Category Archives: Foreign Products

Intellectual Property Insurance – The Most Underrated Insurance!

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Did you know that Intellectual Property (patent, copyright, trademark) claims are 5 times more frequent than Directors & Officer (shareholder) claims?  Yet, while most companies carry D&O insurance, very few companies will cover their intellectual property exposure.

Intellectual Property insurance reimburses the litigation expenses to enforce or defend against Intellectual Property infringement and protects against certain violations involving patent, trademark and copyright infringement.

The average patent infringement lawsuit cost $2.6MM, when the amount in controversy is between $1MM to $25MM.  The median litigation expense for an infringement suit through trial can range from $250,000 for copyright to $2,000,000 for patent.

With the economic downturn and companies’ operating revenues being less liquid or non-existent, a company’s ability to adequately defend itself in an Intellectual Property infringement lawsuit may be the key its survival.

By not having Intellectual Property Insurance you face the following risks:

  1. Abandon your accused products.
  2. Try to obtain a license from the accuser from a position of weakness.
  3. Defend yourself by using your cash reserves and available credit lines.

In my opinion, importers should be twice as cautious of getting embroiled into an infringement claim.   Since the overseas manufactures do not share in any of the risk of an infringement claims or expense, they are not as diligent or concerned about potential infringement claims.  I have seen countless instances and claims involving artwork on imported products and packaging.  For example, rug importers have to pay particularly close attention that their rug patterns are not similar or the same as their competitors and many of the foreign outsourcing manufactures have garnered bad reputations for using the same artwork on packaging for their different customers as a way to hold down development and production cost.

An Epic (Kayak) Question For U.S. Companies Outsourcing In China

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Since I was born and raised in Charleston, SC, I was particularly interested in the story about the Charleston-based company’s, Epic Kayaks, lawsuit against its Chinese manufacturer.  

Apparently, Epic Kayaks had outsourced the manufacturing of its kayaks to Fu Yang Flying Eagle Boat Co., Ltd.  Unsatisfied with the project management of the boats being manufactured at Fu Yang Flying Eagle Boat Co., Ltd, Greg Barton, a two-time Olympic gold and bronze medalist and co-owner of Epic Kayaks decided to end their relationship with the manufacturer and move to another new factory in Fuyang.   According to Greg, Flying Eagle refused to release Epic’s molds and equipment unless it received fees and payments that would effectively put Epic Kayaks out of business.

Now for the interesting part – Epic Kayaks has filed a lawsuit in the intermediate level court in Hangzhou, China to gain control of their molds and equipment rather than pay the fees to Flying Eagle.

I think the million dollar question for every U.S. based company that outsources their products in China or every U.S. based company that is considering outsourcing in China is – is there a remote chance of a fair and impartial trial in the Chinese courts against a Chinese manufacturer?

The other question I have is – what role will politics play in the decision by the Chinese courts?  Will the Chinese court view a negative ruling against Epic Kayaks as more bad publicity at a time when Chinese manufacturing business is struggling with an economic downturn and much bad international press regarding overall product quality?

If Epic Kayaks is successful, it will be interesting what impact this will have with U.S. businesses and insurance carriers that provide product liability insurance for Chinese products.  Maybe confidence goes up for U.S. businesses and maybe some bold insurance carrier will decide to take a chance and sue a Chinese manufacturer that was responsible for a large product liability claim or product recall to recover some of the money it had to pay out in claims.

Product Liability/Product Recall and The Cost Of Human Life In The U.S.

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I heard something both comforting and disturbing at the same time the other day, when I was talking with a Product Liability wholesale broker. 

We were talking about a prospect that designed and manufactured big commercial slides for water parks and the type of claims typically associated with this product liability risk. 

The disturbing part of the conversation was that he said many of the big designers and manufactures of high risk products such as waterslides were taking their new designs overseas to sell before bringing them back to the U.S. to sell because the cost of a human life was so much less in other foreign countries than it is in the U.S.   In other words, if the design of the product turns out to be defective and people are injured or die, it is much less expensive to handle claims in other countries than the U.S. 

I guess the comforting part of this conversation was knowing that the products in the U.S. my children are using are much more likely to be safe because, if they are not, companies know that there could be a costly product liability lawsuit or an expensive recall of their products.

While I am happy that my children are safe, I am also a little sad that they do not get the opportunity to learn to dive off a diving board or swing on a tire swing because insurance premiums make it too expensive to provide such activities or products.

