PUBLIC LIABILITY INSURANCE – FOR THE ATTENTION OF OUR BUSINESS CLIENTS
This article is about claims that our commercial clients may receive from third parties, for damages or injuries that our clients may legally be held liable for and how the new Consumer Protection Act may increase the risk of being held liable for such losses.
[Extracts from an article on the CONSUMER PROTECTION ACT 68 of 2008 by Santam – note our highlights but read everything else including our comments in brackets and italics ]
PARTICULARS
The Consumer Protection Act 68 of 2008 (CPA) brings much needed legislation for consumers, but companies, including their insurers, are not feeling quite so excited about the implications of this Act. Any companies that have not yet adequately addressed their processes and contracts to align with the Act may find themselves nastily surprised when the Act is implemented in full on 24 October this year [the concerned minister has extended the implementation date of the act to 31 March 2011]
A lot has been documented in the media during this year to heighten awareness of the Act and we do not intend to repeat what is already available, rather we wish to point out to brokers some of the highlights that will affect the purchasing of liability cover and ensure that they provide their clients with the correct cover to protect them under the Act (It should be noted that wherever the term ‘Supplier/s’ is used in this document, this represents any manufacturer, producer, distributor, importer, exporter, wholesaler, retailer etc. Naturally this description would then also include Farmers in the various roles that they fulfil).
The CPA brings with it vast implications for all businesses whether they are involved as suppliers, importers, distributors and manufacturers or even service providers. We cannot stress enough how important it is that your clients obtain legal opinion on whether their processes, services and contracts are aligned with the Act, [it is safer to assume that you fall under the act and to make sure that you have the applicable cover in place] particularly if they are involved with products that are considered hazardous to humans whether in terms of the operation of the product or consumption thereof.
The remainder of this document will deal with liability insurance implications and what role you, as a broker, should play in making your client aware of the covers that are available in our market and how he/she can minimize the risk that the Act will present from October [actually from 31 March 2011] onwards. Please note that we are merely highlighting some of the main sections that will have a direct impact from a Public Liability (PL) insurance point of view. Bear in mind that under our standard Commercial PL wording there is always a requirement for Third Party (TP) Bodily injury and/or Property damage to have taken place before Damages are payable. Pure economic losses are therefore not under consideration here [this means that consequential economic loss, such as for example missing a flight following an injury, and an important business meeting, and loss of income as a result thereof, is not considered here].
1) Contract Terms and labelling: The Act deals in great detail with unfair, unreasonable and unjust terms used in contracts and agreements, as well as the need to ensure such contracts are issued in plain and understandable language based on the type of consumer who would ordinarily make use of the product or services supplied. Similarly, labels and instructions of use for such products should be reviewed to align with the Act. Suppliers will no longer be able to “hide behind the small print” and where contractual terms have previously enabled them (and their insurers) to deny liability claims, this will no longer be the case.
2) Quality and safety of service and product: The Act places the onus on the supplier to produce a product that is of good quality and safe to use. Brokers should bear in mind that the purpose of the cover provided under our standard PL section is not to replace a product or to redo the work done, but to rather address the consequences of any TP injury or damage caused by a defective product or work. It is considered against public interest to provide insurance to a client for the actual poor work done, as this may cause the repairer to take less care whilst carrying out his/her work, with a view to being paid for the job by their client and then not bearing any consequences due to the insurer making good the poor workmanship.
3) Damage caused by Products (refer Section 61 of the Act): This portion of the Act is by far of the greatest concern to liability underwriters. Prior to the new Act, Retailers and Wholesalers of products were able to deny liability due to the fact that there could be no negligence on their part during the manufacture of the product. Distributors and retailers therefore frequently failed to purchase adequate, if any, Products Liability cover. Under the new Act anyone in the supply process, whether as manufacturer or distributor can be held strictly liable for injury or damage arising out of the product. Manufacturers are therefore also worse off than prior to the Act in view of the fact that previously the injured party had to prove the negligence of the manufacturer in the production of the product. It should be noted however that the use of the words “strict liability” may not be a true reflection as the Supplier does in fact have access to some defence if:
(i) the unsafe characteristic, failure, defect or hazard (“defect”) is wholly attributable to compliance with any public regulations;
(ii) the alleged defect did not exist at the time that the product was supplied;
(iii) the defect is wholly attributable to the supplier's compliance with instructions from its supplier;
(iv) it is unreasonable to expect the supplier to have discovered the defect, taking into account that person's role in marketing the goods to consumers; or
(v) the claim is brought more than 3 years after a specified date, depending on the type of harm suffered.
