December 1, 2006 by Craig Harris
By the time word got out in early October that select containers of carrot juice from California contained a botulism toxin, it was too late for three Canadians. Two residents of Ontario and one in Quebec contracted the illness, leaving two victims paralyzed and one seriously ill. Botulism, which is rare but can cause blurred vision, difficulty breathing and death, was also linked to four cases in the United States. The tainted carrot juice followed a product recall in late September for spinach grown in the U.S., after 199 cases of illness and three deaths were reported due to E. coli infection. One case was confirmed in Canada.
What could be healthier for people than carrot juice and spinach? As if to underscore the unpredictability of product liability exposures, recalls were issued in September by Natural Selection Foods for fresh spinach and by Bolthouse Farms for carrot juice. Lawyers were quick to post notices and information related to lawsuits for product liability.
The two cases are merely the thin edge of the wedge when it comes to product liability exposures. Everything from medical devices to automotive parts to computer software programs have become “no-fly” zones for many standard insurance companies, pushing these product manufacturers to either self-insure or purchase specialized coverage. The range of lawsuits extends from the well-known – such as Vioxx and other Cox-2 inhibitors used for treating arthritis – to the lesser known, such as the antipsychotic medication, Seroquel, or allegedly defective asthma inhalers.
UNPREDICTABILITY OF LIABILITY
Other factors compound the risk for manufacturers and insurance providers. For example, there is the expanding nature of global trade, the tendency for plaintiff lawyers to seek aggregate tort claims or class-action lawsuits and the increased claims severity of product liability awards. Statistics on product liability claims in Canada are not available, but several companies track jury verdicts in the U.S. as a rough gauge of directions in product liability.
“The median for product liability awards overall is about US$1.8 million,” says Gillian Gerrish, liability leader in Chubb Insurance Company of Canada’s commercial insurance specialty division. “That is up about 20% over the past five years. It is a real trend we cannot ignore.”
Anne Toms, vice president, Elliott Special Risks, notes claims frequency is down, but severity seems to be rising. “The trend is to higher individual costs, but a decreasing number of lawsuits,” she says. “Two years ago, there were roughly 30,000 product liability claims in the U.S., which was down to approximately 25,000 last year. This year, the trend is on line for about 20,000 claims. Yet the average settlement cost has greatly increased. That is what we have noticed in Canada on our own programs, as well.”
One reason the U.S. benchmark is especially relevant is the increased nature of cross-border trade. Canadian manufacturers that sell products in America are subject to the laws in individual states, notes lawyer Peter Pliszka, a partner and specialist in product liability litigation in the Toronto office of Fasken Martineau DuMoulin LLP.
“I often provide advice to Canadian clients about the reality that where there is the sale of goods, inevitably there is the potential for product liability lawsuits,” Pliszka says. “And the plaintiffs are not going to come knocking politely on the doors of Canadian companies to serve the writ. They will start the lawsuit where convenient or advantageous to the plaintiff.”
In Canada, liability is based on the common law tort of negligence and is consistent from province to province, with some civil law differences in Quebec. However, many U.S. states have added “strict liability” statutes – as well as warranty guarantees or so-called “lemon” laws – to existing negligence torts.
Under the tort of negligence, if a defect is found in a product and the manufacturer can demonstrate it took reasonable steps to ensure safety, an argument can be made to escape liability. No such defence can be made under strict liability regimes: if a plaintiff can demonstrate a product defect, the manufacturer is automatically liable. The only issue left is to discuss the relative size of the damage awards.
“I think insurance carriers, along with their clients, are on a steep learning curve when it comes to product liability in the U.S.,” says Pliszka. “Unless you are talking about a large, sophisticated manufacturer, a lot of them are unaware of how the rules vary widely in different jurisdictions. It’s a bit of a hornet’s nest.”
Clients and their insurance carriers can get stung by class-action lawsuits and jury verdicts in plaintiff-friendly states. “Typically jurisdictions in Canada and the U.S. take the position that if a company is selling its goods into a jurisdiction, it is implicitly accepting it can be subject to the laws of that state or province,” says Pliszka. “Because the rules vary so widely in different U.S. states, there are many relevant questions for carriers to ask: Where is the insured manufacturing and selling its products? what are the laws of liability in those jurisdictions? does the insured intend to expand geographically? what is the nature and litigation history of the product or product category? and what is the prospect for additional products that the insured plans to sell?”
Given the inherent risks in international trade, class action lawsuits and emerging exposures, the looming question is how these trends have affected pricing, terms and capacity in the Canadian product liability insurance marketplace.
PRICING FOR PRODUCT LIABILITY
Product liability has been, at least recently, generally written under the Commercial General Liability policy. Unless a manufacturer is within a specified high-risk industry, “about 99% of product liability is written under the CGL,” says Tod Sloan, the managing director of Marsh Canada. “The Canadian market tends to be much more client-friendly than the U.S. market, both from the standpoint of pricing and retention amounts. Our market in Canada is typically one where deductible retention amounts are relatively low.”
According to Sloan, this begs the question of why self-insured retentions in Canada are that much lower than they are south of the border – particularly for companies that have heavy U.S. sales. “Perhaps the real question is whether we are client-friendly or offering nave capacity,” he notes. “I think a lot of insurance companies are becoming smarter in that regard. [They are] at least asking their colleagues in the U.S. their opinion on some of these risks and in some cases having it underwritten in the U.S.”
