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Manufacturers in the consumer products and food industries are facing increased liability claims and product recalls as a result of new laws and growing consumer awareness of safety and quality.
Product liability insurance, a greater focus on quality control, and contract negotiations that transfer risk to suppliers are all part of a company's defense against product liability losses, experts say.
Since the passage of the FDA Food Safety and Modernization Act, signed into law in January 2011, and the Consumer Product Safety Improvement Act of 2008, product liability and recalls have become special concerns in the consumer products and food industries, said Katherine Cahill, global product risk practice leader for the Marsh Risk Consulting unit of Marsh Inc. in New York.
Product liability insurance prices are “very competitive” for manufacturers across all industries with a focus on quality control, and there is ample capacity, said Tony Hardy, partner and global casualty practice leader at Lockton Cos. L.L.C. in London. However, insurers “will obviously pay due regard to where manufacturers' raw materials are coming from,” he added (see related story).
“We consumers like cheap products, and manufacturers are trying to provide them by sourcing cheaper components offshore, but that creates liability risks,” said Ian Harrison, partner and global recall practice leader at Lockton in London. The manufacturer can face product liability claims as well as economic risk from recalls and damage to its brand, he said.
The FDA now has statutory authority to conduct product recalls on food, whereas before they could only request a recall, Ms. Cahill said. As a result, food producers are pushing liability down to raw materials suppliers, more of which are obtaining product liability insurance and product recall insurance, she said.
“A large number of food-related companies buy product recall insurance, also called product contamination insurance,” said Louis Lubrano, senior vp of global crisis management for Liberty International Underwriters, the global specialty lines division of Liberty Mutual Group Inc., in New York. About 10 carriers sell it, including LIU, Houston Casualty Co., American International Group Inc., Crum & Forster, C.V. Starr & Co. Inc. and five or six Lloyd's of London syndicates, he said.
As part of the underwriting process, “We develop an application geared toward identifying the risk of contamination during the production process. We also ask what you do in the event of a recall. Most large companies have that plan in place,” Mr. Lubrano said.
A network of food safety consultants provided by global security specialists red24 “makes valuable recommendations,” he said. “Buying (product recall insurance) forces you as a company in the food business to look at your controls,” he said.
The Consumer Product Safety Improvement Act, which applies to all companies manufacturing or distributing consumer goods, steps up reporting requirements and recall obligations if they have a potential to cause harm, Ms. Cahill said.
For companies in general manufacturing, such as Boston-based Cabot Corp., a fine particle manufacturer, “our focus is not as much on the insurance piece but on the loss prevention piece,” said William Milaschewski, the company's director of risk management.
Cabot manufactures particles including carbon black, a reinforcing agent, for tire manufacturers. Cabot has had “a small handful of product liability claims, of very low frequency and severity, and it shows that our risk is small and that we have a very good process to ensure the safety of our products,” Mr. Milaschewski said.
In the case of a recall, “the issue is never with our product, because it's used by our customers along with other additives,” he said.
Primary insurance is written through Cabot's captive, and the manufacturer purchases excess coverage through “longtime partners” including Chartis Inc., XL Group P.L.C., Iron-Starr Excess Agency Ltd. and Catlin Group Ltd.
“Our real focus is on new and emerging products, such as nanomaterials, to make sure they are safe to work with and that they're well-studied,” he said.
Cynthiana, Ky.-based E.D. Bullard Co., which makes personal protective equipment such as hard hats, has not had a recall in 15 years, said Roger Andrews, director of risk management. Mr. Andrews attributes the company's “really good claims experience” to “aggressive quality control and rigorous testing in our own labs.”
While experiencing “a lot of litigation,” the company has a “litigation management philosophy” of “not paying nuisance settlements,” which has resulted in most cases being dismissed, Mr. Andrews said.
For auto manufacturers, “one of the biggest risks from a financial standpoint is the punitive damage award,” said Mike Stankard, managing director of Aon Risk Solutions' industrial and materials practice and automotive practice in Southfield, Mich. “A lot of the legal strategy is around settling with the plaintiff out of court,” because a sympathetic jury might award not only compensatory damages including loss of income, but “they want to send a message that the company ought to be punished because they didn't make it safe,” he said.
“Auto product recall insurance is sought by auto component manufacturers, and there's a much more restricted capacity” than for product liability insurance, said Bernie Steves, managing director of Aon Risk Solutions' crisis management practice in Chicago. “Generally, the liability gets pushed to component parts manufacturers, (although) a minority of auto suppliers buy recall coverage. It's a function of availability, and it can be expensive,” he said.
As more new technologies such as collision avoidance are introduced into automobiles, “this may create a whole new set of product liability claims because consumer expectation has been heightened,” Mr. Stankard said. Another risk in the future may be driver distraction. A plaintiff attorney could claim, “My client was injured because you overloaded the vehicle with electronics,” he said.
“The first line of defense is quality control upfront,” but the pace of technology makes it difficult to keep pace with quality control technology, said Mr. Steves. The second is “being able to respond when an incident occurs” in order to do an accurate recall.
That's followed by effectively communicating the message “before the media has gone wild with it,” he said.
Morristown, N.J.-based Honeywell International Inc., which manufactures a range of products, “has minimal exposure from the consumer side,” said the company's corporate risk manager, Paul B. Piazza. But as the largest manufacturer of auto turbochargers, Honeywell has a fully insured “product recall front” with Swiss Re Ltd., which provides a certificate of insurance to an auto manufacturer that requests it. Honeywell reimburses Swiss Re for any losses; however, it has not had any insured losses with its current line of products for auto manufacturers, Mr. Piazza said.
Chubb Corp., which covers auto parts manufacturers, is finding that Tier 3 suppliers, such as metalworking job shops, are asking for guidance in demonstrating that they understand products liability law and loss prevention, said Ann Minzner Conley, vp and executive liability loss control specialist in Whitehouse Station, N.J.
Chubb offers “a one-hour webcast introduction to product liability loss prevention—knowing the law, how product liability can affect your specific sector, and what kinds of losses there have been in products similar to those you make,” such as components implicated in auto accidents, she said.