A few months ago, I was speaking with Michael Perry, a Vice President at DLD Insurance Brokers in Los Angeles. Micheal has a wealth of experience in placing international insurance policies and I was picking his brain regarding product liability policies for U.S. companies that get their product from China when I realized Michael’s knowledge would be very helpful to some of our readers. So I asked Michael to write a guest post on product liability insurance for companies sourcing from China and he was kind enough to provide the following:

If you are a retailer or wholesaler sourcing product from China, it makes sense for you to secure product liability insurance to protect your company from liability if your product injures someone or is recalled. Unfortunately, this sort of insurance is becoming more difficult and expensive to obtain due to increasing publicity surrounding recalls and injuries arising from Chinese products.

The most straightforward way for an importer/retailer to secure this sort of insurance is to buy it directly for themselves. The problem with doing this, however, is that the insurance underwriters will assume they are the first and probably only line of defense in a product liability claim and that there will be no recovery from the Chinese manufacturer. Underwriters will assume that they will get stuck holding the bag for the entire loss arising from a faulty product and they will price their insurance accordingly. They will have little to no information on the Chinese manufacturer’s operations or quality assurance and they will just assume both of these are subpar.

Importers/retailers can lower the price of their product liability insurance (and oftentimes increase their protection as well) by requiring their Chinese suppliers indemnify them for costs arising from faulty products and by requiring those suppliers secure their own product liability insurance naming the importer/retailer as an additional insured on these policies. If the importer/retailer is named as an additional insured on the Chinese manufacturer’s insurance policy, the importer/retailer itself will be able to file claims agaist the policy.

Usually when Chinese manufacturers secure insurance, the insurance company issues a certificate of insurance to the importer/retailer showing the Chinese manufacturer’s products are covered by the policy. Due to the differing laws and realities on the ground between China and the United States, it is absolutely essential that the coverage under these policies be reviewed closely to ensure that it conforms to what is necessary for real protection in the United States. I mention the United States here for a number of reasons, with the most important one being that it is the United States where product liability risk is by far the greatest.

My company has reviewed a number of Chinese-based insurance policies to determine the level of protection the Chinese-based insurance policies give our U.S. clients and in most instances that protection has been sorely lacking. Just by way of one example, many Chinese-based product liability insurance policies cover only those claims brought within three-years of the policy’s effective date. This sort of coverage is not adequate for a United States importer/retailer since most states give an injured party two to six years after their injury to bring their claim. In other words, if you secure product from China and someone is injured by your product ten years after you sold it, you can still be sued and you can still lose and lose big. Many states permit children to wait until they are adults before having to sue for bodily injury claims.

The best way for American importers/retailers to protect themselves from product liability risk is usually to have their Chinese manufacturers secure a U.S.-based product liability policy. These policies can typically be secured if the following three requirements are met. First, the Chinese manufacturer is reputable and has appropriate ISO certifications. Second, the Chinese manufacturer can show it consistently produces a quality product. Third, the Chinese manufacturer must be able to show a five+ year favorable loss record. The goal is to make the U.S. underwriters comfortable writing a policy for a Chinese manufacturer.

Surprisingly, the overall cost to the Chinese-manufacturer/U.S.-importer-retailer for the Chinese manufacturer to carry the U.S. policy will usually be less than any other method and the coverage will usually be better for both parties as well. Doing it this way thus becomes a win-win for both parties.

  • Very interesting. I heard this type of insurance policy was harder and harder to obtain, even for selling into Europe.
    The solution of pushing one’s manufacturer to pay for it makes sense, but it is probably very difficult for a factory of less than 2,000 workers to satisfy all 3 criteria listed in this post.

