EC product directive holds new risk for U.S. companies.
Recently, RU 486, a revolutionary pill developed by the French company Groupe Roussel Uclaf and considered to be a superior means of abortion compared to surgery, was taken off the market almost as soon as it was introduced because of pressure from anti-abortion groups. Two days later, the French government, due to pressure from the company, put it back on the market. To date, all efforts to market the pill in other countries have been put on hold.
In the United States, we are used to seeing legal battles that pit big business against the consumer. Although Europe has an enviable history of being less litigious, as 1992 approaches, this situation is changing. The products liability directive and pollution liability draft are indicative of the movement towards a single European market and symbolic of the inroads the consumer movement has recently made in Europe.
Increasingly, Europeans are adopting the American view of the consumer as someone in need of legal protection rather than a bearer of independent responsibilities. As a result, if the European consumer's expectation of safety is not met, it is possible that liability and sanctions are likely to follow.
The Products Directive
The Products Liability Directive is designed and phrased to be responsive to the private consumer and is not applicable to corporate consumers. The directive imposes strict liability, requiring the injured party to prove that there was a defect and damage and to show the causal relationship between the defect and damage. A product is considered defective when it fails to provide "the safety a person is entitled to expect."
The directive provides for damages for death or personal injury, but allows member states to place a ceiling of not less than 70 million ECUs (European Currency Units) on these damages. Damages are recoverable to property other than real property and the product itself, provided that damages claimed total more than 500 ECUs. In addition, the property must be and have been used primarily for private purposes or consumption by the injured party.
In cases in which two or more parties are liable for the same damage, the directive allows for the imposition of joint and several liability, as long as national laws concerning contribution and recourse are not broken. The directive also allows for a three-year statute of limitation from the time a product was "put into circulation," and a 10-year statute of repose after which claims cannot be filed.
The Products Liability Directive, as with all EC directives, must be implemented by the European Community member states within a specific period. The members currently stand in jeopardy of being sanctioned by the European Court of Justice for failing to implement the directive on time. As a result, the EC has issued a warning to nine of its members that they must enact the directive within the next few months. In addition, the European Community is threatening to sue the member states of Italy and the United Kingdom for failing to adopt as strict a standard for the directive.
The Product Liability Directive was the result of 10 years of debate between the EC members. In compromise, certain areas were allowed to be implemented differently by the member states; including whether they wish to enact the 70 million ECU minimum ceiling of liability for bodily injury damages and whether they will include in the definition of "products" such primary agricultural products as fish and game.
The directive gives a defense to the producer if he can prove that the "state of scientific and technical knowledge at the time the product was put into circulation was not such as to enable the existence of a defect to be discovered." Even so, the directive also gives the individual member states the option to impose liability on producers even if they can prove this to be the case.
This development risk defense is similar to what is referred to in the United States as the state-of-the-art defense. As it has for Americans, this defense has already begun to pose some problems for the Europeans. For example, British law allows the producer a defense if he can prove that at the relevant time, the state of scientific and technical knowledge was not such that "a producer of products of the same description of the product in question might be expected to have discovered the defect if it had existed in his products while under his control." The Italians have also given the producer a defense if the producer's product is manufactured according to industry standards. The European Community considers that these two member states have deviated too far from the directive, and as a result, they are suing Italy and the United Kingdom on this issue of development risk defense.
Obviously, the directive is subject to construction and differing interpretations in each EC member state. What remains to be seen is the degree of litigation over these differences in interpretation. At least for now, producers have a more difficult burden and a wider exposure.
Effect on U.S. Multinationals
In many ways, the implications of the Product Liability Directive are the same for American multinationals with businesses in Europe as they are for European companies. Each company must begin by determining whether some or all of their products fall within the scope of the directive.
In looking at its product mix, an organization's experience with consumer lawsuits in the United States and Canada can provide some insight into what it may encounter in Europe. Therefore, it is also essential for an organization to review its past experiences in other countries, as well as in Europe, and apply any lessons to its European subsidiaries. There is a need for American risk management techniques to be applied in multinational corporations operating in Europe. As a result of the Products Liability Directive, the use of product recall as a risk management tool will become more prevalent. Fortunately, there is products recall insurance available for corporations with well-planned strategies. In addition, there will also be an increase in the use of indemnification provisions between various suppliers and producers.
