January 15, 2016

The pitfalls of insurance coverage and additional insured certificates issued by Asian based non US admitted insurers

This re-titled article is reprinted with permission from Bicycle Retailer and Industry News

Editor's note: Steven W. Hansen an attorney who defends product manufacturers, distributors and retailers in product liability lawsuits and provides consultation on all matters related to the manufacture and distribution of consumer products. For further questions visit swhlaw.com.

How the problem arises
We receive lots of inquiries each year from both clients and their insurance brokers about how handle additional insured certificates issued to U.S.-based companies from their key Asian based manufacturing suppliers, who almost without exception, use policies issued by  Asian based non U.S. admitted/regulated insurers. If you are not closely monitoring and vetting all your suppliers additional insured certificates each year then you better go back to square one, read our article on audits, then read this article. This article does not address EU (European) or Japan based non-U.S. insurers. That is a separate future article.

This article is an attempt to outline some of the many issues with coverage provided by Asian based insurers ("AI's" for purposes of this article) and how to begin to spot these issues and develop strategies to overcome them. This article has been assembled from our first hand experience in claims with Asian based insurers and dealing directly with our client's coverage problems arising therefrom. Your first hand experience and opinion may vary, but we feel that these issues at least need to be identified and addressed by those companies least familiar with them.

Why the coverage exists 
You need to understand there is a reason for insurance issued by AIs. First of all there is a need as Asian based manufacturers are usually asked about this coverage by the U.S. companies they supply (or it is required to close the deal). Secondly, AI's are utilized as their coverage is usually much cheaper than U.S.-based coverage, even for the same limits of coverage. There is a good reason for this; in most cases the AI coverage is more limited in scope than most U.S. policies issued to the U.S. companies buying products from Asia and also because the AI's "loss ratio" tends to be lower. This means that the ratio of dollars paid out on claims to dollars of premiums collected is better than comparable U.S. insurers loss ratios. This may be partly due to the fact that the AI's can freely deny so many U.S. claims using their restrictive policies and their is no recourse by U.S. additional insureds in U.S. courts against the AI's directly.

Questions that have to be asked when vetting such coverage
The first question of course is the experience of your insurance broker and in house attorney in dealing with such AI's and their claims process. If you/they don't know the right questions to ask then seek outside expertise.

Unknown Ratings
One problem with AI's is they tend to not be rated by U.S. insurer rating agencies with respect to their financial strength. The reasons for this are varied but can be due to the fact that the AI's will not submit to regular audits by the U.S. rating agencies. The lack of a U.S.-based rating can seriously limit the use of AI's coverage when your company is trying to sell items to large companies like Walmart or Amazon.

Restrictive policies
AI's also tend to issue very restrictive policies when compared to U.S. policies. One way they do this is by only offering "claims made" (versus "occurrence") coverage which creates a whole host of issues as to how claims need to be timely handled. If you have never heard these phrases, again go back to square one. AI's also tend to use manuscripted or non standard policy provisions unlike those issued by most U.S. insurers. This unique policy terminology becomes a bigger problem as U.S. courts never get the opportunity to interpret it as they do U.S.- based policies. U.S. policies also tend to use very standard (copyrighted) policy language not used by their Asian counterparts. The reason this language is used by U.S. insurers of course is so that there is some degree of predictability when courts interpret the language.

Inexperienced claims staff
Not only are the policies a problem but the claims staff (internal and third party) can be inexperienced (or in some cases untrained) and are usually totally unfamiliar with the U.S. legal process and case law as it respects the claim process, coverage and liability. Or sometimes what knowledge they do have is used against the U.S. additional insureds. In our experience most AI staff routinely confuse coverage and liability. In some instances claims are never even opened as legitimate claims are "denied" (or more likely "ignored") before they ever reach the AI, or are denied for reasons that would receive much higher scrutiny in the U.S.

Limited policies
The AI policies are usually financially restrictive as well when compared to U.S.- issued policies. There are often large self insured retention amounts (SIR's) on these policies, in addition to low per claim and aggregate limits as well as limits on total defense costs that erode the available limits of the policy even further (so called "burning limits" policies). The Asian suppliers (with the blessing of the AI and the AI broker) also tend to issue too many additional insured certificates to too many U.S. companies which further erodes the viability of the policies. This creates a very murky situation should multiple claims later arise.

Limited usefulness
Due to these issues above many U.S.-based insurers will not give U.S.-based certificate holders any "credit" for these AI issued certificates. What this means is that these AI certificates are not worth the paper they are written on (at least insofar as U.S. insurers are concerned). Thus U.S. insureds won't get any rate reductions on their own U.S. coverage due to the fact that U.S. insurers are betting on the AI's not coming through for the U.S. additional insureds when needed.

