BUSE4024A Advanced Liability Insurance & Risk Management 2023 Lecture 6 PDF

UNIVERSITY OF THE WITWATERSRAND SCHOOL OF BUSINESS SCIENCES BCOM. HONOURS INSURANCE AND RISK MANAGEMENT BUSE4024A Advanced Liability Insurance and Risk Management 2023 Lecturer: Ms Penny Spentzouris Lecture 6 LIABILITY FOR DEFECTIVE PRODUCTS (PRODUCTS LIABILITY) Nature and Purpose of Liability Rul...

UNIVERSITY OF THE WITWATERSRAND SCHOOL OF BUSINESS SCIENCES BCOM. HONOURS INSURANCE AND RISK MANAGEMENT BUSE4024A Advanced Liability Insurance and Risk Management 2023 Lecturer: Ms Penny Spentzouris Lecture 6 LIABILITY FOR DEFECTIVE PRODUCTS (PRODUCTS LIABILITY) Nature and Purpose of Liability Rules for Defective Products Rules governing liability for defective products seek to achieve one fundamental objective – consumer protection. The aim is to ensure that consumers injured by defective products are compensated. In doing so, the rules also discourage manufacturers from putting unsafe products in circulation. Therefore, it is not a coincidence that in most countries including South Africa the legislation defining liability rules for defective products is invariably titled Consumer Protection Acts. There are many reasons why it is desirable to protect consumers against risks arising from defective products. Perhaps the main one is that consumers have no capacity to test if products they buy are safe. Because of this, it becomes the responsibility of government through regulation to ensure that products sold to consumers are not only fit for the purpose for which they are designed but that they come with all the necessary information to warn consumers of potential risks and dangers that may arise from using those products. In most countries, liability rules applicable to defective products derive from legislation. This a universal standard. There are very few countries where liability rules for defective products derive exclusively from the common law although it is possible for such claims to be formulated in negligence. In addition, the basis of liability for a defective product is liability without fault or strict liability. This too is a universal standard. The doctrine of strict liability for defective products originated from US courts where it was introduced to deal with asbestos claims starting in the 1970s. US courts ruled that any product containing asbestos was defective as a matter of law. This meant that fault on the part of the manufacturer was irrelevant. It is difficult to find a country with a consumer protection statute that provides for liability for defective products on the basis of proof of fault. 1|Page Reflection Question. Why is strict liability the most appropriate way to deal with liability for defective products claims and not fault-based liability? Purpose of Products Liability Insurance Some losses arising from the supply of a defective product can be transferred from the manufacturer to insurance markets. In such cases, insurance serves to protect the manufacturer against claims for compensation arising from the defective product. Most insurance products covering liability for defective products do not cover every potential claim that can arise from supplying a defective product. Details on insurance coverage for defective products are covered in the following lecture. Globalisation and Liability for Defective Products Globalisation has transformed the liability for defective products risk landscape. Through supply chains, components going into the production of a particular product could come from multiple countries. This complicates attribution of liability because a product may be defective simply because one component supplied by another manufacturer is defective. Consider a vehicle model assembled in South Africa. Suppose the seat belts for that model are manufactured in China and they turn out to be defective. The defect is discovered after the model is put on the market. How should liability be attributed in such a case? To a large extent, lawmakers in many countries with consumer protection legislation anticipated the above problem. A common way of addressing the problem that globalisation poses in the sphere of liability for defective products is to widen the scope of people that can potentially be liable for the defect. Therefore, it is common to find in consumer protection legislation of many countries a range of people potentially liable for the same defect. One does not have to be the actual manufacturer to face liability. In our example of a vehicle model assembled in South Africa above, liability can attach to a wide range of people such as the assemblers of the car, people who brand the model, dealers, marketers and anyone involved in certifying the product. When considering the global context of liability risks there is a growing trend to widen the scope of potential defendants. In liability for defective products this trend is quite evident. It seeks to enable the consumers to have recourse against defendants closest to them as long as that defendant forms part of the value chain for the product concerned. It is not a defence for a dealer in cars to argue that they are not the manufacturer of the defective vehicle. What makes them liable is being part of the value chain for the particular model? The dominant thinking in broadening the range of liable parties is to maximise the chances of the injured consumer to get compensation. From the foregoing, it clear that liability for defective products is a risk that is easy to export from one country to another through supply chains and globalisation. Complex supply chain networks increase the difficulty of assessing the risk from an insurance supply perspective. While the insurer may know the reputation and standards of the insured, it is much harder to assess the competency of other parties forming part of the insured’s supply chain network. 