To use the defenses available under the terms of the directive, a company must establish documentation procedures to prove certain facts. A company must be able to prove who manufactured the product or component, where it was manufactured and who put it into circulation. The company must also verify whether the product was manufactured in compliance with mandatory regulations and be able to document what the state of scientific and technical knowledge was at the time the product was put into circulation. It is also necessary for a company to be able to establish whether the product was manufactured based on their own or someone else's design. Comprehensive records of all sales contract provisions and warranties must be maintained. In addition, claims reporting procedures between the manufacturing facilities and corporate headquarters should be set up, even if it is for relatively minor products liability claims.
Trends in Pollution Exposures
The environmental movement is strong throughout Europe, especially in light of Chernobyl and Sandoz. As a result, the European Community has signaled its strong interest in pollution liability through the Single European Act in 1987 by requiring consideration of protecting the environment as a component of other EC policies. The Single European Act, Title VII specifies that "preventive action should be taken, that environmental damage should be rectified at source, and that the polluter should pay." If the draft directive for strict liability for damages due to waste is enacted, it could have an enormous impact in companies doing business in Europe. However, even if the strict liability directive is not enacted in the near future, national governments, such as France, Germany, Italy and the United Kingdom, are expressing increased interest in expanding toward a strict liability standard in their own countries.
In Europe, as in the United States, the expectation of the general public to be able to live in safety and free of risk is on the rise. Though the United States and the European Community still differ on the issue of pollution liability, the fact remains that this exposure must be identified, managed and controlled.
Because of these new product and pollution exposures in the European Community, there will probably be a greater trend toward higher claims frequency for both exposures. In 1988, it was reported that the cost of products liability coverage would increase, and that there would eventually be a need for higher aggregate liability limits. To date, the first prediction of increased rates has not occurred. There has been little or no increase in price on renewals, and the market realities of a soft market have made placement in primary and excess layers quite easy.
In light of these recent trends, American risk managers should consider taking advantage of the soft market to increase their companies working layers. This would strengthen a company's position with its insurer and place it in a better position if a need for increased coverage came about unexpectedly. Another point to consider is that coverage available from European carriers is generally broader in scope, although this varies from country to country. Some local coverages provide limited coverage for product recall, while others provide for pure financial loss.
There have recently been some attempts by American underwriters to charge higher prices for or place restrictions on coverage based on the enactment of the Products Liability Directive. These carriers could be setting their prices based on their experience in the United States, but may be doing to prematurely for coverage in Europe.
For pollution coverage in Europe, sudden and accidental coverage is usually included as part of the general liability conditions. Currently, there is some coverage available, as well as through insurance pools in Italy, France and the Netherlands. The Italian pool has been quite successful and provides fairly high limits of approximately $21 million per loss and aggregate. In France, where the laws have increasingly been interpreted to impose a form of strict liability on corporations involved in pollution accidents, the insurance pool is also providing relatively high limits of about $20 million per loss and aggregate. To date, the insurance pool in the Netherlands has not been very successful, but there is talk of expanding its capacity in the next few years.
Risk managers should keep in mind that after 1990, with certain limitations, if a company qualifies as a "large risk" under the Second Non-Life Directive, it can purchase insurance from a carrier admitted in one country, with that coverage applicable throughout the European Community. In addition, they may allocate the premiums to their subsidiaries in Europe. Limits a company has for its U.S. catastrophe exposures will probably be adequate for its European subsidiaries and remain unaffected by the Product Liability Directive and recent pollution concerns, at least for the foreseeable future.
The products directive and pollution liability movement should be seen as the wave of the future in the European Community. Risk managers should begin to stress to their senior management the necessity of employing in their European subsidiaries the same risk management techniques used in their American operations. Risk managers should also solidify their relations with primary underwriters and consider taking advantage of current market conditions by increasing coverage wherever necessary or analyzing the need for more sophisticated insurance structures.
M. Patricia Casey is vice president of Johnson & Higgins in New York.
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|Author:||Casey, M. Patricia|
|Date:||Jan 1, 1990|
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