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.

Dan Harris

I am a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

I mostly represent companies doing business in emerging market countries. It has taken me many years to build my network and it takes constant communication and travel to maintain it. My work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

I was named as one of only three Washington State Amazing Lawyers in International Law, I am AV rated by Martindale-Hubbell Law Directory (its highest rating), I am rated 10.0 by AVVO.com (its highest rating), and I am a SuperLawyer.

I am a frequent writer and public speaker on doing business in Asia and I constantly travel between the United States and Asia. I most commonly speak on China law issues and I am the lead writer of the award winning China Law Blog (www.chinalawblog.com). Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed me regarding various aspects of my international law practice.

I am licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at my firm, I focus on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.