United States: Representative Actions And Insurance: Some Looming Traps For Product Manufacturers

Introduction

As reported in our earlier blog, a compromise has recently been reached in respect of the content of a new EU Directive on consumer collective redress (the Directive), with the final directive likely to come into force by the end of the year and member states to transpose it into national law thereafter.

In broad terms, the Directive will allow not-for-profit consumer interest groups (such as Which?) to bring cross-border representative actions against product manufacturers on behalf of consumers, on an "opt-in" basis. In addition, the Directive requires member states to establish procedures for national representative actions, which can be on an opt-out basis. Once in force, the Directive is likely to increase the risk of consumer claims against manufacturers, allowing, as it does, for large groups of claims to be brought together EU-wide. A claim brought under the Directive can include a claim for damages for losses arising from defective products, as well as claims for the costs of repair or replacement of the products themselves. Although the Directive does not allow for the creation of US-style plaintiff attorney-driven class actions, it will make the prospect of large numbers of relatively low-level claims being brought more likely than before.

This will be a concern for manufacturers and their insurers.

Insurance protection

Most, if not all, product manufacturers will have some form of product liability insurance to which to turn should the Directive lead to a spike in claims; some may also have product recall or product efficacy insurance.

There are, however, a number of issues of which policyholders should be aware when considering the protection offered by their insurance in this context.

Scope of cover

For product liability insurance, it is important to bear in mind the scope of cover available: broadly, this type of insurance will cover losses arising from property damage or personal injury where those losses have been caused by the product in question. However, these types of policy will almost always exclude the cost of repairing or replacing the product, the costs of any recall which might be triggered by a consumer representative action and any costs arising from a failure of the product to perform its intended function. As such, while product liability insurance will be important if a representative action is based on some failing in a product which causes injury or damage to property other than the product itself, it is unlikely to provide protection in circumstances if the product is simply defective and requires repair or replacement.

Manufacturers should, therefore, also consider, if they have them, their product recall policies, which usually cover the first party costs incurred during a product recall, and/or product guarantee policies (also known as product efficacy insurance), which typically provide cover for products which fail to perform their intended purpose, including the cost of repair or replacement of the product itself. Generally, the take-up of these types of policies is less widespread than product liability insurance, but such policies may become more attractive if, as seems possible, the Directive increases the number of consumer claims which trigger product recalls or merely seek the cost of a replacement product, as opposed to any more extensive damages.

Notice

Whichever type of policy might respond, a key consideration for any claims brought under the Directive (as with any claim) will be the requirement to give notice under the relevant insurance contract. Some product liability policies (and most recall policies) are what are known as claims made policies (where the trigger of cover is a claim being made against the insured (or the recall occurring) during the policy period). Others are occurrence based (where the trigger is the event which causes injury or property damage). In either case, notification may be a condition precedent to liability, meaning that a failure to notify might be a bar to recovery.

While in many cases giving notice of claims made under the Directive will be straightforward, a particular issue may arise due to the typical aggregation language found in product liability policies, which provides for the grouping of claims arising from the same defect or set of circumstances. Depending on the position which is ultimately taken by member states in relation to the degree of similarity required to group claims brought under the Directive, we can foresee disputes with insurers arising as to whether claims deemed to be within a class for the purposes of the Directive will automatically also be treated as a single claim under the relevant insurance policy. This may give rise to uncertainty for policyholders as to when to give notice, whether notice should be given in respect of one or several losses, and whether notice should be given under one or several different policy years.

What next?

While there remains some uncertainty as to precisely how the Directive will be implemented by member states, what is clear is that once it is implemented, the potential for EU-wide mass products litigation, and all the attendant risk and cost, will increase. Now is the ideal time for manufacturers to consider the possible effects of the Directive on their business and risk profile and to ensure that the insurance protection they have in place is fit for purpose.

If the Directive does lead Europe towards a US-style class action environment, the potential for significantly increased premiums, the need for much higher limits of insurance and increased insurer scrutiny of claims cannot be ruled out.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.