Can businesses build resilience against product liability, a multi-jurisdictional risk?

Most exporters will know that international litigation in respect of allegedly defective products is growing - this is what an European bike manufacturer discovered at its expense when a teenager was disabled after the front fork of a Taiwan- assembled bike collapsed in Australia. Lawyer Ben stack of the eponymous Australian firm recalls the litigation became predictably complex, international and prolonged.

The boy sued the importer, which sued the manufacturer, which sued the Taiwanese sub-contractor that had made the part, and the latter then sued another Taiwanese manufacturer that had fitted the same part to the bike.

On the fourth day of the trial, the European manufacturer settled for an eight-figure sum.

What can a manufacturer do in the face of such a diverse array of potential prosecutions? Hiring a lawyer would be a first step. However, suggests Kent Gardiner, chairman of international law firm Crowell & Moring and a specialist in class actions, it is even better to hire an in-house lawyer. “For corporate legal departments nowadays, success demands a more proactive approach than hiring outside counsel [to manage] costs. In-house lawyers need to know more than ever to succeed both about their clients and the legal landscape”.

Prudence is key

If nothing else, the above case serves as a warning to companies that have an exciting and innovative product they are about to bring out onto international markets. With product liability laws being passed almost by the month in most jurisdictions, no risk management professional would allow a retail item to be brought out in domestic or export markets without being satisfied that it is sufficiently robust to survive in the long term and even a punishing use without triggering claims from disappointed, injured or otherwise aggrieved consumers.

As Nigel Hooker, AIG’s head of casualty risk consulting for the EMEA region, points out, product liability has become a multi-jurisdictional issue. “Product liability laws cut across national boundaries nowadays,” he says. A mechanical engineer by training, Hooker has learnt a lot about safety-proofing a product in 20 years of providing advice to designers and manufacturers on behalf of the underwriter.

Product fallibility

Acting in the clients’ interest, he is looking for what might be called product fallibility. “For example, does the product fail to safe,” he asks. “Would the original product continue to function even if a component failed?” if, for example, a heated home appliance self-ignites but continues to function instead of shutting down, the manufacturer could face an expensive lawsuit for property damage and/or personal injury.

Reputational damage

Various product liability issues will likely be triggered with consequent damage to the manufacturer’s reputation and profits. In the highly litigious US, for example, it is common for a product liability claim to cost the culpable company $1m (€815,000) in compensation. Indeed, the courts are so active in prosecuting manufacturers

That exporters are often reluctant to sell their products in the US.

However clever and safe the product may appear, it will fail at some point in its life. This may take months or years, but this is when the ‘fail to safe’ principle becomes crucial.

Essentially, as Hooker explains, the principle means the product will break down in a harmless way.

The good news is that making a product ‘fail-to-safe’ is not normally an expensive proposition. Recently, AIG consultants were able to recommend important changes to the design of a household appliance at little extra production cost. However, over the life of the product, the savings will likely outweigh that cost many times.

This article was taken from StrategicRISK’s guide to property and casualty risks supported by AIG. This guide can be viewed or downloaded here.