  • Even if the importer has to pay the insurance in his own name, there are steps he can take to decrease the amount of fees.
    I had a look at a post I did on this same subject, and a reader left this valuable comment (this is an extract of the comment):
    “Our carrier has asked us for evidence of our programs for preventing safety related defects; we have, among other things:
    1) An ISO 9001/ TS16949 system ourselves, which includes surveillance of our suppliers’ factories;
    2) An inspection and testing program for imported goods;
    3) A product recall system… which thankfully we have not needed to use
    4) On site third party inspections “as needed” – especially to qualify new factories, or validate corrective actions”

  • Mariah

    Thanks for running this guest post. The information is very helpful and I have not seen it elsewhere.
    Mariah

  • Ringo Ma

    We’ve been helping hundreds of Chinese vendors secure Product Liability Insurance up to international standards for years. In the 1990s, major buyers in the US were inclined to arrange wrap-up product liability policies which covered foreign suppliers but after 911, risk managers found prices of all kinds of property & casualty policies were rocketing and it did not make any sense for buyers to cover suppliers whose quality of risk was out of buyer’s control. Therefore beginning in 2002, major buyers in the US started asking Chinese suppliers to buy product liability insurance by themselves according to parameters set forth by risk management department of the buyer. These parameters typically include policy form, limit of liability, financial security of carrier, service network etc. and buyers must be names as additional insureds thereunder.
    At the time no Chinese insurance companies had S&P or Best ratings so foreign insurers espeically American insurers’ operations in China started writing this kind of risks, and they still do so today.
    Asking a Chinese supplier to buy a US-based product liability policy sounds perfectly reasonable from an American insurance broker’s point of view, but unfortunately it is not legal for the Chinese company to do so. According to the PRC Insurance Law, legal entities who are domiciled within PRC territories must buy insurance from admitted or licensed insurance companies. In addition, getting a non-admitted policy creates lots of troubles when it comes to claims settling, policy tax and foreign exchange control.
    So with all due respects, Mr. Perry’s advice on the “best” way was misleading, if not entirely wrong.

  • Frank Wang

    I partially agree with Mr. Ma’s points. Non-admitted policy may create some troubles as mentioned. However, it is not forbidden for the Chinese suppliers to buy the products liability insurance for their export sales. PRC Insurance Law only requires the domestic entities to buy the insurance from domestically-licensed insurance companies for “their domestic insurance needs”. For the suject matter of insurance which is out of PRC, such as the exporting products to US, it does not apply to the above legal clause.

  • Max

    This is quite helpful. Thanks for running this.

  • Yeah, it’s first time as me (as an valve manufacturer ) to know the Liability Insurance to commodity export to US , however I wonder if any chinese company insurance companies could provide this tpye pf insurance . Could anyone have ideas for this ?

  • Nick Xu

    This post is wonderful, exactly what I am looking for.
    Could you refer me to some reputable insurance companies that actually sell these kinds of insurance?

  • luis sant anna

    estou comprando pela primeira vez da China ,tratores, já paguei 30% do valor, o exportador chama-se Hubei Fotma Machinery, nào é o fabricante.Como posso ter certeza que ao pagar o restante da compra 70%, ele irá embarcar os tratores?Contratei a SGS para inspeçào pre-embarque, como forma de proteger a operaçào, mas mesmo assim me sinto inseguro.meus clientes tambem estào nervosos.

  • Juan Velez

    Dear Mr Ringo Ma. I need to find a company who can provide the Insurance Policy for owr provider in China. You see, we use to import LED Lights from China, but we have a hugge contract and the client asks for the insurance policy from provider… What we can do!!! Can you help us.Please give me your comments to ideascloset@gmail.com
    Juan Velez

  • Brett

    This is a great article.  I am an American distributor of products made in China.  Can you introduce me to a few reputable insurance companies that handle this type of insurance.

  • TDAWG

    Hello, I really need some help! I have a product that I designed myself and have manufactured in China. I live in the UK, England, and my product is available worldwide – however most of my customers are in USA. Please can anyone recommend any firms that will help me insure my product? Or someone who I can discuss this with further?

    • Alex Barnes

      I know this is some time ago but feel free to contact me if you still need help. alexbarnes@bjic.co.uk

      • TDAWG

        thanks Alex, I did sort it in the end. But my renewal is this month so If i run into any problems I may give you a shout.