International product exposures can hit business here, there and everywhere

It takes only a brief glance through a newspaper in the United States to see that multimillion dollar jury awards have become a fact of life in products liability cases. But U.S. companies doing business overseas need to be aware of the potential for costly products liability judgments in foreign countries.

To protect themselves against potentially devastating losses, companies can purchase general liability insurance, which typically includes products liability and premises liability. While products liability insurance is not compulsory in the United States, most U.S. companies that manufacture or sell products or provide a service buy the insurance.

A domestic general liability policy purports to provide worldwide coverage, but this applies only if the lawsuit is brought in the United States. Experience shows that consumers are likely to file lawsuits in the country where they live, not where the manufacturer of the product is based. A consumer in France who suffers a claim with a particular U.S. product, for instance, would most likely file a products liability lawsuit in France, not in the United States.

To make sure they are protected, companies that sell products outside the United States should have foreign products liability insurance. They can get this insurance either through a global general liability policy or by purchasing a stand-alone foreign general liability policy.

Companies with a physical presence in a foreign country will likely need a local admitted policy as well. In many cases, extensions of coverage are compulsory or available only through a local policy.

Each foreign country has its own insurance requirements. Examples of coverages typical in some European countries are pure financial loss, environmental impairment and extended products liability. These coverages could be provided locally via an admitted policy, but would not be provided through a global general liability policy. An admitted policy, by itself, may not be enough to provide the products liability protection a U.S. company needs when doing business in foreign markets. These policies fulfill local requirements, but are often limited.

To fill any potential gaps in protection, a controlled master program is a good way to go. A controlled master program includes admitted insurance policies purchased in the countries where the company is doing business, supplemented by a U.S.-issued international policy, commonly referred to as the “master policy.” The master policy provides broad terms and conditions that may not be available in the admitted policies.

Potential cost savings
After determining whether they have appropriate insurance to protect against foreign products liability exposures, companies should consider the possibility they may be paying too much for that insurance. Because the rest of the world is less litigious than the United States, companies may save money on their foreign products liability insurance premiums by making sure their foreign revenues are broken out from their worldwide revenue. When U.S. underwriters price a company’s foreign products liability insurance, they may fail to consider foreign revenues separately from worldwide revenues, and that could artificially inflate the price of the insurance.

Tort costs (relative to economic output) in other countries are much lower than in the United States. The United States has the world’s most expensive tort system, costing more than double those of other industrialized nations, according to “Tort Excess 2005: The Necessity for Reform from a Policy, Legal and Risk Management Perspective,” a white paper issued by the Insurance Information Institute.

With the exception of Italy, most countries have tort costs comparable to levels observed in the United States in the 1960s and 1970s, according to “U.S. Tort Costs and Cross Border Perspectives: 2005 Update,” issued by the Tillinghast arm of Towers Perrin.

There are a number of reasons why civil justice systems in the rest of the world are less costly than the U.S. tort system. Key factors are the lack of punitive damages and jury trials, as well as the reduced cost of claims due to bodily injury. Further, to discourage the filing of frivolous lawsuits, some countries adhere to the “English Rule,” which requires the losing party to pay court costs. Bodily injury claims outside the United States tend to be lower because of socialized medicine and a lower standard of living in many countries. Bodily injury awards are most often based on expectations for future earnings potential or current earnings, so a lower standard of living will lower the cost of claims.

Limits structure
When considering whether to buy a separate foreign general liability policy or a global general liability policy, customers should consider the different limit structures offered under each option. A company with a global general liability policy has one products liability aggregate limit for worldwide claims. Foreign claims, therefore, would erode the aggregate limit available domestically.

With a separate foreign general liability policy, the company has a products liability aggregate exclusively for foreign claims. The company’s domestic general liability policy would provide a limit for the domestic products liability exposure.

Even though foreign countries are less litigious than the United States, companies cannot rely on their domestic products liability insurance for protection overseas. Any company that sells products in international markets runs the risk of being sued in a foreign jurisdiction, and the domestic policy may not respond.

When advising customers on the insurance coverages needed for doing business internationally, producers should keep in mind some key points. Companies that decide to buy a separate foreign general liability policy as well as a domestic general liability policy should consider purchasing a controlled master insurance program to help reduce the risk of gaps in coverage. Select an insurer with a broad international network. By working with an insurer that has extensive international experience, buyers can be sure their foreign products liability insurance will be priced appropriately for the exposure.

Kathleen S. Ellis is a senior vice president of Chubb & Son, and manager of Multinational Risk Group – Global Accounts.