Exposing Foreign Manufactures That Sell Defective Products

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The million-dollar question for many is – will the new searchable database (Section 212) provided by the Consumer Product Safety Commission hold foreign manufacturers that ship defective products into the U.S. more accountable?

Now that the CPSC requires product and package markings that contains information such as source of the product, it should be easier to identify manufactures that sell defective products.

It is my belief that many U.S. manufacturers hope the searchable database (Section 212) provided by the Consumer Product Safety Commission that publishes the name of the product and the manufacturer will impose enough of an indirect cost such as loss of consumer confidence and company credibility that foreign manufacturers looking to do business in the U.S. will have to invest more in product research and safety and therefore, even the playing field for more U.S. manufacturers to compete with regards to product pricing. 

U.S. Importers could be one the biggest benefactors of the searchable database.  Since it is next to impossible to litigate product liability issues against foreign manufacturers, U.S. importers are typically held entirely accountable for the safety of foreign made products.  By having a searchable database that quickly identifies the names of problem foreign manufactures, U.S. importers will be in a better informed and less likely to bring inferior products into the U.S. that could result in costly product liability trials and product recalls.

While the overall goal of the CPSC is to protect the U.S. public from defective products, the changes could also help U.S. manufacturers by imposing some of the same costs on foreign manufacturers for testing and product safety that they must incur in order to do business in the U.S. and it could potentially help U.S. Importers by avoiding foreign manufacturers that have a poor history of safe products.

Common Mistake By U.S. Importers of Foreign Products

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All too often, importers that contact me assume that the foreign manufacturers that they buy their products from share some liability in the event of a product liability claim in the U.S. - particularly if the foreign manufacturer says they have a product liability policy. 

Unless that foreign manufacturer’s policy has a worldwide endorsement that specifically states it will cover product liability claims in the U.S. courts, that foreign product liability policy is useless to the importer. 

The fact is the importer is at the top of the pyramid when it comes to responsibility to ensure that any products brought into the U.S. are safe for use by the American public.  This is why it is common for importers to be classified as manufactures for insurance rating purposes by the product liability insurance carriers because any product liability claims involving manufacturing defect will stop with the importer. 

So if you are an importer, do not assume that, even if the foreign manufacturer has a product liability policy, that the manufacturer has your back or will be responsible for any product liability claims brought in the U.S. involving your imported products.  It is more than likely you are on your own to handle any and all product liability claims.

Administrative Costs For Children, Household And Recreational Products On The Rise

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Let’s face it the Consumer Product Safety Commission has come under increasing fire from congress and the public because of the overwhelmingly large number of product recalls over the past few years – especially for foreign products imported into the U.S. It has become obvious that CPSC lacked the resources to adequately oversee all the things necessary to keep the American public safe.  As a result, on August 14, 2008 the President of the United States signed legislation that will reform the laws and regulations governing the CPSC. 

The U.S. Consumer Product Safety Commission is the federal agency responsible for overseeing product-safety recalls of toys, household products, recreational equipment, some vehicles, and consumer products not under the jurisdiction of other federal agencies.

Because we provide product liability insurance to a large number of manufacturers, importers and distributors of children’s, household and recreational products, I was particularly interested in how much compliance with CPSA of 2008 was going to cost in order to comply.

Below are 4 new administrative costs for businesses that manufacturers, importers and distributors of children, household and recreational products must bear:

  1. Permanent markings must be on all products to help identify them in the event of a product recall;
  2. Businesses must provide registration forms to consumers and keep accurate records of registered consumers;
  3. All children’s products must be tested by an independent testing company before they can be imported or distributed;
  4. Warnings that are on or with the products must also now be included in the advertising.

Business owners that do not feel compelled to comply with the new CPSC statutes are subject to much harsher penalties.  Civil penalties will rise to $100,000 per violation and a cap of $15,000,000.  Criminal penalties have also increased permitting imprisonment and forfeiture of assets.  Also, state attorney generals can sue companies for violation of CPSC statues.

While we believe that more needed to be done to protect the American public from the high number of unsafe products being imported, we also understand that the administrative costs for small businesses in the U.S. continue to make it more difficult for these businesses to be profitable and stay in business.

How Purchasing Foreign Liability Insurance May Reduce Your Product Liability Insurance Cost

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Many of the U.S. manufactures and distributors that contact me looking for a product liability insurance quote and export products to countries outside the U.S. are often unaware there is often a large difference between U.S. product liability insurance rates and foreign product liability rates.  In many cases U.S. exporters are not always aware that another option exist because local and general agents are not aware of all the options when it comes to product liability.