Only time will tell how successful these defences are when actual cases are brought before court.
Brokers should also note that although this section of the Act is only being implemented in full from October 2010 [actually 31 March 2011], the liability will be retrospectively applied to any goods supplied from 24 April 2010. [This means you should make sure that your liability cover is in order right now, anyway]
The liability under this section of the Act is joint and several and brokers should note that even if their client is able to adequately defend any consumer action by invoking the defences listed above (and thereby passing any payment for damages to the manufacturer), such client may still sit with considerable legal defence costs which, in the absence of Product liability insurance, would not be payable under a standard PL insurance policy.
4) Labelling and instructions:
The standard Products Liability extension has always included the labelling of products as part of the product where such labelling may give rise to injury or damage. This labelling will now become far more onerous with a far greater responsibility applying to the company supplying the product. As mentioned under (1) above, such labels should be written in a manner suitable to the expected consumer of the product in plain and understandable language.
5) Reliance on Disclaimers:
There has always been a varied view on how successful disclaimers [such as “entering At Own Risk”] really are in the defence in court. Under the new legislation, insurers [or your business if you are not insured] will be able to rely even less on such disclaimers. These will only be successfully upheld if the Third Parties’ attention has been very specifically drawn to the disclaimer before he/she makes use of the services provided. In addition such disclaimer must be very clear and worded in a manner that will be understandable by the intended customer making use of the services i.e. the less educated the customer, the more easily understood the wording must be, and the more the Insured must make sure the customer has fully understood the meaning.
We would like to make our brokers aware of the need to ensure that their clients are adequately covered for any liability losses that may arise and would therefore like to draw your attention to the following:
(i) Adequate cover: Brokers should ensure that any clients involved in the supply of any kind of product, whether as a manufacturer, retailer, importer (including farmers) etc, has purchased cover under the Product Liability extension of the policy. This means that even in instances where the insured is mostly engaged in the business of repair or maintenance eg. Plumber or electrician, cover for Products Liability should be provided to adequately cover such artisan in the event of any liability arising out of the products (eg. Geyser, electrical wiring) used during the repair work.
(ii) Defective Workmanship: The Act also applies to services performed in the act of repair and maintenance and anyone working on Third Party property should therefore purchase adequate cover under the Defective workmanship extension.
(iii) Legal Defence Costs: The Legal Defence Costs Extension under the standard PL policy is frequently misunderstood to be cover for legal defence in a claim for Damages. This is not the case, legal defence costs arising out of the defence against a Third Party claim for Bodily injury and Property Damage are included under the Limit of Indemnity (see (iv) below). The Legal Defence Costs Extension on the other hand provides specifically for defence costs where an employee, partner or director of the Insured is criminally prosecuted following contravention of one of the listed statutes. It therefore makes sense that this extension is amended to include this Act as one of the statutes. Our Claims staff have been instructed to apply our Public Liability wording in this manner and the Act will be included in new versions of the wording (after current printed copies of the wording have been used up).
(iv) Limits of Indemnity:
a. Although much has been said above about the liability arising out of products supplied, brokers should realise that their client’s exposure in terms of their ‘General and Tenants’ cover may also have been increased in view of lower possibility of reliance on disclaimers and other contractual conditions.
b. The limit of indemnity should be sufficient to cover any potential Damages awarded by a court of law, as well as the associated legal defence costs (where such costs
arose as part of the defence or the Third Parties’ defence costs).
c. Brokers frequently appear to overlook the fact that the Products Liability and Defective workmanship extensions are limited in the annual aggregate. In other words, the limit of indemnity shown in the schedule is not only applicable to each and every claim but also in total for the period of insurance. Brokers should therefore carefully reconsider the limit currently being purchased. Bear in mind that with liability insurance the premium does not increase in direct relation to the limit of indemnity purchased and it is usually very economical to increase the limit at a reasonable increase in premium.
d. The limits for Products Liability and Defective Workmanship should always be for the same amount in order to avoid unpleasantness during a claim where the cause of the claim could fit under either of the extensions. Ideally the General and Tenants, Products and Defective workmanship limits should all be the same.