Risky strategy
At the end of the day what this really means is that whether or not your U.S.-based company gets a defense and indemnification in a U.S. suit (or other country other than the AI's home country) from an AI comes down to how much pressure can be applied by your company to the Asian supplier, to its Asian based broker and ultimately the AI. That's a very risky strategy which can drastically change from one year to the next as players in the game change, let alone the viability of your long term business relationship with the Asian supplier.

Looking Forward
Again this all comes down to due diligence, experience in the AI market, timing and relative bargaining power. If your company is not getting the right advice from the insurance brokers and attorneys consulting with it, asking the right questions and offering solutions at the right time in the process, you will not get anywhere and may end up being counterproductive. Trying to retroactively work around or safeguard against these issues/pitfalls can be frustrating as you are not negotiating directly with the AI, nor are you on equal footing with them as compared to your Asian supplier. Many "contractual workarounds" attempted with the Asian insured supplier will not yield results for the simple reason that the AI is not a party to the contract and its insured has no power to bind it. The biggest problem with insurance is that you don't know you have a problem usually until years after the coverage was placed. At that point its too late to try to "fix" it.

Evolving picture
There are a lot more legal and underwriting issues and strategies involved than just the few mentioned in this article. Its never too late to start fixing these potential gaps in coverage. But they generally take a few policy renewals to iron out. And even then its an ongoing yearly battle as the players and policies in the shell game often change.

The information in this column is subject to change and may not be applicable in your state.  It is intended as a thought-provoking discussion of general legal principles and does not constitute legal advice. Any opinions expressed herein are solely those of the author.

Law Offices of Steven W. Hansen | www.swhlaw.com | 562 866 6228 © Copyright 1996-2013 Conditions of Use

April 22, 2015

Letter of AAFA to U.S. Trade Representative Regarding counterfeit goods on the TaoBao platform of Alibaba

We came across a copy of this April 8, 2015 letter and thought it would be helpful to share it with some of our clients and others in the recreational sports market who we know are having similar frustrations not only with Alibaba but Amazon as well. The letter is quite detailed and is a good outline of at least the the American Apparel & Footwear Association's (AAFA) longstanding issues with Alibaba and TaoBao. AAFA represents the apparel and footwear industry.

Law Offices of Steven W. Hansen | www.swhlaw.com | 562 866 6228 © Copyright 1996-2013 Conditions of Use

April 19, 2015

UPDATE California mandatory bicycle helmet law and retroreflective clothing bill [Senate Bill 192 2015]

As for the California Senate Bill 192 introduced in February 2015 discussed in our earlier post a number of bicycle advocacy groups came out of the woodwork against this bill much like the mandatory motorcycle helmet bills. The changes are set forth below as of this posting, so it looks like the clothing part is gone as well. The revised bill language is now asking the state’s Office of Traffic Study (OTS) to work with the California Highway Patrol (CHP) to investigate helmet use and report back the findings in early 2017. Robert Oakes, the legislative director of the bill sponsor stated that "The hope is that OTS and the CHP can examine current bicycle helmet use and accident reports to determine what percentage of adults do not wear a helmet when they ride a bike, and also determine how many deaths and injuries would have been prevented if those riders had been required to wear helmets". The "theory" is that many injuries or deaths in car vs bike scenarios would not be prevented with just helmets but of course what really needs to be examined closely at are long term traumatic brain injuries (but not necessarily fatal) that occur due to the lack of a helmet regardless of the circumstances of the crash or other injuries that would not be prevented using a helmet (such as injuries to other body parts). 

Amended  IN  Senate  April 09, 2015


Senate Bill No. 192

Introduced by Senator Liu

February 10, 2015

An act to amend Section 21212 of add and repeal Section 21213 of the Vehicle Code, relating to bicycles.


SB 192, as amended, Liu. Bicycles: helmets.

Existing law prohibits a person under 18 years of age from operating a bicycle, riding on a bicycle as a passenger, or riding in a trailer towed by a bicycle unless the person is wearing a bicycle helmet meeting specified standards. A violation of those provisions is an infraction punishable by a fine of not more than $25.
This bill would require every person, regardless of age, to wear a bicycle helmet when operating a bicycle, riding on a bicycle as a passenger, or riding in a trailer towed by a bicycle. The bill would also require a person engaged in these activities in the darkness to wear retroreflective high-visibility safety apparel, as specified. Because a violation of this requirement would be a crime, the bill would impose a state-mandated local program. require the Office of Traffic Study, in coordination with the Department of the California Highway Patrol, to conduct a comprehensive study of bicycle helmet use, including specified information, and to report the study’s findings to the Senate Committee on Transportation and Housing and the Assembly Committee on Transportation by January 1, 2017.
The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.
This bill would provide that no reimbursement is required by this act for a specified reason.

