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.

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