August 12, 2008

THE LESSON FROM CHINA’S EARTHQUAKE

Earlier this year a 7.9 magnitude earthquake ravaged central China.  The size of this quake cannot be emphasized enough.  This was an extremely powerful event, but unfortunately for China this kind of event should not be unexpected.

China has severe exposure to earthquake, flood and hail. The country has had 15 earthquakes 7.0 or greater in magnitude, and four 8.0 or greater, since 1900. Anyone placing assets in China must understand the awesome relevance of these statistics.  In addition, China’s great rivers periodically inundate surrounding areas, creating loss of life and property.

Location of assets, avoiding concentration of assets in single locations, and placing of the proper insurance will be critical measures for investors.  Understanding the exposure in any particular area is an exercise that has to be undertaken.  The kinds of resources we are used to here in the US, including the US Geological survey for quake statistics and predictions, and FEMA for the same regarding flood, will generally not be available for China.  Companies also need to focus on the exposures of independent Chinese companies they rely on for contract manufacturing, or those they use as suppliers or major customers.  Destruction of the facilities of those companies will disrupt the flow of goods to and from them.  This is considered a “contingent business interruption” exposure for which there is an insurance market.

For more details on this issue, contact Debora Wu, DWu@LicataKelleher.com 

May 8, 2000

REGULATORS WORLD-WIDE ARE GETTING AGGRESSIVE RE NON-ADMITTED INSURANCE

Imposing Fines, Penalties, Taxes, (Even Jail Term?)

So-called “non-admitted” insurance is prohibited in many countries, but until recently the problem has been given lip service and circumvented to at least some extent by US companies doing business in those countries.  Now, in a push to generate insurance premium tax dollars, foreign regulators have clamped down. 

Some of the countries prohibiting non-admitted insurance outright are China, Brazil, Russia, India, Mexico, Japan and Switzerland.  There are many others as well.  Germany has passed laws which indicate strongly that Directors & Officers Insurance for German subsidiaries should be purchased locally in Germany.

The issue is about whether insurance purchased in, or for assets in, a country is purchased from insurers licensed (or “admitted”) in that country.  Sometimes the only admitted insurers are the insurers based in that country, quite often unknown or unrated entities.  Many US firms purchase only insurance types and limits to meet minimum “compulsory” requirements (such as auto liability) from these admitted insurers, while purchasing the rest of their program from US insurers.  If this is not legal from the point of view of the country where the exposures are located, it can pose the following tax issues:  1. the premium paid in the US  may not be a deductible expense in the US, or in the foreign country either;  2.  non-admitted premiums may be considered additional capitalization of a subsidiary and subject to local taxation;  3. payment of the loss by the non-admitted insurer could be considered subject to local income tax;  4. replacement equipment shipped into the foreign jurisdiction could be subject to import taxes.  Non-tax issues include: 1. penalties may be levied for the purchase of illegal non-admitted insurance;  2. defense by a non-admitted insurer of a liability claim may not be allowed – this would have to be known in advance so policies can to be amended to provide for reimbursement rather than direct defense.  Clearly, structure of the international program has to match actual country conditions and requirements.

Additionally, in some countries civil law and criminal law overlap to an extent we are not used to.  Business managers are jailed for unpaid business debts and for violations of employment laws, for example.  Just within the last few weeks, an employee of insurer American International Group (AIG) was jailed in Mexico over a dispute about whether an insurance claim was covered.  There also have been reports about jail time related to non-admitted insurance in various third world countries.

The bottom line:  one needs to be careful in structuring global insurance programs to walk the fine line between creating a complete and cost-effective global insurance program, and complying with local laws in the countries of operation.

For more details on this issue, contact Debora Wu, DWu@LicataKelleher.com 

March 1, 2008

COMPANIES ARE SEARCHING FOR SOLUTIONS TO CHINESE PRODUCT QUALITY PROBLEMS

Legal avenues and insurance are considered

The flood of problems involving products manufactured in China is causing US customers of Chinese companies to review their legal remedies.  They are finding that legal redress is hard or impossible to achieve.

The product problems are by now well known to those who do business world-wide.  Just a few of the industries and product types affected are food products, toys, medical devices and pharmaceuticals  Defects in the products are showing up very frequently causing the customer company to recall their end product, to suffer product liability claims and to suffer damage to their reputations in the marketplace.

The solutions to this problem are few and are not often satisfactory.