(v) Liabilities not covered under Santam’s standard Public Liability wording: whilst a lot has been documented in recent media about the need for broader liability wordings and product recall cover, we would like to point out that the cover provided under the PL section of our Santam Commercial Policy wording is more than adequate for most businesses. Broadform and Recall covers can be sought from specialist liability underwriters in the market, however the high premiums required for these covers usually place these products out of the reach of small to medium businesses.
(vi) Premiums and rating:
Prior to the new Act the consumer had little successful recourse against manufacturers guilty of supplying defective goods or products in view of the fact that negligence had to be proved. Consumers have always struggled to establish negligent manufacture of the product as they are not privy to the manufacturing and quality control of the processes of the manufacturer. This is set to change when the Act is fully implemented and although we envisage a time lag between the implementation and any increase in liability claims, as insurers we [and your business if you are not insured or not amply insured] cannot sit back and wait for claims to start happening before we take corrective actions under our liability portfolio. At the same time we cannot impose premium increases without relevant facts indicating the potential deterioration of loss ratios for this class of business. Liability premiums have been reducing over many years as premium spend was mainly focussed on protecting Asset and Motor risks. In recent years, the market has moved away from true exposure rating (based on Annual Turnover or other means
of measuring Third Party Exposure) to “flat” premiums based on the Limit of Indemnity therefore you paid a specified premium for R1m cover no matter what your exposure or your turnover was]. This has created an unequal situation where businesses with low liability risk are
supplementing the premiums of businesses with high potential liability exposure. Brokers frequently use the lack of liability claims under a policy as a reason to reduce the liability premium. In truth, liability claims should never be of a frequency nature, rather liability claims when they occur lead to lengthy time delays and the need for expensive expert witnesses to establish the lack of negligence on the part of the Insured. When claims occur they usually involve high amounts claimed which can severely affect an insurer’s loss ratio under the liability class of business. The new Act also brings with it the potential for class action claims which may further increase the severity of claims. Only time will tell whether Attorneys will now turn their attention to claims under the Consumer Protection Act. Depending on the nature of a liability claim, the calculation of damages can also become a nightmare depending on the number of Third Parties affected by the defective product.
The implementation of the Consumer Protection Act is once again forcing insurers to return to scientific pricing based on the potential liability exposure of the insured. At Santam we require the following MINIMUM information in order to provide a quotation:
1) Limit of indemnity – to establish the maximum amount payable in the event of a claim.
2) Number of insured premises – The basic (General and Tenants) limit of the policy is payable for each and every claim with no limitation for the period of insurance. The number of premises the insured trades from therefore add directly to the exposure under the policy. Santam uses a sliding scale to increase the premium if the Insured operates for more than one premises, i.e. the basic premium is not merely multiplied by the number of premises.
3) Annual Turnover / Annual Contract Value – this best measures an insured’s exposure to Third Parties, whether in the production or amount of goods sold and supplied, the number of visitors to the insured premises, the amount of time spent at TP premises to carry out work eg. plumbing, electrical work. We therefore request brokers to provide the correct estimated annual Turnover for all requests for new business quotes and increases on current business, particularly where Products liability is concerned. Brokers should note that any under representation of the Turnover figure could be viewed as ‘Misrepresentation’ under General Condition 1 of the policy. The current trend to use the limit of indemnity as a substitute for the Turnover figure will no longer be an acceptable practice.
4) Occupation/nature of the Business – every kind of business brings with it a different hazard in terms of liability, whether such liability may arise, for example:
a. due to Third Party exposure at the premises of the insured eg. the office of, say, an attorney in comparison with the crowds experienced at shopping centres and stadiums.
b. from the nature of a product supplied eg. a business supplying books in contrast to the supply of pharmaceuticals
c. the type of work being performed eg. a workshop working on bicycles versus a repairer of aircraft.
Brokers should always ensure that sufficient information is provided to ensure that the underwriter adequately understands the nature of the business to determine the correct premium and terms.