2|Page Defining the meaning of ‘Defect’ for Product Liability Purposes For purposes of liability, a product is defective if one or more of three things are proved about that product. These are: § § § Defective manufacture Defective design Failure to warn or inadequate instructions on the product The first two forms of defect require technical and scientific analysis of the product to establish them while the third one is mainly a factual issue. For the layman, it is virtually impossible to prove that a product was defectively manufactured or designed. An ordinary person does not have the technical know-how to prove defective manufacture or faulty design. The fact that liability for defective products is usually strict does not mean in all cases there will be compensation. Most consumer protection statutes provide for a range of defences that a defendant company can plead to avoid liability. Most of the defences relate to claims based on defective manufacture or defective design. For example, it is a competent defence in some countries for a manufacturer to show that the defect in the design or manufacture of a product was due to compliance with regulatory instructions by authorities pertaining to the production of that product. Allegations of defect based on failure to warn or inadequate instruction by the producer of a product are more factual than technical. In the US, most asbestos companies were found liable for asbestos diseases mainly for failure to warn consumers of the dangers posed by asbestos. Courts accepted the view that most of these companies knew the dangers posed by asbestos but decided not to warn the public about them. Almost the same argument was used in claims against tobacco companies. People who developed cancer linked to smoking filed claims in the US against tobacco companies such as Philip Morris alleging that they were not warned of the dangers of smoking. In 2022, jurors handed down a $1 billion verdict against Philip Morris for the role they found the tobacco giant played in the lung cancer death of a Massachusetts woman. Fontaine v. Philip Morris, 2081CV00169. The decision delivered by a Middlesex County (Massachusetts) Superior Court jury, includes $8 million in compensatory damages and $1 billion in punitive damages for the 2017 death of Barbara Fontaine at age 60. Jurors found against Philip Morris on negligent design, breach of warranty, fraud, and conspiracy claims among others. However, jurors cleared grocery chain Demoulas, a co-defendant in the case. Fontaine began smoking as a teenager and continued for more than 40 years, favouring Philip Morris’ Parliament and Marlboro brands. Her husband, Armand Fontaine, contended that the tobacco giant is responsible for her fatal lung cancer by placing dangerous, addictive cigarettes on the market and then working for decades to conceal those dangers. The trial that turned in part on whether Philip Morris cigarettes were defectively designed and what, if any, financial punishment should be imposed on the company. 3|Page During closing arguments last Thursday, the plaintiff’s legal representatives, highlighted evidence that said showed that Philip Morris produced and marketed addictive cigarettes during much of the latter half of the 20th century, despite knowing their cancer risks. The company researched alternative designs, including an ultra-low nicotine, or “denicotinized” cigarette that would reduce the likelihood of addiction or make it easier for smokers to quit cigarettes entirely. One of those denicotinized designs was at the behest of the company’s president at the time, Clifford Goldsmith, who did not want to become hooked to nicotine. Publicly the defendant was denying that nicotine was addictive, and denying that cigarettes caused lung cancer. And yet internally, secretly, they were making denicotinized cigarettes for the president of that company. The defendant argued that the technology was good to reduce the nicotine, but people just didn’t like it. Philip Morris invested hundreds of millions of dollars in trying to get these products to market. They wanted them to succeed, but they were just failures. The defendant argued further that even if jurors found the company engaged in misconduct, punitive damages were not warranted because the company and the industry at-large had changed drastically since the 20th-century era of cigarette marketing. The company acknowledged the dangers of smoking for decades, while it paid out billions of dollars to states for the public health impact smoking has had. Philip Morris supported the U.S. Food and Drug Administration’s regulation of the industry. It was argued that an award of punitive damages in the case could potentially dissuade other companies from making positive changes following potential misconduct. But the changes were only made by the company only when it came after it faced suits from states’ attorneys general and others. It is not always easy to draw a line between defective manufacture and defective design. Consider a pharmaceutical drug that turns out to be defective. Due to inadequate clinical trials the drug is administered to patients who later develop serious side effects as a result. Had adequate trials been conducted the side effects could have been detected and corrective measures taken. Is the defect in the drug defective manufacture or defective design? Liability