I had a nice meeting with a potential client today, and we got to talk about liability insurance.
What is liability insurance? According to Wikipedia, it “protects the purchaser (the “insured”) from the risks of liabilities imposed by lawsuits and similar claims.” It is particularly interesting for products that might hurt/kill consumers and be recalled.
The purchaser explained to me that they buy large quantities of very cheap electrical products, such as watches or razors, for about US$1.00 FOB. She has a liability insurance policy covering these goods. It makes sense, since the potential damages are quite high and a safety issue might pull her company down.
She told me it was harder and harder to get this type of policy. Insurance companies are afraid of higher and higher claims, so they are not really interested in that type of business.
Important clarification: this type of insurance policy can protect an importer from getting buried under millions of dollars of claims. But it does not help in any way if the buyer receives junk that cannot be sold at all (in that case the whole order is lost). And it does not help to regain the trust of domestic resellers/retailers.
As usual, I would argue that the most important is to catch issues upstream, at the design stage or at least at the production stage. When the products are on the market, everything is more expensive. See the 1:10:100 rule.
Has anybody got some experience with liability insurance for importers?
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UPDATE 30 Sept.: I came across some good tips, for those importers interested in liability insurance.
1. If you purchase from a large Chinese manufacturer, you might be able to convince them to pay for the insurance policy. The reason is that it will probably be less expensive. Go read this post on the China Law Blog, written by an insurance professional.
2. If you have a very strong quality assurance system in place, you might also be able to decrease the amount of the insurance fees. For a good example, read the first comment below this article (written by Brad Pitts).
Well, my largest client is primarily a manufacturer who also imports products; some of our end product sales are assemblies which incorporate the imported components, and in other cases we sell the imported product directly with no change. Nearly all of our importing is from China; a little from Canada and Mexico.
We have product liability insurance with a $10 million claim limit, and high deductible ($500,000, I think offhand). It is true that it can be difficult to get this. We shop the policy every few years and many carriers don’t offer coverage. (We’re a small company; for larger enterprises the $10million would be a drop in the bucket.)
It is helpful, as the original post points out, to carefully consider what is being covered. Product liability coverage protects against the risks of your customers, or third parties, who might be harmed by the product and sue you. In our case we sell auto and truck parts; if one fails it could cause an accident and injure, or God forbid, kill someone. The “someone” could be our customer or some third party. It’s also possible that you might be sued for some injury which has nothing to do with your product, and liability coverage will help you defend this.
Liability coverage does not help if the products don’t sell, or arrive spoiled, or don’t arrive because they are stolen in transit, or the truck delivering them catches on fire and burns (the last two have both have happened to us; we have other insurance to cover those risks; we do not have insurance against the first two problems!)
Our carrier has asked us for evidence of our programs for preventing safety related defects; we have, among other things:
1) An ISO 9001/ TS16949 system ourselves, which includes surveillance of our suppliers’ factories — yours truly visiting the factories several times each year and doing on site process and part audits;
2) An inspection and testing program for imported goods;
3) A product recall system… which thankfully we have not needed to use
4) On site third party inspections “as needed” – especially to qualify new factories, or validate corrective actions
Meanwhile, if goods arrive out of specification, we hold the sellers responsible for warranty corrections. They are not happy with this, of course, but they recognize that this is the cost of a long-term relationship. I assume that if we were making one-time buys from trading companies they would tell us to get lost.
As an aside, in another assignment several years ago, my client demanded that the factories (in Taiwan) obtain product liability insurance themselves. After a lot of p***ing and moaning they were able to obtain coverage although it was difficult.
Best regards………………..Brad
Hi Brad, thanks a lot for your input. Very interesting.
I never heard about a Chinese factory that accepted to pay for product liability insurance. But I guess some large manufacturers do it.