By: Christopher Appanah, Head of Claims – Liabilities, Bryte
Recent global changes have exposed businesses to risks that affect all facets of their operations.
This has compelled companies to identify effective partnerships with insurers that can mitigate some of that risk, and provide risk management solutions, and valuable advice. This is intended to protect the business against the potential negative financial consequences of the insured risk.
Liability claims against a business have often been overlooked and not adequately catered for in the business insurance portfolios. As a result, companies are increasingly becoming vulnerable to liability risks that threaten their continued operation. For instance, the potential liability risk a manufacturer may face as a result of product defects that cause harm to consumers may result in a barrage of liability claims against the manufacturer. Such claims may result in extreme financial stress and a possible shutdown of operations.
The insurance industry expects global liability claims to grow in frequency and impact annually. This growth in liability claims may be attributed to factors such as industrialisation, developing systems, digitalisation, consumer enlightenment and financial impacts due to macroeconomic volatility. The propensity of third-party claimants to pursue liability claims through the courts has also increased.
In light of this, it is vitally important that businesses ensure that their risk mitigation strategies include measures to effectively damper the impact of liability claims on their balance sheets and operational longevity.
Product risks and recalls, defective workmanship, slip and trips
The expectation of producing quality products cost-effectively continues to be threatened by global factors that heighten risks for businesses. Global manufacturing, supply chain complexities, and challenges to quality controls increase the likelihood of more large-scale recalls.
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A number of local businesses have encountered tremendous product recall challenges, with one of the country’s biggest packaged goods companies reporting over R600 million in losses due to its recall of canned vegetable products. A similar situation was experienced by a large, processed food manufacturer which resulted in consumer illness and deaths.
The automotive industry has been synonymous with encountering cases of recalls, which are triggered by components failing, resulting in parts defects. While most of these recalls are done proactively, there have been instances where recalls have been due to customer injury or death.
Consumer legislation imposes strict liability on businesses manufacturing products for the man on the street, where such products are defective and cause harm. The risk of liability emanating from faulty products and recall costs can seriously ruin a business’ financial standing and brand reputation. The social impact, in some instances, will follow a financially strong company for years to come if such risks are not adequately mitigated and factored into the insurance arrangements of a company.
Role of the intermediary
There is no doubt that liability risks have climbed up to the top of the list regarding insurance considerations. Brokers should guide their clients carefully to understand where these liability risks may come from, considering the environment that their clients operate in.
Adequate limits are imperative to ensure the client is not left with a large uninsured portion of any claim. Clients should also be educated about their cover and what it can protect them from. Liability indemnity policies are subject to exclusions and conditions that are precedent to cover, so these terms need to be considered in the business risk management framework.
Brokers should work in conjunction with insurers to understand liability insurance products and responsibly advise clients on the terms of such cover.
Insurers want to partner with brokers to ensure clients can navigate around possible risks. Collaboration with brokers and clients assists in creating solutions best suited for their businesses. Understanding in-depth and costly evolving risks creates an appreciation for their role in business survival.