While it is, in most cases, safe to assume that your insurance policy will cover you in the event you have a foreign product liability lawsuit, it is important to understand that most of the U.S. product liability insurance policies will only cover foreign product liability claims that are brought back into the U.S. courts. 

The problem with allowing foreign product liability claims to be heard in the U.S. courts is it is usually much more expensive than the alternative of having the claim heard in the country of origin.   The first reason for this is contingency fees. In the U.S., lawsuits can be brought with little or no expense to the litigant and therefore, there is no cost to the litigant and no reason not to “roll the dice”.  The result is often frivolous and marginal lawsuits in the hopes of “hitting the jackpot”.  Contingency fees are simply a percentage of settlement or judgment awards so the litigant pays nothing if nothing is won or recovered by the litigant’s attorneys. The second reason is the liberal discovery rules in the U.S.  It has become an art for U.S. law firms to cover-up defendants with discovery materials. The cost for a defendant to comply is enormous. Even when it is obvious that the defendant has no negligence or role in the lawsuit, the defendants’ insurance carriers are often willing to pay thousands of dollars to get their names released from a lawsuit because it cheaper to settle than respond to all the discovery materials. The third reason is punitive damages.  Punitive damages allows the jury to reward further damages on top of compensatory damages.  If a plaintiff can show the defendants behavior was egregious and callous, punitive damages may be awarded.  While in many cases proving gross negligence can be a daunting task, foreign product liability litigants may have the luxury of venue shopping to find more favorable forums or courts in the U.S. to have their cases heard and therefore, increase the chances of finding a more sympathetic jury pool and receiving punitive damage awards.

In summary, for many U.S. exporters of products that are considered very high risk such as chemicals and critical aircraft and auto parts, foreign liability insurance will likely not be available. For all other U.S exporters, when the foreign liability insurance coverage is available it should save you considerable money by have purchasing this insurance and excluding Worldwide coverage on their U.S. product liability insurance policy.

The U.S. Consumer Products Safety Improvement Act of 2008 Mandates Searchable Database for Consumers

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One of the most significant changes of the U.S. Consumer Product Safety Improvement Act of 2008 is the creation of a searchable database (Section 212) for consumers by the Consumer Product Safety Commission.  This one change could significantly impact a company’s reputation and product liability litigation.

CPSC is required to establish a searchable data base by October 2010 on the internet that consumers can access.  The information provided will identify the name of the product, the manufacturer’s name and provide reports on deaths and injuries caused by the product.  In order to make sure that no information on the website is materially incorrect or trade secrets are not exposed, manufacturers will be allowed to review and comment on the information before it is posted on the database.

This one change should help potential U.S. importers and distributors of foreign products to identify problem foreign manufactures and as a result, reduce the number of unsafe products brought into the U.S.  It may also increase product liability litigation because U.S. consumers will be able to identify more easily whether their product in question has a history or potential for harm and assist with gathering important facts to assist them with their product liability lawsuit.

Additional Insured On A Chinese Product Liability Insurance Policy? – Whoop Tee Doo!

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If you are an importer of Chinese products and have been told by the Chinese manufacturer or distributor that you are covered by their product liability insurance policy, I recommend you read Linda Stamato’s article below.  After reading this article, you will have a better understanding of why your U.S. insurance carrier does not provide discounted rates on your U.S. product liability policy when you can provide proof you are Additional Insured on the Chinese manufactures or distributitors insurance policy.  Simply put, nobody with any experience in the product liability field has any confidence that any type of restitution be found in the Chinese courts, even if the case is an obvious slam dunk of manufacturing defect or design defect.

As reported by Linda Stamato of NJ.com: In the United States, we have no end of attacks on product liability litigation, consumer protection laws and class action lawsuits. (A visit to Americans for Tort Reform provides information and perspective on these efforts.) As this group and others question the “excesses” of lawsuits in compensating the injured and doubt their efficacy in bolstering product quality, consider what is taking place in China……  Read the Full Story on Toxic milk and poisoned babies: Product liability limits in China

Confidence in Chinese products is so low that I predict that more retailers and U.S manufactures that use Chinese parts in their finished products are going to start requiring the U.S. Importers and Distributors of these products to start carrying Product Recall Insurance with a third party endorsement that will cover the expenses of any third party (retailer) for the recall of any product that incorporates your product including the cost to repair or replace such product.