Aside from insuring their property and equipment, businesses that manufacture products must also have product liability insurance to protect them against damages arising from product defects as well as associated litigation and recall costs.
However, many businesses, especially smaller ones, do not pay much attention to this area and are left vulnerable to an incident that could leave them in financial ruin.
Insurance Business interviewed Lei Yu (pictured), managing director of Marsh Hong Kong and Macau, to shed more light on the importance of product liability cover and why small and medium enterprises (SMEs) ought to pay more attention to this type of insurance.
“A lot of the product liability cases we see are the result of faulty goods or badly-written user instructions from other countries, which are then exported to the US, Canada, or Australia by a Hong Kong distributor,” Yu said, adding that the products most susceptible to such cases are toys, electrical appliances, electronic products, and healthcare items.
Yu revealed that as more countries adopt stricter consumer protection measures, more and more sellers of defective products are increasingly finding themselves having to defend against legal proceedings. These legal costs can be hefty, especially for firms that are in the early stages of growth.
In addition to compensation and legal costs, brand reputation is also at risk, especially in the age of social media. Unhappy consumers can create damaging posts which can go viral quickly and destroy a brand that took years to build, said Yu, who also stressed that risk mitigation through prevention is the best first resort.
While some business owners think they have excellent quality control and that they are immune to product liability cases, Yu believes that getting hit by such a claim is more likely (and more expensive) than one may think.
She cited data from US-based insurer The Hartford, which estimates that four out of 10 small businesses will experience a property or general liability claim in the next 10 years.
“If you are an exporter or manufacturer selling to the US, Canada or Australia, it is not a question of whether you will incur a product liability claim, but rather it is a question of when,” Yu said.
Furthermore, product liability lawsuits are more expensive than general liability or medical malpractice cases. Yu shared the results of a 2014 US study that showed juries awarding an average of US$5.2 million in personal injury damages stemming from product liability claims, compared to US$1.05 million for general liability claims and US$775,500 for medical malpractice.
More markets that previously did not allow class action lawsuits, such as Germany, France, China, and the Nordic countries, are now beginning to adopt public interest litigation through amendments of their civil procedure laws, Yu said. These increase the likelihood of multiple lawsuits across markets.
“One incidence of product failure can bring an SME to bankruptcy, without adequate insurance coverage,” Yu warned. No matter how strict a business’s quality control, there will always be a chance for errors and oversights.
Marsh offers a product liability insurance program designed for SMEs in Hong Kong that manufacture and/or distribute their products in other countries. The product, which has a maximum policy limit of US$10 million, also comes with an option to avail of Marsh’s risk consulting service which can help identify potential exposures through site inspections.
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