Most buyers of Chinese product have a contract with their supplier which may contain remedies including indemnification of the buyer by the seller.  The problem, though, is proving to be enforcement of the contract.  Suing in the US is often a waste of time as the target company will generally have no assets here, and will probably not respond to the suit,  Suing in China has its own problems, as the plaintiff is then at the mercy of the Chinese courts which may be corrupt at worst and non-responsive at best. 

One suggestion we have always made to our clients is to have the contract subject to Hong Kong law, with Hong Kong as the venue for litigation.  The Hong Kong legal system is westernized and effective.  Also, there is a treaty between mainland China and Hong Kong facilitating enforcement of judgments rendered in the Hong Kong courts.  This treaty also applies to arbitration awards, and arbitration in Hong Kong may be the most effective course of all.

We are watching the development now of an insurance product that might have an application to this problem.  Many or most Chinese companies have not carried products liability insurance, but they are being pushed by their larger customers to purchase it.  In reaction to that we’ve seen the emergence of the Vendor Influenced Products Liability (VIP) insurance product.  The uniqueness of this kind of policy is that the terms and conditions can be influenced if not controlled by the buyer, and this should include the usual “additional insured” status for the buyer where appropriate.  The reason for being of this product is that the influence of the (US) buyer on the policy will make the terms comply with western standards for products liability insurance, and some standardization will be the result.  This is brand new and we will be following its progress.

For more details on this issue, contact Debora Wu, DWu@LicataKelleher.com

November 29, 2007

RISKS OF USING OR DISTRIBUTING PRODUCTS FROM CHINA

This is an update of a news item put on the site in June, 2007

The June news was about food and pharmaceutical contamination that was traced to Chinese suppliers. Beijing has admitted problems with corruption in the country’s food and drug administration. Corruption has affected many other areas of product control.

Now, the Chinese government, in the form of the General Administration of Quality Supervision, Inspection and Quarantine (the product quality regulator) has announced a massive crackdown. Almost 1000 people have been arrested, criminal cases have been filed, and hundreds of tons of unauthorized products have been confiscated.

Vice Premier Wu Yi made the following statement:

“Local governments of each district, county or city should make sure there are no dens producing or selling fake products in the region.”
Food product sellers have a special product liability exposure which is highlighted by this scenario. This applies to all players in the supply chain from farmers to manufacturers to retailers. Liability arising from death or injury can be substantial, and with products in general, and food products in particular, there is the likelihood that the defective product will affect large numbers of victims, resulting in multiple claims.

With respect to components (or ingredients) purchased from suppliers outside the US, there are the further problems of uncertainty re quality control, and possibly lack of recourse against the supplier. Some foreign suppliers may not have substantial assets or may not carry any or enough product liability insurance (this of course could also be the case with a US supplier). Furthermore, distance and difference in legal systems could prevent recovery. Plaintiffs who cannot reach the ultimate culprit will go after the US company. These same recovery problems would apply to your insurer as it tries to subrogate after paying your claims.

Risk Management

Consider the following in managing your product liability risk:

August 30, 2007

MORE EMPLOYMENT LIABILITY EXPOSURE AS CHINA’S LABOR MARKET MATURES

New Labor Law is Passed

China’s legislature in July passed a wide-ranging new employment law, strengthening protections for employees, and at the same time adding another layer of red tape for employers.

China is a victim of its own success. As more and more manufacturing takes place in China, drawn by low wage rates, inevitably its labor market begins to mature along with all the symptoms of such maturity.

Of course one of the symptoms is rising wages and resultant rising manufacturing costs for outsourcers. Along with wages, though, come more and more employment regulations which foreigners must comply with at the risk of fines and liability for non-compliance.

The maturity of the Chinese labor market involves regulation concerning hiring and firing (including the push towards unionization), responsibility for employee injury, and the payment of certain wage rates.

This latest law changes the labor market in the following ways:

• Enhances the role of the Communist Party monopoly union

• Provides government oversight of workforce reductions

• Requires written employment contracts for every employee

• Limits the use of part-time and temporary labor

The full impact of the law is yet to be known as only a summary of the provisions has been released, not the full text.

Employment practices liability, an exposure that did not exist in China in the past, will continue to grow as a concern. For those who stay or expand in China, whether and how this exposure should be managed is something that must be seriously considered.

For more details on this issue, contact Debora Wu, DWu@LicataKelleher.com