clark, who has represented claimants in major food-borne illness cases since the early 1990s, said he has never seen an insurer invoke a contamination exclusion to deny product liability coverage to a food company defendant.

Mr. Clark, a partner at Marler Clark L.L.P. P.S. in Seattle, represents 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.

Recall cover is pricey

Unlike product liability insurance, product recall coverage is expensive, and food companies are the major buyers, experts say.

London market insurers comprise the major part of the recall market, providing $70 million of capacity for accidental defects and $150 million of limits for malicious product tampering, according to Julie Ross, a vp with Marsh Ltd. in London. The coverage sometimes can be augmented with an additional $15 million/$50 million of capacity from the U.S. market, she said.

But another type of coverage that U.S. companies increasingly are demanding is trade disruption insurance, brokers say. The coverage is a derivative of political risk insurance, which is designed to cover the loss of a policyholder's subsidiary overseas due to nationalization, appropriation or terrorism.

A trade disruption policy responds when foreign suppliers fold or are barred by political actions abroad or domestically from honoring their contracts. It covers the policyholder's lost revenues and the cost of arranging a replacement supplier, including retooling the new supplier, brokers say.

The policy, however, does not respond when a policyholder wants to drop a supplier because of its shoddy work, said Bryan Squibb, the Chicago-based managing director of Aon Risk Services Inc.'s trade credit practice.

Attorneys note that many U.S. companies recalling products have found that their suppliers in China have folded.

But buyers are interested in the insurance because it covers them if suppliers become unavailable due to political acts by the U.S. or foreign governments, Mr. Squibb said. That is important because a trade dispute over a narrow issue between two governments could grow and affect unrelated products because of their value as leverage in the dispute, he said.

Only a couple of Lloyd's of London syndicates and a U.S. insurer, which brokers refused identify, write the coverage.

As a result, market capacity is about $50 million, which satisfies midsize companies but is inadequate for large companies, said Ken Horne, managing director and political risk practice leader for Marsh Inc. of New York.

Marsh is trying to arrange more capacity for larger companies "sometime this year," Mr. Horne said.