Don't be caught short with product liability claims

- Herman Schoeman

Most companies have some element of product liability included in their insurance portfolio. But, because it is very expensive, few companies have comprehensive product liability cover that also provides for liability arising from malicious tampering with products and subsequent product recall. That this cover is often required in hard currency - especially if the company trades internationally - makes an already expensive product even more costly and does little to encourage companies to take it up.

This means that this type of cover does not always receive the attention that it deserves within the corporate insurance portfolio. And, because the whole issue of product liability is relatively intangible, and the potential for claims arising is perceived as remote, many companies choose to take their chances. But such a decision could prove catastrophic and could shut the company down entirely in the event of a claim. This is especially relevant when one considers that product recall in the international context can be astronomical, not to mention the fact that, in the global scenario, liabilities attaching to malicious product tampering would be dictated in hard currency, and awards could be made in even more litigious societies than our own.

Many companies do not realize that there is a fine line between liability arising from conventional product liability and malicious tampering with products. In the event of a claim the burden of proof falls on the insured to prove that the liability emanated from circumstances which were not in any way premeditated. Simply put: standard product liability covers production errors that lead to a potential liability claim. But it can be extremely difficult, if not downright impossible, to prove that the error was genuine and not maliciously carried out by a disgruntled employee.

It makes good business sense to ensure that provision is made for both conventional product liability and malicious tampering with products. The latter is almost impossible to rule out entirely: despite a company's best attempts the products would be vulnerable to tampering at several points between manufacture and end user. And, it goes without saying, that the greater the volumes produced, the more costly and logistically daunting quality control and product protection becomes.

All of this must be viewed against an increasingly risky environment fueled by a progressively more militant workforce, within a society focused on ever greater consumer rights.

It is essential that all companies make sufficient financial provision for potential liability claims (whatever their source) and that effective and, above all, speedy recall processes are developed.

A local company recently discovered that its products were being contaminated by malicious staff. Because the company had both the means and systems in place to effect immediate recall of all damaged goods, the brand suffered no harm and the cost borne by the company (although not insignificant) was undoubtedly far lower than would have been the case if the company had not preempted such a situation.

The issues of brand rebuilding and reputational losses must also be considered in the product liability context. Generally neither brand rebuilding nor reputational losses are insured. The reason is not because it is difficult to calculate brand and reputation value - accountants are insisting on it these days - but rather because the cost of insuring these is so high. Conventional liability insurance attaches at a relatively high point: cover is only provided when the loss is really high. Effectively, for a loss of R100m, insurance would kick in at around R30m and the company would be forced to carry the R30m - a daunting task even for medium sized companies.

Companies need to be more creative in finding bridging mechanisms to cover that first portion of the loss. Alternative risk transfer vehicles can be used as a mechanism to provide for the deductible, which will allow capacity to build up over time.

For further information contact:
Herman Schoeman, MD, Guardrisk: +27 11 669-1000 / +27 82 376 3821

Prepared by:
Melanie Davis, PR@Work CC, Tel: +27 11 615-3309 or +27 83 225 7450