Risk reduction strategies for importers

Companies importing goods from any foreign country – including the world’s manufacturing hub in China – need to have comprehensive safeguards in place to ensure product safety and thereby lessen their liability and recall risks.

As the number of companies importing products from manufacturers in emerging markets continues to increase with advances in technology and cost pressures, so too do their risk exposures. This has been evidenced in recent years by numerous large-scale product recalls in both the US and Australia for potentially unsafe imported products. These products have ranged from children’s toys (eg Bindeez beads laced with toxic chemicals and face paint containing unsafe lead levels) to tyres, clothing and even pet foods (responsible for the deaths of many much-loved cats and dogs in the US and elsewhere).

According to the US Consumer Product Safety Commission (CPSC), approximately two thirds of recent US product recalls have been for imported products – a large majority of them manufactured in China. Australian companies importing products from any foreign country need to be aware of their ultimate responsibility for product safety under the Trade Practices Act 1974. Safety-related recalls – voluntary or otherwise – are the responsibility of the supplier under the Trade Practices Act.

What’s more, if the foreign manufacturer or supplier doesn’t have a place of business in Australia, any company selling their products is vulnerable to potential liability litigation and should take steps to protect themselves. In this situation, your importer client is likely to be treated as the manufacturer and held liable for all aspects of product design and safety in litigation.

While consumers can take action against both the supplier and manufacturer, your clients are at increased risk in the absence of insurance or indemnity protection from the foreign manufacturer.

So which clients are at risk?

Affected clients include manufacturers that procure some portion of their products from a foreign source, as well as wholesalers and retailers that import all/most of the products they sell, including private-labelled goods. Whether companies import all or only a small portion of their products, they need to be aware of – and take responsibility for – risks at every step of the process.

Failure to effectively manage these risks could have serious consequences ranging from liability litigation to expensive recalls and serious damage to the company’s reputation and brand.

Prevention is critical. Your clients need solid strategies to assess and manage risk, and they should follow their plans with ongoing vigilance.

Beware of ‘hidden’ risks

Importers need to be aware of their risks by looking at the entire lifecycle of their products – starting with design if this is outsourced offshore. There also could be points in the manufacturing process where the risks extend beyond the foreign manufacturer, for example when production and/or raw material procurement is outsourced to other vendors.

Unless the importer sets forth requirements for the foreign manufacturer or supplier to notify them of and make transparent these types of situations, they are likely to be unaware of additional risks stemming from subcontracting and other material changes.

In the event of a recall, there are several legal hurdles your clients will need to overcome in their attempts to join a foreign manufacturer to pay for the resulting losses. Rarely can foreign manufacturers provide any Certificates of Insurance showing coverage in the importer’s jurisdiction. Even where they can, rarely do they have adequate limits.

In turn, your clients are likely to shoulder the ultimate liability and responsibility for ensuring the safety of the products they import, thereby becoming the prime target for litigation resulting from product design/development and manufacturing risks.

Prevention through solid risk-management strategies

In light of this, importers must have a rigorous product-liability risk management plan in place with redundant, multiple layers of controls that address a product’s entire lifecycle. Your client might also require the services of legal counsel or outsourcing specialists familiar with the legislative, cultural, regulatory and other issues in the originating country or countries. These factors are significant in determining the amount of oversight and the level of vigilance needed to control product quality.

An importer’s product liability risk management plan should include:

  • Written contracts with appropriate protection, including indemnification, intellectual property protection and dispute arbitration in case of non-compliance with contract requirements and subsequent costs of recalling defective or unsafe products
  • Qualified suppliers with thorough quality management programs verified through in-person plant visits
  • Clear product specifications and quality assurance to help ensure the foreign manufacturer is clear about product requirements
  • Product warnings in inspection checks – to ensure they are clear, commensurate with the degree of hazard and in compliance with all applicable industry and government standards
  • Being aware of supply chain risks through continuous monitoring and testing.

See checklist below for other criteria that need to be addressed.

If a foreign manufacturer is responsible for the complete product, including design, extra care must be taken to review product specifications for compliance with industry and governmental standards and regulations. This is particularly crucial for regulated products, such as children’s toys, jewellery, textiles, food and pharmaceuticals. It goes without saying that the cost of liability, coupled with the far-reaching expenses of a recall, can be staggering.

Although product recall insurance may be available, it can be expensive and have restricted limits. In addition, most insurance does not help when it comes to damage to a company’s reputation and brand. Your clients are much better advised to focus on the preventative measures they can take to help ensure the safety and quality of their imported products. In the end, what really matters is the company’s brand name on the product and the promise of quality that goes with it.

Importer’s top 10 check list

  1. Perform due diligence analysis of the foreign manufacturer before entering into an outsourcing or distribution arrangement, including an on-site visit and a review of references. While many world-class manufacturers and distributors in emerging markets deliver quality products, selecting the right supplier in a foreign country can take considerable time and effort.
  2. Consult competent legal counsel familiar with laws in the supplier’s country in all contract negotiations, particularly for any patents, copyright and intellectual property issues.
  3. Insist on a written contract to document all the terms and conditions of the outsourcing arrangement – this should include all specifications, compliance requirements, costs, logistics, quality inspections, certificates of guarantee, returns/recalls and warranties.
  4. Explore and negotiate insurance protection from the foreign manufacturer under a valid and collectable insurance policy with a reputable insurer with adequate limits and indemnity terms whenever possible.
  5. Perform an on-site assessment of a supplier’s facility before finalising outsourcing arrangements.
  6. Insist on prior notification and approval for any changes in materials, production processes, subcontractors and specifications.
  7. Arrange for on-site sampling and periodic audits by your company’s personnel or by reputable third-party organisations with an Australian affiliation.
  8. Perform additional sampling and inspections of incoming shipments at the port(s) of entry and before the distribution of products into the chain of commerce.
  9. Implement a post-sale monitoring program that includes tracking of customer complaints and trends.
  10. Develop and implement a product recall and crisis communications program for brand protection.

This story was authored by Ashutosh Riswadkar, Liability Line of Business Director for Zurich Risk Engineering in North America, with the help of Product Liability Line of Business Director Peter Dion and Senior Risk Engineer David Jewell.