Defective goods from China have many insurers on edge.

The growing number of defective or potentially harmful Chinese-made products imported into the United States is causing anxious days at insurance firms.

From pet food that sickened and killed dogs and cats to toothpaste, toy trains, honey, car tires and seafood, U.S. distributors and retailers have wound up pulling bad products off their shelves in recent months. Now they're bracing for the slew of lawsuits that inevitably will follow.

Commercial carriers in the United States, China's largest overseas market, are also on alert, and some are looking at ways to strengthen their underwriting of imported products.

Robert Lala, a vice president at insurer Liberty International Underwriters, said the growing number of defective-product cases will force underwriters to be more diligent in their underwriting efforts and investigations of overseas manufacturers.

Lala said the growing concern also may compel carriers "to only consider writing products coverage for products that are fairly innocuous" But even seemingly harmless ingredients can cause major problems. Menu Foods, the pet food manufacturer whose products allegedly resulted in the deaths of several animals, blames imported wheat gluten contained in the pet food for causing the contamination. Menu Foods pulled the suspected products off the market March 16.

John Sullivan, a senior vice president for broker Lockton Cos., said insurers likely would pay the claims for property damage to the 16 animals that died from eating the pet food, as well as bodily injury claims for pet owners who suffered stress and anxiety, but not for the costs associated with the recall.

Product recall is a standard exclusion in the liability policy. The product liability coverage covers injury to a third party, and offers defense and litigation costs.

Menu Foods' vendors now have become prime litigation targets. Indeed, more and more vendors are being listed as defendants in other product lawsuits.

Sheila Birnbaum, who represents corporations as head of product-liability defense at Skadden Arps Slate Meagher & Flom, said it doesn't matter whether a company's name is on a product. "You're liable if you're the seller," she said.

Plaintiffs' attorney W. Mark Lanier of The Lanier Law Firm recently reached a confidential settlement in a case involving defective toys imported from China. He said his usual practice is to go after whoever put the bad product in the hands of his clients. "We're into efficiency, which means we're going after the easiest source of recovery for our clients," Lanier said.

Indeed, Lanier failed to obtain U.S. jurisdiction to sue the Chinese manufacturer, but he succeeded in suing the importer of the product, as well as the fast food restaurant that put the toy in the meal.

Due to the same jurisdictional issues, carriers also have to treat the vendors and distributors they insure as an actual product manufacturer, said Lala. "The United States courts have no jurisdiction in foreign countries, and foreign manufacturers normally have no attachable assets in the United States."

For commercial brokers like Lockton. with Fortune 1000 clients that do a lot of business overseas, all of this presents some interesting challenges. How do you help a client that imports a lot of goods from China to reduce its risk?

"We have our insurance recommendations, but we don't like for our clients' insurance programs to direct their business plan," Sullivan said.

And until China improves its product-safety regulations, Lanier said everyone should expect to see more of these cases. "It's like a snowball effect. It's going to get bigger and bigger of a problem."

Chinese Fireworks
Top five U.S. imports from China,
2003-2005.

($ Millions)

Category                 2003     2004     2005

Office Machines,
  Data Processing       23,646   35,620   42,242
Telecom and
  Sound Equipment       16,937   24,388   34,249
Misc. Manufactured
  Articles              26,287   29,505   33,573
Apparel and
  Accessories           11,381   13,607   19,931
Electrical Machinery,
  Parts & Appliances    11,875   15,270   18,102

Source: U.S. Department of Commerce, International
Trade Commission