Risk managers and insurers need to operate within a clear and stable product liability legal framework, so that they can accurately estimate their potential exposure. The existing Product Liability Directive (85/374/EEC) strikes a sensible balance between the interests of consumers and those of business. Any shift in this balance could encourage spurious claims, impede technological advances and require reassessment of the nature and level of risk faced by individual companies and their insurers.

The Product Liability Directive was implemented in 1985 and imposed strict liability on producers for damage to health, safety and/or property caused by a defective product. If a consumer can establish that a product is defective and that the defect caused the particular injury or damage concerned then, subject to very limited defences, a producer will be liable.

As the Directive imposed strict liability (ie. liability without fault) on producers, a fair balance was achieved by limiting that liability in time (ten years from the date the product is placed on the market) and permitting innovative developments through the so-called “state of the art” or “development risks” defence. Additional protection was available through the optional provision for member states to impose a maximum ceiling in the case of damage caused by identical products with the same defect. Only Germany, Spain and Portugal opted to implement this upper ceiling, which is currently ECU70 million.

Green Paper

In July 1999, the European Commission published its Green Paper on liability for defective products. Its purpose was to consult relevant parties on the impact of the Directive to date and to reflect on whether revision would be appropriate. The Green Paper included several “options for reform”, although it was stressed that these were merely guidelines for discussion.

The consultation period lasted until November 1999. Sebastian Bohr, one of the individuals within the Commission (Directorate General Internal Market) who is responsible for the Green Paper, recently said that about 100 responses to the Paper had been received. The Commission is currently analysing those responses and plans to start work on its report in the autumn, with a view to adopting a report before the end of 2000. At that time, the Commission will decide whether the Directive needs to be revised and, if so, what those revisions should be.

Several options for reform were proposed in the Green Paper, not all of which are of direct relevance to risk managers and insurers. Those which are relevant are considered below.

Relaxing the burden of proof

The Directive currently imposes on the consumer the burden of proving:

  • the identity of the producer of the particular product;

  • that the product is defective;

  • that injury or damage was sustained; and

  • a causal link between the defect in the product and the injury or damage.

    The Commission considered that this burden on consumers could be too heavy, especially when the proof required is technically complicated and/or expensive in terms of the expert opinions required. There is usually a lack of balance between the consumer and the producer in terms of their access to information on, for example, how the problem occurred. The Commission therefore proposed several options for reforming the burden of proof, each of which was designed to make it substantially easier for claimants to satisfy the various requirements.

    Within Europe, the development of a compensation culture is, broadly speaking, already evident. Giving consumers a significant “helping hand” with proving their cases can only serve to accelerate its establishment. Relaxing the burden of proof could lead to an increase in spurious claims, not just meritorious claims. It is likely that those spurious claims will be defended by corporations or their insurers and can only result in substantial increases in costs for business, in terms of time as well as money. If insurers are required to defend an inflated number of claims, then this will also result in increased costs to business through larger premiums. In some circumstances, insurance cover might cease to be available. The litigation and insurance costs combined could force companies to withdraw particular products from the market, or even lead to the company itself going out of business.

    Inferring a causal relationship

    Reducing the burden of proof by, for example, inferring a causal relationship once a consumer has proved the damage and the existence of a defect, will obviously make it easier for claimants to bring successful claims against producers. If the Commission decides to relax the burden of proof in this way, then risk managers will need to conduct significant reassessments for their companies. If causation is no longer required as part of the burden of proof, risk managers may find their task more difficult, depending on the particular product and how risky it is.

    Introducing market share liability

    As part of its considerations on revising the burden of proof, in particular the requirement that a claimant prove the identity of the producer of the relevant product, the Commission asked for comments on whether the US theory of market share liability might be feasible in Europe. Used very rarely and only in relation to pharmaceutical products, the theory of market share liability requires claimants to prove a link between the damage and the particular product, without needing to establish the manufacturer's identity. If a manufacturer has a share of the market for a generic product, such as a vaccine, then it will be liable to compensate the victim, with its percentage liability being directly linked to the size of its market share.

    The application of this theory in Europe would lead to those with the greatest market share assuming the greatest financial responsibility to victims, even in circumstances where that particular company has not been named as a defendant in litigation. For risk managers, this particular revision would be easily incorporated into risk assessment calculations – if the company had a large market share it would face the risk of large liabilities. That would be the case irrespective of the safety and quality control systems which that company had in place, and irrespective of whether one of that company's products was directly implicated. Conversely, those with small market shares need not be overly concerned about their safety systems as, even if those systems failed and a defective product caused injury, the majority of the costs would be borne by the market leaders. This proposal, if accepted, could therefore act as a major disincentive to individual companies taking responsibility for product safety and implementing preventative measures. A further consequence would be that the additional liability risk for those with large market shares would be likely to impede the development of new products.

