Sludge Watch ==> Food safety - bringing liability to market - insuring risk

[Maureen Reilly]

Canadian Underwriter,  December 2006


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Bringing Liability to Market

The risks of product liability can be unexpected - particularly when 
something as benign as carrot juice or spinach can cause illness or death 
and require massive product recalls.

By Craig Harris


By the time word got out in early October that select containers of carrot 
juice from California contained a botulism toxin, it was too late for three 
Canadians. Two residents of Ontario and one in Quebec contracted the 
illness, leaving two victims paralyzed and one seriously ill. Botulism, 
which is rare but can cause blurred vision, difficulty breathing and death, 
was also linked to four cases in the United States. The tainted carrot juice 
followed a product recall in late September for spinach grown in the U.S., 
after 199 cases of illness and three deaths were reported due to E. coli 
infection. One case was confirmed in Canada.

What could be healthier for people than carrot juice and spinach? As if to 
underscore the unpredictability of product liability exposures, recalls were 
issued in September by Natural Selection Foods for fresh spinach and by 
Bolthouse Farms for carrot juice. Lawyers were quick to post notices and 
information related to lawsuits for product liability.

The two cases are merely the thin edge of the wedge when it comes to product 
liability exposures. Everything from medical devices to automotive parts to 
computer software programs have become "no-fly" zones for many standard 
insurance companies, pushing these product manufacturers to either 
self-insure or purchase specialized coverage.

The range of lawsuits extends from the well-known - such as Vioxx and other 
Cox-2 inhibitors used for treating arthritis - to the lesser known, such as 
the antipsychotic medication, Seroquel, or allegedly defective asthma 
inhalers.

UNPREDICTABILITY OF LIABILITY

Other factors compound the risk for manufacturers and insurance providers. 
For example, there is the expanding nature of global trade, the tendency for 
plaintiff lawyers to seek aggregate tort claims or class-action lawsuits and 
the increased claims severity of product liability awards. Statistics on 
product liability claims in Canada are not available, but several companies 
track jury verdicts in the U.S. as a rough gauge of directions in product 
liability.

"The median for product liability awards overall is about US$1.8 million," 
says Gillian Gerrish, liability leader in Chubb Insurance Company of 
Canada's commercial insurance specialty division. "That is up about 20% over 
the past five years. It is a real trend we cannot ignore."

Anne Toms, vice president, Elliott Special Risks, notes claims frequency is 
down, but severity seems to be rising. "The trend is to higher individual 
costs, but a decreasing number of lawsuits," she says. "Two years ago, there 
were roughly 30,000 product liability claims in the U.S., which was down to 
approximately 25,000 last year. This year, the trend is on line for about 
20,000 claims. Yet the average settlement cost has greatly increased. That 
is what we have noticed in Canada on our own programs, as well."

One reason the U.S. benchmark is especially relevant is the increased nature 
of cross-border trade. Canadian manufacturers that sell products in America 
are subject to the laws in individual states, notes lawyer Peter Pliszka, a 
partner and specialist in product liability litigation in the Toronto office 
of Fasken Martineau DuMoulin LLP.

"I often provide advice to Canadian clients about the reality that where 
there is the sale of goods, inevitably there is the potential for product 
liability lawsuits," Pliszka says. "And the plaintiffs are not going to come 
knocking politely on the doors of Canadian companies to serve the writ. They 
will start the lawsuit where convenient or advantageous to the plaintiff."

STRICT LIABILITY

In Canada, liability is based on the common law tort of negligence and is 
consistent from province to province, with some civil law differences in 
Quebec. However, many U.S. states have added "strict liability" statutes - 
as well as warranty guarantees or so-called "lemon" laws - to existing 
negligence torts.

Under the tort of negligence, if a defect is found in a product and the 
manufacturer can demonstrate it took reasonable steps to ensure safety, an 
argument can be made to escape liability. No such defence can be made under 
strict liability regimes: if a plaintiff can demonstrate a product defect, 
the manufacturer is automatically liable. The only issue left is to discuss 
the relative size of the damage awards.

