Chinese Drywall and Product Liability in China

Recent article from Associated Press (Click here) discusses the issue of Chinese manufacturers ignoring the suits brought against them in the U.S. courts for the products that allege a flood of defective Chinese drywall was sent into the United States after a string of hurricanes in 2004 and 2005. The material is known to decay, creating corrosive chemicals and fumes.

This should not be a shock to anyone who has any dealings with commercial insurance placements in global markets. According to Axco Insurance Information Services Ltd in London, their report on the Product Liability market in China is as follows:

According to official figures from the China Insurance Regulatory Commission ("CIRC"), product liability premiums were around $142.84 million in 2006.

Because of low profit margins and low legal awareness, product liability insurance is rarely purchased in China. Most business is represented by export liability policies, but these are only purchased at the insistence of overseas buyers and normally have indemnity limits of less than $5 million. According to research by Chubb in 2006, only 4% of Chinese exports are insured, the vast majority of overseas buyers apparently accepting the fact that manufacturers' margins are too thin to include an allowance for product liability insurance. There is also the technical difficulty that export liability policies are subject to Chinese law, which means that in some cases US court judgments might not be enforceable against Chinese exporters or their insurers.

The variable quality of Chinese manufactures has been highlighted over the last 12 months by a series of product recalls in the US. Harmful chemicals have been found in toothpaste, seafood and pet food, whilst toys have been found to present toxicity and choking hazards. These problems have led to state-sponsored improvements in risk management rather than increased take-up of product liability or product recall insurance.

Because of lack of experience, reinsurance capacity and overseas claims handling facilities, domestic insurers take second place to the foreign branches in the export liability market. Leading product liability insurers include AIG, Chubb, Huatai (supported by ACE) and Allianz.

Product Liability Legislation

The Product Quantity and Quality Law, effective from 1 September 1993, made sellers and manufacturers strictly liable for injuries resulting from defective products. The law does not apply to unprocessed goods such as fish and defines a defect as "unreasonable danger existing in a product or a product not in conformity with the applicable health and safety standards of the state". Sellers are entitled to recover from manufacturers. Manufacturers can rely on a "state of the art" defence.

The Consumer Rights Protection Law, effective from 1 January 1994, allows a plaintiff to claim against the owner of an exhibition hall or leased premises if the exhibitor or tenant from whom the defective product was purchased cannot be traced. If a consumer is injured as a result of inaccurate advertising, damages can be claimed from the advertising agency if the latter cannot supply the name of the advertiser. Punitive damages are available if the plaintiff can establish fraud.

The concept of product liability is in its infancy in China, unlike the U.S., UK and other countries where the laws and history are more mature. I have to believe that the plaintiff attorneys understood this risk when they took on this action in the courts, and now their need to chase the money around the globe was a worst case scenario for them.

Too often commercial businesses in the U.S. assume that everyone in this global economy are subject to many of the same rules, and therefore insure their risks in similar fashion. There is nothing further from the truth, and this is why it is critical for any business with exposures to overseas risks should have advisors, including their insurance broker, who understand the markets in which they have these exposures.

ECJ Rules on Period of Sickness Occurring During Holiday

The European Court of Justice ("ECJ") has recently held in Pereda v Madrid Movilidad, that employees who are sick during scheduled annual leave should be permitted to reallocate their holidays, even into the next holiday year.

In 2007, Mr. Pereda was injured and he requested his employer to allocate a new period of paid annual leave on the ground that he had been on sick leave during the period of annual leave originally allocated to him. His employer rejected the request. The ECJ ruled that his period of sick leave should not have counted towards his holiday time on the basis that employees are entitled to a minimum period of 4 weeks paid annual leave under the Working Time Directive ("WTD"). The ECJ emphasized the right of employees to a period of actual rest for relaxation and leisure during annual leave, as opposed to sick leave during which an employee is recovering.

This decision is a new interpretation of the WTD; following the ECJ and the House of Lords' recent rulings on the Stringer case that holiday continues to accrue during sick leave. The House of Lords decision in Stringer means that a worker is entitled to take paid annual leave even though they are not at work due to extended sick leave.  The question of what would happen if sickness coincided with scheduled leave was not addressed in the Stringer case. Although unlikely to be welcomed by employers, the ECJ's ruling in Pereda has helpful addressed this void however it remains unclear whether  employees will be able to claim retrospectively.

As a result of the decision on Pereda, employers should be prepared to manage attempts by workers to exploit the ECJ's decision. A worker could effectively increase their entitlement to annual leave by alleging that they were sick whilst on holiday. Strict requirements on supporting medical evidence should be enforced to avoid abuse.

The judgment is immediately effective for public sector employers but private sector workers may not be able to benefit from this decision until the Government amends the Working Time Regulations. Most employers therefore have time to consider their policies and perhaps even implement changes before the law changes.

