The European Commission has embarked upon a wide-ranging review of the current European Union rules on product liability, the results of which could have profound implications for all insurers, reinsurers and risk managers carrying on business in the EU.
The first stage in this review was the publication of a green paper on 28 July 1999 which proposed a series of reforms to the current EU product liability rules. These reforms, if implemented, will tip the European regulatory framework on product liability firmly in favour of consumers to the detriment of European producers and their insurers. The reforms include:
Although European consumer groups have welcomed the proposals, trade and industry representatives have warned that the reforms, if implemented, could stifle innovation and force producers to divert funds away from research and development towards a burgeoning number of claims.
There have also been concerns raised about the effect that the proposedreforms could have on the cost of insurance, given the predicted rise in compensation levels. However, despite these concerns, the insurance industry, as yet, has made no direct response to any of the Commission's proposals.
The Commission is in the process of analysing responses to the green paper and intends to produce a second report containing more concrete proposals for reform towards the end of this year.
The green paper
The “mad-cow” disease crisis in the United Kingdom, which itself led to an extension of the current rules on no-fault liability to agricultural products, served as the impetus for this review of European product liability law. In addition, there have been significant concerns about whether the principal directive on product liability (directive 85/374) has been effective in raising product safety standards in the EU.
The twin aims of the green paper were:
i) to assess how effective the application of the directive is in practice throughout the EU and whether it achieves its objectives; and
ii) to gauge reactions to proposed reforms aimed at bolstering the directive's effectiveness.
Responses to the green paper have now been submitted. These responses, as well as the proposed reforms, are examined below. The majority of the responses received by the Commission were submitted by consumer bodies and trade associations from across Europe. There appears to be no direct response to the green paper from the insurance industry.
Proposed reforms and responses
Although the Commission has emphasised that its proposed reforms are consistent with its policy of balancing the competing interests of producers and victims, the proposals it makes in its green paper are “pro-consumer”.
The responses have, therefore, fallen into two opposing camps. Consumer groups have welcomed the proposals, citing the absence of claims under the directive as an indication that it is not functioning as intended and that victims of injuries caused by defective products are going uncompensated. In contrast, trade and industry associations view the absence of claims as a clear indication that the directive is operating effectively, having led to increased standards of product safety throughout the EU with the few genuine claims which are made being settled without recourse to litigation.The key reforms proposed by the Commission and the responses submitted are outlined below.
Burden of proof
Under the directive, the victim has the burden of proving that he has suffered damage which was caused by a defect in the product. Given that proving causation is often technically complicated and expensive, the Commission has taken the view that the producer, who controls the production process, is in a better position than the consumer to detect how the defect has arisen. The Commission, therefore, proposes to alter the burden of proof by one of the following methods:
Both the Confederation of British Industry (CBI) and the European Federation of Pharmaceutical Industries Associations (EFPIA) have raised concerns that reversing the burden of proof could produce a flood of spurious and unsubstantiated claims, which industry would then have the costs of defending, or alternatively be forced to settle unfavourably out of court to avoid bad publicity.
Any one of the Commission's suggestions to alter the burden of proof, in practical terms, may increase a producer's cost of defending a claim and would have a similar impact on claims made under the producer's liability or legal expenses insurance.
In our view there seems little justification for the first of the Commission's proposals, namely to infer a causal relationship between the damage and the defect once the victim has proved the existence of either. The directive is already based on a “no fault” liability principle, which means that a producer has strict liability for any damage caused to a consumer by any defect in its product. Inferring causation, however, would mean that the producer may become liable for damage which its product has not in fact caused, unless it is able to prove how the damage was actually caused.
Obliging the producer to disclose the necessary documentation to victims so they can avail themselves of the facts necessary to prove their case is more in line with the balance of interests which the directive seeks to maintain. In the UK, this is already achieved through the pre-action protocols introduced by the Civil Procedure Rules in April 1999 which govern the conduct of civil litigation in England and Wales.
Under the pre-action protocols, the parties to litigation are expected to exchange documentation about the claim at a pre-action stage so as to ensure any opportunity for settlement without recourse to the courts can be explored. This has meant that many English based producers have had to introduce efficient document retrieval systems in order to comply with the three month time-limit imposed by the many pre-action protocols.
The development risks defence has proved to be the most controversial aspect of the directive. This defence states that a producer is not liable if the state of scientific knowledge at the time at which the product was put into circulation did not permit detection of the defect. The Commission has now suggested that it should be abolished.
The directive as it stands leaves the adoption of the development risks defence to the discretion of the individual member state. Luxembourg, Finland and, for specific classes of products, Spain, France and Germany, – have chosen to omit the defence from their domestic legislation. In contrast, in the UK the adoption of the directive into domestic law in the form of the Consumer Protection Act 1987 (CPA) became dependent on the inclusion of the developmental risks defence.