Vote: MAJORITY   Appropriation: NO   Fiscal Committee: YES   Local Program: YESNO  

The people of the State of California do enact as follows:


 Section 21213 is added to the Vehicle Code, to read:
 (a) The Office of Traffic Study, in coordination with the department, shall conduct a comprehensive study of bicycle helmet use, including, but not limited to, determining the percentage of California bicyclists who do not wear helmets, and the fatalities or serious injuries that could have been avoided if helmets had been worn. A report of the study’s findings shall be submitted to the Senate Committee on Transportation and Housing and the Assembly Committee on Transportation by January 1, 2017.
(b) Pursuant to Section 10231.5 of the Government Code, this section is repealed on January, 1, 2021.
SECTION 1.Section 21212 of the Vehicle Code is amended to read:21212.
(a)(1)A person shall not operate a bicycle, or ride upon a bicycle as a passenger, upon a street, bikeway, as defined in Section 890.4 of the Streets and Highways Code, or any other public bicycle path or trail unless that person is wearing a properly fitted and fastened bicycle helmet that meets the standards of either the American Society for Testing and Materials (ASTM) or the United States Consumer Product Safety Commission (CPSC), or standards subsequently established by those entities. This requirement also applies to a person who rides upon a bicycle while in a restraining seat that is attached to the bicycle or in a trailer towed by the bicycle.
(2)A person shall not engage in the activities described in paragraph (1) in the darkness, as defined in Section 280, unless that person is wearing high-visibility safety apparel, which may include a vest, jacket, or shirt, that is retroreflective and meets the requirements of the American National Standard for High-Visibility Safety Apparel and Headwear, published by the American National Standards Institute/International Safety Equipment Association or standards subsequently established by those entities.
(b)A person under 18 years of age shall not operate a nonmotorized scooter or a skateboard, nor wear in-line or roller skates, nor ride upon a nonmotorized scooter or a skateboard as a passenger, upon a street, bikeway, as defined in Section 890.4 of the Streets and Highways Code, or any other public bicycle path or trail unless that person is wearing a properly fitted and fastened bicycle helmet that meets the safety standards described in subdivision (a).
(c)Any helmet sold or offered for sale for use by operators and passengers of bicycles, nonmotorized scooters, skateboards, or in-line or roller skates shall be conspicuously labeled in accordance with the standard described in subdivision (a) which shall constitute the manufacturer’s certification that the helmet conforms to the applicable safety standards.
(d)No person shall sell, or offer for sale, for use by an operator or passenger of a bicycle, nonmotorized scooter, skateboard, or in-line or roller skates any safety helmet is not of a type meeting requirements established by this section.
(e)Any charge under this subdivision shall be dismissed when the person charged alleges in court, under oath, that the charge against the person is the first charge against that person under this subdivision, unless it is otherwise established in court that the charge is not the first charge against the person.
(f)(1)Except as provided in subdivision (e), a violation of this section is an infraction punishable by a fine of not more than twenty-five dollars ($25).
(2)The parent or legal guardian having control or custody of an unemancipated minor whose conduct violates this section shall be jointly and severally liable with the minor for the amount of the fine imposed pursuant to this subdivision.
(g)Notwithstanding Section 1463 of the Penal Code or any other provision of law, the fines collected for a violation of this section shall be allocated as follows:
(1)Seventy-two and one-half percent of the amount collected shall be deposited in a special account of the county health department, to be used for bicycle, nonmotorized scooter, skateboard, and in-line and roller skate safety education and for assisting low-income families in obtaining approved bicycle helmets for children under 18 years of age, either on a loan or purchase basis. The county may contract for the implementation of this program, which, to the extent practicable, shall be operated in conjunction with the child passenger restraint program pursuant to Section 27360.
(2)Two and one-half percent of the amount collected shall be deposited in the county treasury to be used by the county to administer the program described in paragraph (1).
(3)If the violation occurred within a city, 25 percent of the amount collected shall be transferred to and deposited in the treasury of that city. If the violation occurred in an unincorporated area, this 25 percent shall be deposited and used pursuant to paragraph (1).
SEC. 2.
No reimbursement is required by this act pursuant to Section 6 of Article XIII B of the California Constitution because the only costs that may be incurred by a local agency or school district will be incurred because this act creates a new crime or infraction, eliminates a crime or infraction, or changes the penalty for a crime or infraction, within the meaning of Section 17556 of the Government Code, or changes the definition of a crime within the meaning of Section 6 of Article XIII B of the California Constitution.

Law Offices of Steven W. Hansen | www.swhlaw.com | 562 866 6228 © Copyright 1996-2013 Conditions of Use