UK Solicitors’ claims arising out of pension schemes

Pensions is a highly technical and regulated area where trustees and employers are increasingly relying on solicitors (aka attorneys in U.S.) to advise. As a result of poor investment terms and improving mortality rates, defined benefit schemes are, across the board, in deficit. In the recession, where many companies are becoming insolvent, leaving schemes in deficit and without an employer to make good the shortfall, trustees are more inclined to scrutinize the advice they have received to assess whether this has exposed the scheme.

Areas where solicitors may be exposed to claims include:

1. Drafting scheme documents and amendments to schemes – this remains the principal area of exposure for solicitors;
   
2. Conflicts of interest where solicitors act both for the employer of a pension scheme and the trustees; and
   
3. Failure to give or to qualify advice.
   

Solicitors need to analyze areas of potential exposure, and consider the steps that can be taken with a good insurance broker to reduce the risk of claims.

Employment Liability Insurance - Taking precautions in UK

In the U.S., where employment practices liability insurance ("EPL") originated, claims of this type can typically turn into multi-million dollar lawsuits. While the UK legal system differs vastly from the U.S. - not enabling costly class actions, punitive damages, or juries typically more sympathetic to the claimant to adjudicate - meaning compensation is oftentimes far lower, litigation is undoubtedly on the rise.

According to figures from the Tribunals Service (Click here to learn more about this Ministries of Justice agency) published earlier this year, the number of employment tribunal claims rose sharply to 189,303 for the period of April 2007 to March 2008, an increase of 43% on the 2006/2007 figures.

Despite this, firms that are purchasing EPL, which covers discrimination, harassment and other similar employer-employee disputes, has been relatively low in the UK. For instance, it has been reported by a leading insurance broker that just 17% of the top 100 UK law firms have EPL, compared to 75% of U.S. practices.

Companies which sell EPL in the UK as both a standalone product and as part of its directors' and officers' ("D&O") offering, say that - while the U.S. is more litigious than the UK - England, Northern Ireland, Scotland and Wales are a "long way ahead of many parts of Europe", and that there is an increase in compensation awareness, predicting that interest in EPL will build over the next decade. It has also been reported that the European Union influence will also have an effect because of its focus on protecting consumer rights. The EU is currently consulting on the possibility of bringing class actions, which while they won't be the same as in the U.S., will still provide a vehicle to claim for those that may not singularly do so.

Ignoring obligations

It has long been the case that some firms have a reputation for ignoring their obligations under employment law, and believing that their staff will not take them on in employment tribunals and court, thus choosing to fail to put this type of insurance in place to cover them. There are many reasons for this. Cost is a factor, particularly in the case of larger firms, but also, historically there has not been a range of products in this area on the market - although this is now starting to change. With potential compensation for successful discrimination claims now unlimited, the cost of the premium may be a small price to pay for peace of mind.

The U.S. has seen much higher levels of compensation paid out in discrimination cases, and this may be why a higher percentage of firms in the U.S. have insurance. However, UK employees in all sectors are now more aware of their employment rights than they were 10 years ago and there is no longer the stigma attached to pursuing claims before employment tribunals. The number of discrimination laws in UK is increasing and, therefore, employers are becoming increasingly vulnerable. In a recession, more people become unemployed and, therefore, the prosecution rate for unfair dismissal is bound to increase. Even if the claim is without foundation.

Currently, it is the larger commercial companies (more than 25 employees), rather than the smaller businesses (less than 25 employees), that take out EPL. The theory behind this is mainly because they will have systems in place, an HR department and the right kind of guidance. The company would be UK domiciled, not U.S.

Right fit for all?

Some question whether EPL is the right fit for all firms because the U.S. legal system differs vastly from the UK in a couple of crucial areas - the ability in the U.S. to launch class actions and punitive damages - both of which can lead to multi-million dollar claims. In the UK, compensation is much lower, therefore, while a number of companies buy standalone EPL policies, most of the mid-market companies interested in the product tend to buy an extension to their D&O policy. In a recession, exposure for EPL increases, however, perversely, this is the time where companies are struggling to find the money for extra cover. Most that buy EPL will not cancel it but there are not many buying it for the first time.

Some believe that EPL is not striking the right cord in the UK market. There are reportedly a number of reasons for this. Namely, it was a U.S. product designed for that market, and, in the employment sphere, while U.S. workers have few rights compared to the UK and Europe, they are more prepared to exercise the rights they do have. Also, in the U.S., the cases are determined by jury, not a judge, this is a bigger risk for the U.S. firms.

Given the current economic circumstances and certainty that claims will rise, it is believed this is a market crying out for a good quality EPL policy that is cost effective.