"I think insurance carriers, along with their clients, are on a steep 
learning curve when it comes to product liability in the U.S.," says 
Pliszka. "Unless you are talking about a large, sophisticated manufacturer, 
a lot of them are unaware of how the rules vary widely in different 
jurisdictions. It's a bit of a hornet's nest."

Clients and their insurance carriers can get stung by class-action lawsuits 
and jury verdicts in plaintiff-friendly states. "Typically jurisdictions in 
Canada and the U.S. take the position that if a company is selling its goods 
into a jurisdiction, it is implicitly accepting it can be subject to the 
laws of that state or province," says Pliszka. "Because the rules vary so 
widely in different U.S. states, there are many relevant questions for 
carriers to ask: Where is the insured manufacturing and selling its 
products? what are the laws of liability in those jurisdictions? does the 
insured intend to expand geographically? what is the nature and litigation 
history of the product or product category? and what is the prospect for 
additional products that the insured plans to sell?"

Given the inherent risks in international trade, class action lawsuits and 
emerging exposures, the looming question is how these trends have affected 
pricing, terms and capacity in the Canadian product liability insurance 
marketplace.

PRICING FOR PRODUCT LIABILITY

Product liability has been, at least recently, generally written under the 
Commercial General Liability policy. Unless a manufacturer is within a 
specified high-risk industry, "about 99% of product liability is written 
under the CGL," says Tod Sloan, the managing director of Marsh Canada. "The 
Canadian market tends to be much more client-friendly than the U.S. market, 
both from the standpoint of pricing and retention amounts. Our market in 
Canada is typically one where deductible retention amounts are relatively 
low."

According to Sloan, this begs the question of why self-insured retentions in 
Canada are that much lower than they are south of the border - particularly 
for companies that have heavy U.S. sales. "Perhaps the real question is 
whether we are client-friendly or offering naïve capacity," he notes. "I 
think a lot of insurance companies are becoming smarter in that regard. 
[They are] at least asking their colleagues in the U.S. their opinion on 
some of these risks and in some cases having it underwritten in the U.S."

Many insurance companies continue to lump cross-border risks into general 
CGL package policies, according to Toms. "They simply double or triple the 
premium amount based on U.S. exposure," she says. "But many don't look, for 
example, at the suggested ISO rates for product liability."

Cheryl Barker, a vice president in Aon Canada's risk management practice, 
says "we get the benefits of more competitive rates from the perspective of 
a Canadian company simply because of litigation and trends. It is a matter 
of managing risk and getting the appropriate premium for it."

Despite a softening market in commercial lines, product liability has not 
seen any substantial premium decreases, Gerrish observes. "In product 
liability, rates are highly variable based on risk factors," she says. "In a 
changing marketplace, you see rates eroding more slowly than other lines due 
to things like tail exposure, incurred but not reported claims and latency. 
Insurers need to be cautious in reducing prices with some of the unknowns in 
the equation."

Pliszka says he has seen a gradual withdrawal of capacity in the primary 
layers of product liability coverage. "The number of carriers willing to 
write coverage for product liability claims is shrinking at the primary 
level, although there is a reasonably large number willing to write excess 
layers," he notes. "The effect is two-fold: premiums are higher, but also 
more clients are becoming self-insured to a higher level. That ultimately 
translates into a change in both risk management strategies and claims 
management functions, especially selection of counsel."

MANAGING RISK

Manufacturing companies are consequently making their own risk management 
assessments, according to Pliszka. "At the starting point of product 
development and testing, manufacturers are improving their quality control 
processes to reduce the incidence of claims," he notes. "A lot of companies 
are getting better at monitoring their products in the marketplace. If they 
can see signs of potential unexpected defects that can pose safety risks, 
they are in a better position to issue post-sale warnings or conduct recall 
campaigns."

Insurers and brokers alike stress to clients the importance of implementing 
good risk management programs. "The best advice we can give them is that 
they [should] know their businesses best," Gerrish said. "We learn a lot 
about risk management from them. Our job is to take what we have learned 
from our portfolio and the performance, and offer that as suggestions to 
clients to improve their risk."

