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
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