for Defective Products Claim Types A defective product can produce a wide variety of potential claims. The most notable of these are: § (1) Bodily injury, death or illness as a result of using or consuming a defective product. This is one of several straightforward claims. In 2018, people who consumed processed meats produced by a South African company Tiger Brands succumbed to illness or death from listeria contamination of the processed meats. Investigations revealed that the contamination of these products occurred at the company’s processing plant in Polokwane. A class action is being prepared against the company and it remains to be seen what the outcome will be. https://www.foodsafetynews.com/2022/02/court-overturns-decision-in-tiger-brandslisteria-case/ 4|Page . A potential sticking point in the listeria class action is that listeriosis is a disease found in the general population. It kills a significant number of people in South Africa annually. Proving that the death arose exclusively from consumption of the Tiger Brands product was a strategy implemented by Tiger Brands, but the court has addressed this! The court ruled that Tiger Brands’ argument to investigate whether it was the sole source of the outbreak was not relevant to the class-action as claimants are only seeking to hold it responsible for harm. It added the demand for documents was “speculative” and seemed to be based on the hope it would find a basis for co-liability with another party. See also the case of asbestos presence in baby powder in the 2021 Coker v Johnson & Johnson et al 3:2021cv14214: https://www.reuters.com/investigates/special-report/johnsonandjohnson-cancer/ § § § (2) Damage to material property. A defective product can cause damage to property e.g. a defective electricity current regulating device may cause electric gadgets connected to it to explode or burn due to excessive current beyond what the gadget can sustain. Property damage due to a defect in a product is a form of harm that is easy to envisage for most people just like bodily injury or death. (3) Consequential loss arising from a defective product. Damage from a defective product often carries with it collateral consequential losses. For example, a service station selling contaminated fuel puts this fuel in the car belonging to a customer. Due to the contaminated fuel, the engine of the customer’s car is damaged and has to undergo repairs for a month. The customer is forced to hire a car from a rental company to transport him to work. (4) Pure economic loss. We have discussed that a pure economic loss is a financial loss without a preceding physical harm attached to it. A defective product may cause pure economic losses without any form of physical damage. Consider a company that specialises in research and development of new seed varieties for farmers. It markets a new seed variety to farmers. A number of farmers buy and plant the new seed variety only to see that their crop does not mature at all. It is just a plant with no yield. The loss to the farmers is a pure economic one. § (5) Damage or injury suffered by the customer from using the defective product. Here we envisage something different from property damage or injury caused by the defective product itself e.g. an exploding electricity current regulator. The exploding current regulator causes direct property damage to the connected electric gadgets. Sometimes a defect in a product does not produce such direct damage. Instead, it produces indirect 5|Page Damage merely because the product in question fails to work as expected. This is also called ‘inefficacy risk’. The two examples in the text box below illustrates the difference between loss type (2) and (5). Example 1. Company X manufactures agricultural pesticides. A farmer buys one of the pesticides and applies it to his crop of potatoes. Instead of preventing pests from attacking the crop, the pesticide burns the crop leaves instead causing the farmer loss due to the destruction of the entire crop. In this case the farmer cannot claim for property damage in the form of the burnt potato crop leaves. His loss lies in lost potential revenue he could have earned from selling potatoes. Example 2. A buys a sun cream to protect himself from sunburn. The cream does not work and A suffers sunburn instead. The harm suffered by A is not caused by the product itself but by the sun. As we will see later, the difference between losses in these 2 examples and those in loss type (2) above is important from an insurance perspective. § § (6) Legal obligation to repair or replace the defective product. This is called product guarantee or trade risk. Some products come with an undertaking or warranty from the manufacturer or supplier that in the event of a defect, the manufacturer will repair or replace the product. Many products such as mobile phones and electric gadgets are sold with this undertaking. (7) It is standard practice following discovery of a defect in a product to recall that product from the market. Eg Ford Kuga recalled about 4500 vehicles when dozens caught fire since 2015. Depending on the nature of the product and its circulation speed, product recall is a costly undertaking. Some products such as motor vehicles are easier to recall because they are not mass purchased products unlike something such as bottled water. Despite this batch numbers are an accurate device used to trace products in the event of a recall. Reflection Question. Which of the above claim types are capable of being transferred to insurers through products liability insurance? Dr Albert Mushai /Penny Spentzouris 2023 6|Page