Insuring against a bad crop.

Thomas Battell outlines the benefits of a product liability policy to manufacturers.

We are all familiar with the irate customer in high street shops.


They return goods with a profuse verbal exposition on their inadequacy to
an audience of other potential customers and demand an instant replacement
or cash back. Naturally their requests are promptly met on the basis that
the customer is always right. This is the expectation of today's consumer
world.


What happens, however, when these expectations pass into the commercial
arena between the primary manufacturer and the finished goods
producer?


The same person who was complaining in the high street shop may also be
your customer's purchasing manager. This can provide a direct entry route
for consumerism into commerce with its attitudes, expectations, and
demands.


Moreover, if the business is stretched financially, pressure may be
applied to see extensive financial settlements from manufacturers in the
event of a faulty raw material being supplied. Years of previous good
business relations may be swept away on the basis of a single fault.


An example might be a chemical company supplying a paint manufacturer.


Processing leads to faulty batches of paint and the producers insist the
raw materials are out of specification. Immediately they cease purchasing
further stocks and are not prepared to settle outstanding accounts until
financial redress is made. Minimal investigation is allowed and, if
business is to resume, full financial reimbursement is demanded, together
with a guarantee to supply further product free of defects. The supplier
is effectively held to financial ransom.


It is clear that the expectations on primary manufacturers are higher than
ever and they are now looked to for greater advice, quality control and
service by their purchasers at a time when profit margins are reduced and
everyone is trying to be at the leading edge of development. The
inevitable consequence is an increase in product liability claims.


What can be done to review and manage these enhanced consumerism
risks?


Firstly, assessment of inherent product risk should be done. Reviewing the
design and manufacturing process eliminates safety hazards and possible
defects. Adequate instructions for usage, and suitable packaging for
storage bearing in mind the nature of the product, whether it is dangerous
to health or explosive/corrosive should be provided.


Second is quality control. ISO 9000 standards may apply but do these
extend to dispatch facilities, the sales force and any subcontractors?


What fail-safe checks are made concerning the human element? For example,
a chemical may be manufactured to specification but ruined by a delivery
man tankering off through an inadequately cleaned delivery pipe. Full
tracability is required, preferably in conjunction with retained analysed
samples.


The third point is training. A continuing training programme for new and
existing staff is paramount. A trained individual can spot problems early
on before delivery to any purchaser.


Sale conditions v purchase terms is fourth. Plain English sales conditions
which over-ride any countering purchase terms are considered reasonable
within the Unfair Contract Terms Act are to be admired. However, are they
drawn to the purchasers notice prior to the sale preferably with written
acceptance on an annual basis? Are all telephone orders linked to
this?


The chance is given to limit any financial liability and it is of benefit
to have the conditions reviewed regularly by a solicitor and accurately
translated in respect of foreign sales.


Next comes complaint procedure/recall policy. An agreed complaints or
'non-conformance report' is a helpful way of obtaining information from
your customer concerning possible defects, without admitting
liability.


An agreed recall policy can be adopted providing the terms of
reimbursement.


These steps promote responsible investigation rather than making the
customer 'build' a claim.


The sixth point to look at is the business relationship. Establishing
goodwill has always been of paramount importance. Knowing individuals such
as the purchasing manager will reap benefits in providing early warning of
potential problems. Bad debt positions tend to lead to serious claims from
insolvent purchasers.


Lastly, there is product liability insurance cover. Selecting product
insurance including financial loss is the best way of off-loading the
financial risk associated with product defects. While every manufacturer
constantly strives to avoid defective products they cannot legislate for
the many and varied reasons that purchasers have for pursuing exorbitant
claims, especially with they are assisted by loss assessors, plaintiffs'
solicitors, or in-house 'legal eagles' wishing to make a name for
themselves.


Looking more closely at the benefits of a product liability policy,
obviously it removes the financial burden from the manufacturer in the
event of legal liability being proved.


However, waiting until the matter is settled in court is no answer.


Rather, the policy allows a more proactive approach in that, generally, on
notification of an incident, specialist loss adjusters will be appointed
to carry out investigations into cause, potential liabilities, and examine
possible solutions.


This will include a review of data sheets, design history, past problems,
and first hand inspection of the manufacturing process and the meeting of
key personnel. The trading position with the customer will be established,
together with conditions of sale.


The suggested cause and other alternatives will be examined in detail.


The practical out workings of the policy will be explained and an action
plan proposed, particularly if recall is involved to avoid contravening
the policy.


The next step would then be to meet with the third party, treating them as
a valued customer rather than the opposition.


Having experience of all forms of manufacturing, the adjuster should be
able to quickly assimilate the specific concerns a customer has, and bring
confidence to all parties when it is appreciated that he is not involved
in a quasi-legal position, but rather to accurately gauge the issues and
bring about a resolution.


In commercial trading the question is: should you stand on a point of
principle, or attempt to turn the situation round and bring a joint
resolution with your customer rather than forcing him to become an
opponent? I would suggest that the optimum use of business funds would be
a move towards ensuring good quality manufacturing procedures and trading
relations combined with the selection of a product liability insurance
cover, rather than throwing your coins into the bottomless pit of
litigation.

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• Lloyd's/London