5) Imports and exports – where the product supplied ends up, and where the goods used in the production of such products originate, are of equal importance. Most of you would have seen in recent media, the reports regarding products (eg. dog food and milk powder) imported from China, these have caused grave concern for goods received from that country, and at the same time any kind of recovery from suppliers in China is near to impossible [if an imported element of your product caused injury or damage your business can be held liable and if you are not insured or not amply insured this recovery from your foreign supplier is then your problem].Similiarly, the markets our clients supply to are different in terms of legislation, consumer protection, language etc and all of this brings potentially complex claims to the insurer that are not of concern iro of products originating entirely in the RSA and supplied to South African customers.
6) Nature of the product: many products sold and supplied are commonly used and therefore easily understood by the underwriter. More and more frequently however fast moving technology means that new products are being developed at such a rate that Underwriters may need to make enquiries from the broker to ensure that they fully understand the liability risk implications of each product. We request brokers to assist in whatever means possible to provide our underwriters with a clear understanding of the liability risks associated with the product. The labelling and instructions provided with the product can often increase the liability risk and sometimes the nature of the product may mean that we need to obtain copies of such labels and/or instructions to ensure that the risk can be assessed in full.
Santam is currently not looking at any kind of general liability premium increases. We are however endeavouring to apply rating in a fair and appropriate manner. If we find that this is not sufficient to counteract the effects of the Act, we will regrettably be forced to look for increased premium contributions from our Insureds. Unfortunately, as has already been acknowledged in recent media, such increased premium costs will ultimately be borne by the very Consumer who this Act sought to protect as higher premiums will invariably be passed on to the Consumer in the form of price increases on products.
(vii) Questionnaires:
Brokers frequently complain about the time spent by clients to complete lengthy questionnaires. Whilst it is possible for us to quote in most instances subject to the basic information supplied under (1) to (6) above, where we are dealing with occupations and products considered to be high hazard or high limits of indemnity we will have no option but to insist on a questionnaire being completed in full, prior to quoting. Questionnaires provide the underwriter with invaluable information to enable them to accurately assess the risk. We have recently redesigned our Products Liability. [We will supply questionnaires to all our commercial clients as this will serve the purpose of highlighting specific liability risk areas that you may not have thought about]
(viii) Changing of Insurers:
Consumers’ appetite for insurance cover is currently very much price focussed, hence the frequency with which policies move amongst insurers and brokers alike, in search of the lowest premiums. Whilst we cannot prevent this, we would like our brokers to be aware, and likewise make their clients aware, of the dangers of moving around policies with Public Liability cover. Liability cover is nowadays mostly issued on a claims made basis and brokers frequently fail to recognise the implications of this, particularly of the retroactive date applicable. In order for the insured to be correctly covered, the retroactive date of the original claims made cover should always be carried forward from insurer to insurer. The difficulty arises when over a couple of years many insurers have participated on a particular policy during different periods of insurance. The argument may well arise regarding when an actual event that gave rise to the claim (ie. before or after the retroactive date) actually took place, whether the insured was aware of it, whether the previous insurer had already been notified of the potential claim and should therefore pay even though the policy has since been moved to another insurer. All of these complexities should be considered by brokers particularly where companies with a potential long tail liability exposure (eg. suppliers of food and other products for human consumption, nursery schools, contractors) or high limits of indemnity are involved.
(ix) Liabilities assumed by contract/agreement:
a. Brokers must remain aware of Specific Exception 5 which excludes any liability assumed by agreement. Any liability assumed by the Insured under a contract which changes the liability under common law (or legislation) would be excluded unless specifically agreed to by the insurer. If the insured business falls within the definition of a ‘Consumer’ under the Act (Companies above a certain threshold, currently shown as R 5 million as per the recent draft regulations, will fall outside the definition of consumer), the Insured may be able to get such a contract waived based on the contract being unfair, unreasonable and unjust.
b. Similiarly, where our Insured is a retailer, such a company should not agree to sign a contract with the manufacturer where the manufacturer waives their liability or where the retailer specifically assumes liability on behalf of the manufacturer. In fact, the retailer should rather ensure that the contractual conditions specifically allow his company recourse against the manufacturer for any claims brought against the retailer/distributor due to a defect in the product.