Many insurance companies continue to lump cross-border risks into general CGL package policies, according to Toms. “They simply double or triple the premium amount based on U.S. exposure,” she says. “But many don’t look, for example, at the suggested ISO rates for product liability.”
Cheryl Barker, a vice president in Aon Canada’s risk management practice, says “we get the benefits of more competitive rates from the perspective of a Canadian company simply because of litigation and trends. It is a matter of managing risk and getting the appropriate premium for it.”
Despite a softening market in commercial lines, product liability has not seen any substantial premium decreases, Gerrish observes. “In product liability, rates are highly variable based on risk factors,” she says. “In a changing marketplace, you see rates eroding more slowly than other lines due to things like tail exposure, incurred but not reported claims and latency. Insurers need to be cautious in reducing prices with some of the unknowns in the equation.”
Pliszka says he has seen a gradual withdrawal of capacity in the primary layers of product liability coverage. “The number of carriers willing to write coverage for product liability claims is shrinking at the pr
imary level, although there is a reasonably large number willing to write excess layers,” he notes. “The effect is two-fold: premiums are higher, but also more clients are becoming self-insured to a higher level. That ultimately translates into a change in both risk management strategies and claims management functions, especially selection of counsel.”
Manufacturing companies are consequently making their own risk management assessments, according to Pliszka. “At the starting point of product development and testing, manufacturers are improving their quality control processes to reduce the incidence of claims,” he notes. “A lot of companies are getting better at monitoring their products in the marketplace. If they can see signs of potential unexpected defects that can pose safety risks, they are in a better position to issue post-sale warnings or conduct recall campaigns.”
Insurers and brokers alike stress to clients the importance of implementing good risk management programs. “The best advice we can give them is that they [should] know their businesses best,” Gerrish said. “We learn a lot about risk management from them. Our job is to take what we have learned from our portfolio and the performance, and offer that as suggestions to clients to improve their risk.”
“The more information you can provide to an underwriter, the better the terms you are going to get,” Barker adds. “If [a client] can sit down face-to-face with any underwriting company and explain the product and the risk management, it gives [the underwriters] a level of comfort to provide better terms and conditions.”
In order to reduce risk, clients may consider developing “parallel” products that address key exposures. “We have seen a consistent need that manufacturers face looking for products to fill gaps in their traditional GL policies – including product liability exposures,” notes Gerrish. “So we have recently gone into developing products outside the space of product liability, but very much sold in alignment with those products. [Examples include] manufacturer’s E&O, products withdrawal expense coverage, more specialized environmental products and umbrella policies that address the need for higher limits in territories like the U.S.”
Gaps in traditional coverage also relate to emerging product exposures. For example, the question on the minds of many people in the insurance industry is: From where is the next “asbestos” exposure going to come? Will it come from nanotechnology, life sciences/biotech, genetically modified foods, software and virtual reality programs, lifestyle drugs, and/or pollution-related health effects? In many of these areas, the key challenge is to underwrite these exposures based on little or no claims data patterns.
“You get these new products in the life sciences area and these technologically advanced products that nobody has experience with,” says Toms. “The pricing is really from thin air. In a lot of these cases, there is nothing to base your pricing on. We know there are certain classes that we even feel we are not there for. “
Barker says biotech is a “growing area of exposure, and I don’t think we have enough expertise in that area from an underwriting perspective. I think it will become a highly specialized area with things like synthetic blood products, where we will go to major players not afraid to take on some of these risks.”
Pliszka, a member of a U.S.-based, defence-oriented organization called the Product Liability Advisory Council, points to virtual reality programs as a potential emerging exposure. “There was a relatively little-known claim incident that arose in Japan recently, where a child allegedly suffered traumatic psychological effects from watching and experiencing a virtual reality program,” he says. “I think that is a harbinger of what might come down the road as virtual reality software programs grow in the marketplace.”
In addition, the litigation trend will likely proliferate in pharmaceuticals and medical devices because of aging demographic trends and a growing market for the so-called “lifestyle” drugs. “You have a lot of money available for people to buy non-life-essential pharma products and medical devices, combined with what seems to be an increasing level of litigiousness among the public generally, which will likely equal more claims,” Pliszka says.
Ironically, it may not just be the future that proves to be a source of claims, but also the past, according to Pliszka. “I could see more claims related to long-tail policies, many of which may have been event occurrence [policies], as opposed to claims-made policies,” he says. “Even though the policy may have been long since forgotten by insured and insurer, it is still potentially in effect and available to be triggered if a claim arises and can be linked to an event in time that the policy was current. These kinds of long-tail claims tend to fall into toxic tort claims, such as environmental damage, pollution, sick buildings.”
And, of course, given the nature of global trade and the increased number of free trade agreements, the risks of product liability claims in other countries will continue. These risks extend not just to export, but to importing arrangements as well, according to Sloan.
“We are starting to see distribution from a wholesale perspective,” he notes. “The product is manufactured elsewhere, like China or India, and a Canadian client is the distributor. That [Canadian] client could certainly end up wearing at least some degree of any lawsuit that comes with [distribution]. From a quality control perspective, clients have to be aware of what they are buying. [They also have to be aware of] the ability to subrogate against manufacturers in other jurisdictions, which may not be carrying limits necessary from a North American perspective.”
For Gerrish, these twin areas – global risk and emerging hazards – will dominate the product liability landscape in the years to come.
“The main challenge for clients who are looking for product liability coverage is they have to seek underwriting companies that have expertise in global exposures,” she says. “But they also need an understanding of emerging hazards. It is really up to underwriters to show expertise and anticipate some of these challenges on the horizon.”