Products liability, a sword of Damocles

THE CONCEPT of liability insurance probably began with employers being made responsible for accidents and/or injuries to their workmen. Later with the development of motor transport the liability concept was extended to cover loss or damage that may accrue to third party personnel or property in motor accidents.

Now, in almost every industrial / commercial activity, there is need to take care of possible liabilities. One such liability is in respect of products and services that can cause damage to buyers on account of some defect in the product or service concerned. The liability is slowly but surely assuming a global aspect. Manufacturers of products or providers of services that are exported to various countries could become liable for damages in the event of their exports being harmful or defective. The awareness of this liability has spread so much that in the case of most exports from India, buyers now-a-days insist on product liability coverage upto stipulated limits being taken by their suppliers.

Coverage

The product liability policy will indemnify the insured against all sums upto the limits specified for which the insured shall become legally liable to pay compensation for :

a) Accidental bodily injury or illness to any person not being a member of the insured's family or engaged in or upon the service of the insured; and

b) Accidental loss or damage to property not being property belonging to or in the custody of or in the control of the insured or any member of the insured's family or any person who at the time of the accident is engaged in and upon service of the insured.

This indemnity will be provided for anything harmful or defective caused by any product (or container thereof) sold or supplied by the insured, in connection with his business and happening at any time during the period of insurance.

In addition, all costs and expenses, incurred with the consent of the insurer in defending any legal proceedings for enforcing any claim for compensation, will be payable.

Exclusions

The insurance will not cover

(a) The cost of removing, replacing or repairing defective products or loss of use thereof; (b) Liability for costs in the repair, reconditioning, modification or replacement of any part of any product which is or is alleged to be defective; (c) Costs arising out of the recall of any product or part thereof; (d) Losses arising out of any product which is intended for incorporation into the structure, machinery or control of any aircraft;(e) Liabilities arising out of deliberate, wilful or intentional non-compliance with any statutory provision;(f) Expenses arising out of pure financial loss such as loss of goodwill, loss of market, etc; (g) Damages arising out of fines, penalties, punitive exemplary damages;(h) Injury and/or damage occurring prior to the retroactive date shown in the schedule to the policy;(i) Liabilities arising out of deliberate, conscious or intentional disregard of the insured's technical or administrative management of the need to take all reasonable steps to prevent claims;(j) Injury to any person under a contract of employment or apprenticeship with the insured where such injury arises out of the execution of such contract;(k) Damages arising out of contractual liability which would not have existed in the absence of the specific contract;(l) Losses arising out of any product guarantee;(m) Liabilities arising out of claims for failure of the goods or products to fulfil the purpose for which they were intended;(n) War perils;and (o) Nuclear exclusions.

Coverage can be tailor-made

The market for products liability insurance is in its early stages of development. Hence, it is possible to enlarge the scope of the coverage or delete/minimise some of the exclusions in respect of a specific large contract where the overseas buyer demands such alterations. Indian insurers depend heavily on overseas reinsurers for arranging such changes in the normal coverage. So each proposal has to be negotiated with the Indian insurer and the overseas reinsurers concerned. In particular, there is a growing demand for meeting the expenses of a product recall, where the product sent / to be sent is defective or suspected to be defective.

Excess

The policy will be subject to a compulsory excess of 0.25 per cent of the limit of indemnity per any one accident subject to a maximum of Rs. 1 lakh. In the case of exports to North America, the excess applicable will be 5 per cent subject to a maximum of Rs.2 lakhs per claim. This compulsory excess will be applicable to both (a) death/bodily injury and (b) property damage inclusive of defence costs arising out of any one accident.

The insured may also opt for bearing a voluntary excess in consideration of a reduction in premium (over and above the compulsory excess)

Vendor's clause

The``persons insured''provision in the policy can be amended to include any person or organisation (referred to as vendor) as an insured. Such an extension is advisable where specific representatives of the insured are involved in the storage / marketing /sale of the insured's products.

Claims

Normally these claims are considered serious and they will be handled either by the regional office if the claim is minor or the head office if major. As soon as any demand for compensation is received, immediate advice should be given to the insurer and all actions should be taken on the basis of the insurer's advice.

The documents needed for processing the claim will be :

a) Completed claim form.

b) Original letter from third party claiming compensation.

c) First Information Report of police where necessary.

d) Medical certificate/medical bill/post mortem report where necessary.

e) Survey/Investigation report.

N. RAMACHANDRAN

The author is an insurance consultant.

He can be contacted at nramac@md3.vsnl.net.in

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