The main reason for justifying the inclusion of the defence in the CPA was that its exclusion would lead to prohibitively high insurance premiums, particularly in sectors where the development risks were inherent, such as pharmaceuticals and aerospace.
Industry representatives, such as the CBI and the EEPIA, argue that abolition of the development risks defence proposed in the green paper would discourage innovation and research. A paper submitted by the Defence Research Institute on behalf of US based corporations who carry on business in Europe, says that the development risks defence gives an incentive to producers to ensure that they develop the safest products that the most advanced state of scientific knowledge allows.
In contrast, the Consumers in Europe Group has welcomed the proposed abolition of the defence suggesting that it provides a loophole for manufacturers to exploit in trying to force unfavourable out of court settlements on consumers. Furthermore, the discrepancy in the domestic laws throughout the member states means that producers can, in effect, test their products by putting them into circulation in countries where the defence exists.
The difficulty in assessing the strengths of the arguments on this issue is the absence of any evidence as to the impact which the development risks defence has had on product liability claims. However, if it is abolished, insurance companies will have to calculate exposures to risks which the current state of science does not know about. Insurers will either have to phase in a large contingency factor when assessing the limit of the cover they are willing to offer or risk having inadequate reserves to cover potential losses.[LC1]
Extending the prescription period
Under article 10 of the directive, a producer's liability ceases 10 years after the product first goes into circulation. The Commission proposes to extend this period to 20 years. Once again, this has been welcomed by consumer groups and objected to by industry.
A 20 year prescription period would place an upward pressure on premiums which would have to reflect the longer exposure period. In addition, unless manufacturers institute a system of maintaining ancient business records (either by computer file or microfiche), there may be little evidence available to advance in defence to a claim arising 15 to 20 years after a product was put into circulation.
Extending a supplier's liability
Currently, a simple supplier of a defective product is only liable if:
a) a person asks the supplier to identify the manufacturer or own-brander
of the defective product;
b) it is not practicable for that person to make the necessary identification himself, and;
c) the supplier fails to comply with the request within a reasonable time.
The Commission now proposes to extend the simple supplier's liability bylaying down specific time-limits within which the supplier must notify the claimant of the identity of the relevant “producer”.
Placing a specific time-limit on the supplier to respond to a request would, once again, mean that the supplier would need to have in place a system of record-keeping which could be accessed quickly and cover the prescription period (see above). This is something which both brokers and insurers would need to investigate at the time the risk is placed.
In addition, the Commission has suggested extending no-fault liability to every professional in the product liability chain whose activities affect the safety properties of the product. So, for example, suppliers who repackage the product could be liable under the proposed reform. Insurers would, therefore, want to review their existing wordings to see if a policy might respond to product liability risks in a way which was not originally intended. Reinsurers may wish to check that their treaty wordings contain “change in law” and/or “Acts in force” clauses to protect their position in the event of new legislation coming into force which might materially increase their liability.
Making adequate insurance compulsory
The directive, as yet, places no obligation on producers to take out insurance cover for an amount that is adequate to cover damage caused by a defective product. The Commission has suggested changing this.
The pharmaceutical industry has raised significant objections to this proposal. Insurance for pharmaceuticals has, traditionally, been more costly than for other products. The sheer size of the risks involved has meant that obtaining enough insurance coverage at affordable rates has never been easy.
One of the ways pharmaceutical companies have overcome this problem has been by adopting alternative risk transfer strategies such as forming their own captives.
In addition, pharmaceutical companies have become increasingly involved in financing their own risk through products such as insurance bonds. Forcing producers to obtain commercial insurance for risks linked to their products would, therefore not be practical for certain sectors such as the pharmaceutical industry where price and availability of high limits of cover cannot be guaranteed.
Other suggested reforms
The other suggested reforms are:
It is clear that the reforms proposed by the Commission in its green paper will have an impact on insurers and risk managers alike. If the development risks defence is abolished, (re)insurers will face the difficulty of having to calculate exposures and premium for risks that are beyond the current state of scientific knowledge and which may never materialise. Risk managers will be wise, if they have not done so already, to institute effective and efficient document retrieval systems which are adequate to identify all persons in the supply chain and to permit the retrieval, at short notice, of documents for potential claimants spanning, potentially, a 20 year period.
The Commission intends to produce a further report at the end of this year containing its conclusions on the responses it has received to its green paper. Given the marked pro-consumer impetus behind its initial proposals, the likelihood is that any conclusions it reaches will have a similar slant.