Many unhappy returns

As safety legislation tightens and consumer awareness grows, product recalls are soaring, and some lawyers believe a 'flood tide' of claims is imminent. Alex Murray reports

What do Worcester sauce, the Manchester United teddy bear and Farley's Rusks have in common? They have all been the subject of product recall actions in the past two years.

Mark Kendall of insurance lawyers Reynolds Porter Chamberlain made this arresting point in a recent seminar on product liability. Research by his firm found that, between 2003 and 2005, figures for recalls had risen dramatically: in the pharmaceuticals sector, they were up by a massive 150% and in consumer goods they were up by 17.6%. Overall this year, recall figures in the UK are running at 30% ahead of last year's.

In separate research, Pricewaterhouse Coopers has found a 126% rise across the European Union. The only apparent good news was that food recalls fell by 5%.

At the RPC seminar, specialist medical barrister Peter Feldschrieber commented that when it came to claims against pharmaceutical products he was expecting "a flood tide of litigation". And he was critical of the new legal and regulatory regime, which he said demanded a 100% safe product when no such thing could exist. He suggested that, under that regime, penicillin - with its known tendency to cause allergic side-effects in one in 1000 users - could not have been developed.

When lawyers talk of exciting times, their clients - in this case the insurance industry - need to pay attention. The Food Labelling Regulations 2005 and the EU's General Product Safety Directive 2004 have both made those that manufacture and distribute products take a 'better safe than sorry' line when it comes to product recall.

On the production side, the situation is not helped by inadequate quality controls, especially at a time when more products are manufactured abroad and this aspect is outsourced. Companies will recall products not because they are damaged, but to protect brand reputation - some children's products, for example, have been recalled because it emerged they had been made in factories using child labour.

With more lawyers turning their attention to product liability and members of the public increasingly aware of their rights, the position is likely to get tougher for insurers underwriting product liability risk. With the financial penalties punitive and impact on reputation high, recall is no longer something done as a last resort.

Despite having a range of alternatives, the evidence is that major companies are increasingly looking to insurance for their cover in this growing area of uncertainty. Those underwriters who continue in this sector will need to review their wordings and undoubtedly increase premiums, while claims departments will be looking closely at coverage, particularly in respect of whether loss or damage has occurred, to trigger the policy.

Another aspect that is likely to receive the increasingly close attention of claims managers, and their advising lawyers, is the question of dates of awareness, raising potential issues of late notification and non-disclosure. In the future, it is likely that more policyholders will report all notifications to the underwriter and certainly all contact between the insured and the recall regulator will have to be monitored and understood.

Trading triangle

In fact, the claims department stands at the base of an important triangle with the insured and the regulator - which in many cases will be the local authority's trading standards department, an office that is traditionally understaffed and overwhelmed.

This triangle, it must not be forgotten, is made up of three very different points of view and perspectives. Keeping them all on the same page is going to be very much part of the not-so-brave and litigious new world of product liability.

It is clear that the claims operations are going to have to take the initiative at an early stage, in an area that has traditionally tended to be handled with a 'wait and see' approach. In order to keep claims costs down there has to be a more dynamic approach or costs and problems will escalate in an area that is already fraught with potential difficulties.

In conclusion, there is a way forward in the new product liability and recall world that may not be as exciting as predicted, but could enable underwriters to make significant reductions in exposure to liabilities and costs.

Underwriters need to review wordings and ratings in this new environment, assuming that they continue to write the business (and irrespective of the underwriters' decision to continue there is still a need to deal with policies in place, which may be in run-off).

There is a case to be argued for a separation of current and run-off business in this respect, which recognises the different environments in which policies are written and rated.

In either case, a dynamic approach is required that recognises the exposure at an early stage, identifies resources with the appropriate skills and experience to deal with these matters, and then manages the problem on a two-track basis dealing with both the coverage issues and the underlying claim.

While coverage is critical and may need to be handled with the benefit of good legal advice, there is a danger that the insurer can lose control in handling the recall process, with resultant exposure to escalating costs. Prudent underwriters may consider the value of reviewing their book of product liability business to identify any potential increase in exposure arising from these changes in regulations.

Armed with this analysis, it should be possible to put in place a plan to handle any notifications and more effectively project-manage claims that do materialise.

- Alex Murray is a director of the liability division of Fitzgerald Consulting.

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