The China Liability Wall. What I Meant To Say....
An East Coast lawyer contacted me the other day seeking help for his client in writing an outsourcing contract with its Chinese manufacturer. We talked for maybe 10 minutes regarding these contracts and then he told me he had called me because of what I had to say about always requiring the Chinese manufacturer to agree to buy product liability insurance. I paused for an uncomfortably long time thinking about how I could not believe I had ever said this.
Finally, I asked him what he was talking about. He then said "in the Washington Post article." I then said, "oh," and did a very quick Google search and came up with a very interesting 2007 article (I had never before seen), entitled, "Liability Lawyers Struggle to Pierce Chinese Curtain." That article has me down for the following:
Smaller importers are increasingly writing liability insurance into their contracts with Chinese manufacturers and paying third parties to test product quality, said Daniel P. Harris, a Seattle lawyer who writes contracts for American companies outsourcing to China.
I explained that this was the first I had heard of the article and that I had either misspoken or been misquoted. It is true that I have noticed a trend towards increased product quality checking even among smaller U.S. importers of product from China and it is true that I am constantly advocating to our clients the need for them to look into purchasing product liability insurance to protect themselves from bad product. I am of the view that importers of product from China must think of themselves as product manufacturers because that is how an American jury will see them if there are no other defendants around to pay the damages incurred by the injured plaintiff before them.
But, I have never advocated writing into the OEM (original equipment manufacturing) contract with the Chinese manufacturer the requirement that the manufacturer secure its own product liability insurance. Well sorta. We do sometimes put that provision in our contracts, but we always make clear to our clients that they should not rely on it unless they first conduct serious due diligence to determine whether the Chinese manufacturer has really taken out a policy that will actually protect the US company should something go wrong.
It is simply safer for the Western company to get its own insurance than to rely on the Chinese manufacturer to get insurance to cover the Western company. And since, in theory at least, the Chinese company will need to charge the Western company more for product if the Chinese company is buying extra insurance, the Western company's securing its own insurance should end up costing little to no more than if the Chinese company had purchased it.
Glad I have this forum to clarify something I may or may not have said two years ago.
Comments
... SUSPENSE!
Posted by: Joel Dietz | January 1, 2008 5:50 AM
There are U.S. and Chinese insurance companies that provide coverage to Chinese manufacturers who sell into the U.S. The largest shareholder in Huatai Insurance Co. in China is ACE Insurance, one of the world's largest insurance companies. So it is possible for Chinese manufacturers to get insurance to satisfy any requirement. But, yes, it costs money and the importer will be paying for it indirectly.
But the importer's insurance premiums will go up if there is no insurance provided by the Chinese manufacturer that is the primary coverage for this product. The insurance company will consider the importer to be a manufacturer to set rates, and those are higher than for importers. And the insurance company will delve into what controls are placed on the Chinese company to lessen the risk of safety problems. So their loss control people will get more active in that situation.
Either the importer or manufacturer needs to have insurance that will respond to claims in the U.S. The importer needs to pick the best way to protect themselves.
One problem with relying on the Chinese manufacturer's insurance policy is that you don't really want them controlling the defense of the case. The importer's reputation is on the line as the defendant, even if the manufacturer's insurance company pays the bill. So any adverse verdict could harm the importer's future business opportunities.
So the importer needs to seriously analyze which route to take and not just assume that their insurance policy will take care of it.
Posted by: Ken Ross | July 6, 2009 8:27 AM
That's not actually much of a distinction, is it?
Posted by: Joe | July 6, 2009 1:16 PM