When I was learning the law, I was trained to hate insurance. One of my law professors, whom I greatly respected, would say that insurance law is to law as military music is to music. Those who went straight from my law school to insurance companies were invariably in the bottom quartile in class rank. I saw their job as claiming someone’s wrecked Honda Accord was worth $6,200, not $7,000.

I eventually came to realize that insurance has a legitimate place in the practice of law. When clients come to my firm with a risk of being sued, or after having been sued, or even on issues requiring they sue, insurance nearly always pops into my head. My firm has been having to deal with insurance issues more and more as the bad economy sends us more defective international product and international fraud cases. We usually call in an outside lawyer to assist us on the insurance side of these issues.

Insurance has always been a fairly big issue in the OEM contracts we write with China manufacturers. Our Western clients often tell us they want a provision in their contracts with their Chinese manufacturers that makes clear the Chinese manufacturer must secure X dollars in insurance protecting our clients from any harm the Chinese manufactured product might cause. On top of this, our clients want that insurance to name them as a third party beneficiary. Our response is that we are happy to put such a provision in the contract, but that it is dangerous to rely on it. Insurance in China is still a nascent industry and many (most?) Chinese manufacturers have little to none. Having seen instances where Chinese companies agreed to purchase insurance but never did and even instances where Chinese companies sent back fake certificates of insurance, we explain the high cost and great difficulty of ensuring the Chinese manufacturer has secured the insurance it contractually promised to secure. We strongly suggest how it might be easier/cheaper/way safer for our clients to secure their own insurance, rather than rely on their Chinese counterpart. Virtually without exception, they agree.

I thought of China insurance today when I read yet another post at Absurdity, Allegory and China (AAC) on the Chinese drywall that is stinking up homes in the United States. AAC has been covering the drywall situation since its inception and it has done a whole host of excellent posts on it.

From day one, I always saw this whole “Chinese” drywall thing as essentially a domestic issue and so I have not written on it much, nor really immersed myself in its minutiae. The story goes essentially like this. US companies buy drywall from China. Chinese drywall emits odors into US homes. The way I saw it, this would lead to US homeowners suing the US companies that bought/imported/marketed/made/sold/mentioned/looked at the drywall. I figured some of these homeowners would also sue the Chinese companies here in the US, not realizing that US judgments against Chinese companies are, at least in China, not worth the paper on which they are printed. I also figured some of the US companies would go back to their Chinese suppliers seeking refunds and more for the allegedly defective drywall, but figured they would end up getting little to nothing, whether they sued in China or not.

It never occurred to me that the Chinese manufacturers might have insurance to cover all this. If I had thought about it, I am sure I would have thought, “no way.”

Well it turns out I will probably end up being right about all of the above (gosh…. I just love writing long posts with this conclusion), but it also turns out that some of my assumptions were wrong.

I assumed the Chinese drywall manufacturers were domestic Chinese companies. Wrong. According to AAC, it turns out at least one of them, Knauf Plasterboard Tianjin Company, LTD, is “part of” (I am guessing it is a Wholly Foreign Owned Entity owned by) Knauf, “a German multinational supplier of building materials with a worldwide presence in 58 countries.” Despite this connection to a German MNC, Knauf Plasterboard Tianjin is reported not to have insurance that would cover this. That is contrary to what I would have expected and contrary to what AAC would have expected as well:

No insurance? Right. And I’m posting this blog entry from Mars where I’m sitting with Manny Ramirez passing one back and forth, wondering where we’re gonna find some water and a better contract than the LA Dodgers waved in his face.

The takeaways from all of this are the following:

  • Insurance does matter.
  • Insurance you have gotten yourself, through people you know, is usually a much safer bet than relying on your Chinese counterpart.
  • Even foreign companies doing business in China may have less insurance than one would tend to believe.

UPDATE: I could not have scripted this better. China’s leading online travel agency, Ctrip.com, just apologized for having (inadvertently?) issued fake insurance policies. Go here for more on this.

  • Good post. Important topic.
    I can report that I do what I can on my end to get my MBA students and your future clients just to start with Step One and read their damn policy to try to understand it, get a feel for what is covered and what is not, etc.. It is a challenge to get them to appreciate that this area of business is every bit as important as the more “sexy” areas such as finance, marketing, negotiations, etc.
    See, e.g., my post below:
    http://calpolymbatrip.com/2007/china/wheeeeee-meets-the-world-of-insurance/
    Cheers,
    Chris.

  • Dan

    Chris,
    Thanks for the link. Insurance must be sexier than we think since you certainly got a whole host of rather impassioned comments in response to your post.

  • Sexy topic …. or …. a required assignment (to wit, “read this particular post and comment re your takeaways”). 🙂
    Cheers,
    Chris

  • Jim

    Thanks for this, Dan. I guess the reason I am dogging this story is because I believe that it must also be a bigger story here within China, one that is not being told. I think that there is a “better than fair” chance that if the exported drywall has problems, then there is also a corresponding Chinese local/national problem, which could be a significant health issue. I cannot imagine that only the bad ‘rock’ ended up being exported. With the frenzied building boom over the last decade, I cannot imagine any local company saying, “Well that stuff’s probably not up to snuff. Let’s junk it.” And even if they did make that choice to get rid of it, the way to “junk it” would most likely have been a quick, possibly discounted, dump into local construction markets. Not saying that happened, but if it did it shouldn’t surprise anyone. I cannot help but believe that there is a much larger story here that will eventually emerge. And Knauf may end up taking it on the chin from this side too, though my sense is that the problem may be considerably bigger than Knauf Tianjin.
    Knauf, no insurance? Well, that seems to be a hare-brained dodge. They do have assets. Or at least you’d think they would. But, then again, it is 2009. Who knows who has or doesn’t have what anymore?

  • Dan

    Chris,
    Damn, that’s real power. What I wouldn’t give to be able to FORCE about 25 people to comment on my blog….

  • Dan

    Jim,
    Keep flogging the story. It needs to be flogged. You make three very good points in your comment. One, that it does seem hard to believe Knauf Tianjin has no insurance. Two, that there is virtually no way this same drywall isn’t causing these same “issues” in China. Three, that this economy means we cannot be sure of anything with respect to the economic viability of companies.

  • Rene Galvin

    Hi
    I have Knauf Chinese Drywall in my home.
    It has been a real nightmare. The builder was non responsive, at best, the smell made us sick, we had to move out, and the damage can be read about if you google
    Rene Galvin Chinese Drywall
    What is our thoughts. Do you think the chinese just live with all these defective products.

  • David McNitt

    Sulfur attacks cement. Since most of Florida’s construction is cement block it will not be long before the structure is affected. Sulfur disolves the portland cement glue holding the block together, so be sure to check the structure for damage too.

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