    Removal of the development risks/state of the art defence

    Under this defence, a producer of a defective product will have no liability if he can show that the state of technical and scientific knowledge when the product was put onto the market was not such as to enable the existence of the defect to be discovered. Within the Green Paper, the Commission considered whether, in order to provide compensation to consumers genuinely injured by innovative products, the defence should be removed.

    The development risks defence is the most treasured defence to risk managers and insurers. Exposures can only be quantified in relation to the current state of scientific knowledge. It is no more possible for risk managers and insurers to anticipate future technological advances than it is for the product's designers. Without this defence, there would be a huge amount of uncertainty and, in all likelihood, insurance would not be available for certain types of risk, or available only with an inflated premium. Companies would then need to consider whether the risks were too high to justify innovation.

    Removal of financial limits

    The Commission is considering whether retention of an upper financial limit is justified. In Germany, Spain and Portugal, where an upper financial ceiling has been set, its removal would reduce the certainty of maximum exposure.

    Removal of time limits on liability

    The Green Paper also includes a proposal that the current time limitation on liability be removed. Under the present terms of the Directive, a producer's liability ceases ten years after the product was put into circulation. While acknowledging that increasing the liability period, or removing it altogether, would lead to increased costs for business, the Commission is anxious to provide compensation to consumers whose injuries take more than ten years to become apparent.

    Introduction of compulsory insurance

    In order to ensure that victims are compensated, it has been proposed that producers be required to have in place insurance which is adequate to cover any damage caused by a defective product. If this was implemented, then risk managers would need to ensure that all potential risks were insured to an appropriate level. As discussed earlier, however, there may well be circumstances in which insurance is not available, leading to companies being forced to withdraw products from the market, or curtailing a company's capacity for innovation.

    Improving consumers' access to justice

    The Commission has considered in the Green Paper whether special measures are needed to improve victims' access to justice. In this respect, one of the proposals is to establish procedures for bringing group actions. In a group action, there are usually one or more claimants selected to represent the others in circumstances where there are questions of fact and/or law common to all of them. It is a concept which is permitted in certain situations in the UK, France and Portugal.

    The Commission has proposed that a mechanism for the common representation of similar interests be introduced for all member states. Depending on the precise limitations of the group procedure, this proposal could have a significant impact on companies and their insurers.

    The worst case scenario would be that “class actions” be permitted in Europe. Class actions are widely used in the United States with varying effects, depending on the subject matter and the particular state in which the action is brought. Generally, they are viewed as one of the most controversial litigation tools. In class actions, it is for a judge to determine whether the action brought on behalf of numerous plaintiffs is suitable for resolution by reference to an individual representative. If the class is approved by the judge, then it binds all members unless they opt out. In other words, “victims” can be bound by the action, even if they know nothing about it. Generally, advertisements publicise the existence of the action and of the opt-out arrangements. This is very different from the multi-party procedures available in the English jurisdiction.

    The class action procedure poses a serious threat to defendants. The aggregation of claims can make the outcome of the litigation a matter of life or death for the defendant company. We were recently reminded of the potential threat of such action with the award of $145 billion in the Engle tobacco class action. In the fen-fen litigation, the defendant manufacturers of diet pills have made an offer of approximately $3.75 billion. The diet pill litigation is a good example of why class actions are sometimes referred to as “judicial blackmail”. In such an action, the defendants' fear of an adverse award often leads to an attempt to make a once and for all settlement, irrespective of the merit, so as to limit the extent of their financial liability.

    Class actions could have a devastating effect if implemented in Europe, as they would compel companies and insurers to offer settlements in cases of little or no merit, in order to enable them to continue with their business. This is because the cost and time demands of defending a class action are very significant, and the risk of an all-or-nothing judgment is too high.

    Conclusion

    Each of the proposals discussed in this article would have a negative impact on risk managers and insurers. Each would result in increased costs and some would potentially result in companies being forced to withdraw certain products from the market, or even to withdraw from the market altogether. The proposed revisions of the Directive would result in greater uncertainty and would make the task of risk managers and insurers a very difficult, if not, in some aspects, an impossible one.

    The European Economic and Social Committee (EESC), the body responsible for advising the Commission on the Green Paper, issued its opinion in March 2000. The EESC concluded that any revision of the Directive called for caution, as the current balance struck within the Directive is satisfactory in the main. It therefore proposed that, instead of amending the Directive, the Commission monitor the situation in conjunction with all the interested parties, with a view to presenting a report in five years' time.

    It remains to be seen whether the Commission will act in accordance with the EESC's opinion, and the situation is unlikely to become any clearer before the end of the year. It is certain, however, that there is a pro-consumer attitude currently prevailing within the EU institutions and, therefore, reform of the Directive in favour of consumers, if not imminent, is likely within the next few years.

    Donna Lambert is an assistant solicitor in the product liability group of Lovells. Email: donna.lambert@lovells.com.