"The more information you can provide to an underwriter, the better the 
terms you are going to get," Barker adds. "If [a client] can sit down 
face-to-face with any underwriting company and explain the product and the 
risk management, it gives [the underwriters] a level of comfort to provide 
better terms and conditions."

In order to reduce risk, clients may consider developing "parallel" products 
that address key exposures. "We have seen a consistent need that 
manufacturers face looking for products to fill gaps in their traditional GL 
policies - including product liability exposures," notes Gerrish. "So we 
have recently gone into developing products outside the space of product 
liability, but very much sold in alignment with those products. [Examples 
include] manufacturer's E&O, products withdrawal expense coverage, more 
specialized environmental products and umbrella policies that address the 
need for higher limits in territories like the U.S."

EMERGING EXPOSURES

Gaps in traditional coverage also relate to emerging product exposures. For 
example, the question on the minds of many people in the insurance industry 
is: From where is the next "asbestos" exposure going to come? Will it come 
from nanotechnology, life sciences/biotech, genetically modified foods, 
software and virtual reality programs, lifestyle drugs, and/or 
pollution-related health effects? In many of these areas, the key challenge 
is to underwrite these exposures based on little or no claims data patterns.

"You get these new products in the life sciences area and these 
technologically advanced products that nobody has experience with," says 
Toms. "The pricing is really from thin air. In a lot of these cases, there 
is nothing to base your pricing on. We know there are certain classes that 
we even feel we are not there for. "

Barker says biotech is a "growing area of exposure, and I don't think we 
have enough expertise in that area from an underwriting perspective. I think 
it will become a highly specialized area with things like synthetic blood 
products, where we will go to major players not afraid to take on some of 
these risks."

Pliszka, a member of a U.S.-based, defence-oriented organization called the 
Product Liability Advisory Council, points to virtual reality programs as a 
potential emerging exposure. "There was a relatively little-known claim 
incident that arose in Japan recently, where a child allegedly suffered 
traumatic psychological effects from watching and experiencing a virtual 
reality program," he says. "I think that is a harbinger of what might come 
down the road as virtual reality software programs grow in the marketplace."

In addition, the litigation trend will likely proliferate in pharmaceuticals 
and medical devices because of aging demographic trends and a growing market 
for the so-called "lifestyle" drugs. "You have a lot of money available for 
people to buy non-life-essential pharma products and medical devices, 
combined with what seems to be an increasing level of litigiousness among 
the public generally, which will likely equal more claims," Pliszka says.

Ironically, it may not just be the future that proves to be a source of 
claims, but also the past, according to Pliszka. "I could see more claims 
related to long-tail policies, many of which may have been event occurrence 
[policies], as opposed to claims-made policies," he says. "Even though the 
policy may have been long since forgotten by insured and insurer, it is 
still potentially in effect and available to be triggered if a claim arises 
and can be linked to an event in time that the policy was current. These 
kinds of long-tail claims tend to fall into toxic tort claims, such as 
environmental damage, pollution, sick buildings."

And, of course, given the nature of global trade and the increased number of 
free trade agreements, the risks of product liability claims in other 
countries will continue. These risks extend not just to export, but to 
importing arrangements as well, according to Sloan.

"We are starting to see distribution from a wholesale perspective," he 
notes. "The product is manufactured elsewhere, like China or India, and a 
Canadian client is the distributor. That [Canadian] client could certainly 
end up wearing at least some degree of any lawsuit that comes with 
[distribution]. From a quality control perspective, clients have to be aware 
of what they are buying. [They also have to be aware of] the ability to 
subrogate against manufacturers in other jurisdictions, which may not be 
carrying limits necessary from a North American perspective."

For Gerrish, these twin areas - global risk and emerging hazards - will 
dominate the product liability landscape in the years to come.

"The main challenge for clients who are looking for product liability 
coverage is they have to seek underwriting companies that have expertise in 
global exposures," she says. "But they also need an understanding of 
emerging hazards. It is really up to underwriters to show expertise and 
anticipate some of these challenges on the horizon."