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U.S. manufacturers step up efforts to manage Chinese supplier risks


American manufacturers buying products from Chinese suppliers are taking steps to protect themselves from product liability claims and ensure the quality and safety of their goods.

In the past, U.S. manufacturers buying products from contract manufacturers in China “would keep their fingers crossed that those manufacturers had some product liability coverage,” said Claude Gallello, international practice leader at Willis North America in New York, a unit of Willis Group Holdings P.L.C.

Now Willis works with ACE Ltd. and Chartis Inc. to issue a product liability policy to a Chinese manufacturer that names the American manufacturer as an additional insured. The U.S. company's excess policy would respond after that, Mr. Gallello said.

“My advice to risk managers who have international exposure is to figure out where the loss resides in terms of the policy,” he said. Mr. Gallello has developed a product liability matrix to help risk managers understand which of their policies covers a loss depending on where the product is made, where it is sold, where the occurrence takes place and where a suit is brought.

It's also important to “work with an underwriter who has the capability of investigating claims anywhere in the world,” he said. In the case of the loss of an eye, or a death, “usually the first 48 hours are very important because you need to investigate if it's a manufacturing negligence or if the individual is responsible,” Mr. Gallello said.

Any Chinese supplier to Morristown, N.J.-based Honeywell International Inc. “is required to have product liability insurance. We're encountering a lot of suppliers that don't have insurance. We have had pushback, and we try to select the best suppliers that have insurance,” said corporate risk manager Paul B. Piazza.

Honeywell also is “in the early stages of discussing setting up a vehicle that can provide (product liability) insurance to mostly Chinese suppliers that can't get insurance,” Mr. Piazza said. If an insurer is chosen for this vehicle, “the underwriters would be familiar with the product. We're also exploring using our captive in Bermuda; the Chinese suppliers would pay premium to our captive,” he said.

Rockford, Ill.-based Mega Fabrication Inc., a metal fabrication manufacturer, buys components from vendors all over the world, including China, said Chief Financial Officer John P. Claxton. The company also pays a Chinese manufacturer to assemble its smallest product line, he said. A U.S. insurer provides product liability coverage for Mega Fabrication's Chinese and U.S. operations, he said.

“What we found is that when you outsource, you've got to know something well to teach it. Outsourcing to China forced us to get that down on paper and make sure our (blue)prints were 100% accurate. What we found is that when we did that, we actually got better parts” with fewer reworks needed in-house, Mr. Claxton said.

“The other part of that strategy is when we decided to go to China, we embraced it fully. We designed roles for two people from our own machine shop to become global sourcing individuals. They spent time with our vendors—we embraced that sourcing channel and built a very strong support supply chain. We spent a lot of time traveling, working with our vendor, helping them be successful. A lot of U.S. companies may miss that. We're really living it—diving in,” he said.

In addition, he said, quality control was formalized when the company became an outsourcer. “We realized we really have to focus on a quality and inspection process.”

The company recently engaged a global engineering consulting firm that is able to discuss technical matters in Chinese with the vendor and inspects components in China to make sure they're “in spec” before they leave the factory, Mr. Claxton said.