China's Toy Scandal Seen As Unlikely

Had the problem been more significant, Ms. Murphy said, things might be different. As an example, she said that had the recent problems with pet food been with goods meant for human consumption, it could have been a severe problem for insurers. As it stands, she said, "I don't think it will turn the market hard."

Rick Jensen, international practice leader for Hilb Rogal & Hobbs, echoed those sentiments, saying the product liability international market "remains pretty competitive" despite the Mattel recall.

"We haven't seen too many negative effects yet," he said.

Mattel recalled roughly 1.5 million toys over concerns regarding lead contamination–about two-thirds of which were scheduled for delivery to the United States.

Fred Perez, a vice president with the claims services firm McLarens Young International, noted that Mattel was effective at minimizing the damage, and only about 30 percent of the recalled toys actually made it into stores.

"The actual exposure is not as great," he said. In fact, he added, "this is more of a public relations nightmare for Mattel," although he noted the company "took a big charge" for the recall.

In fact, Mr. Jensen said many insurers are not involved with a recall at all. "By and large, recall expense is not insured by most firms," he said.

With lead, Mr. Perez said the Center for Disease Control has effectively set the threshold for dangerous levels at 10 micrograms per deciliter of blood–although problems would not become evident unless the actual exposure was to 20 or even 30 micrograms per deciliter, he noted. As a result, he said, "you won't notice that your child has had an exposure."

From a claims perspective, Mr. Perez said the situation can be difficult for Mattel, which would have to look for alternative sources of the lead exposure such as the paint or other materials used in the building of some older homes.

"It's going to be dicey for Mattel to deal with that situation," he added–all the more so given that the potential exposure was through children's toys.

"Parents are a funny lot," he said. "Their kids are sacred, and none of us would be too keen on hearing that it's not their [Mattel's] fault when we've seen the kids chewing on the toys."

That circumstance, Mr. Perez said, only adds to "more of a PR nightmare than an actual claims nightmare" for the company.

In addition, the media attention the problem has received will only make it bigger, as parents will be looking at any problems their children may have through a prism of lead poisoning. "Now they're looking for it," he said, "and they associate it" with the Mattel recall.

Even though the number of claims will rise as parents look for lead poisoning, Mr. Perez noted that parents "will still have to prove their claims" and produce evidence if they wish to collect.

Going forward, the Mattel recall and others involving Chinese or other imported products are not likely to have an effect on rates for product liability coverage, but Ms. Murphy suggested that highlights the difference between insuring for liability relating to products made in the United States and those manufactured elsewhere.

"I think there is, from an underwriting perspective, more transparency for products made in the U.S.," she said. Essentially, she added, it's easier for underwriters to ask questions and get answers from U.S.-based manufacturers than those overseas in terms of the process. "When they can get their questions answered, it's better for the underwriters," and by extension the policyholder, she noted.

What the recent problems will do, she said, is "increase the scrutiny" facing manufacturers and importers seeking liability coverage.

Underwriters will be taking a much harder look at overseas manufacturing, she said, ensuring the products live up to U.S. safety standards.

As a result, underwriters will also have more leverage in negotiating a contract, Ms. Murphy noted. For example, many manufacturers could negotiate out a lead exclusion in previous years, she said, but underwriters will be significantly more insistent in keeping that provision in the current environment.

Mr. Jensen said insurers, and companies themselves, will also be looking at what is being done to ensure similar problems don't occur, or at least how the costs of such a problem might be better shared.

"You have to look at what the companies are trying to do about this, and how they mitigate the risk," he said.

Among the ways a business might seek to spread its product liability risk, he said, is to ask the manufacturers to show some evidence they are covered as well, although he added that getting a manufacturer to purchase coverage is "not always a lay-up."

Mr. Perez said the difference in business culture could be a source of difficulty between American companies and their Chinese manufacturing partners. While it might not be uncommon for domestic firms to include in a contract language requiring the manufacturer to indemnify a vendor in the case of a recall, "business in China isn't done that way."

While American companies will likely step up their efforts to get some form of evidence that their overseas manufacturers have gotten coverage, Mr. Jensen said that would not be as simple as it sounds.

"You'll get pushback from the Chinese" on that issue, he predicted, noting that many will argue they are unable to get coverage. Even if they do obtain insurance, he said, it likely would not be for more than $1 million to $3 million, making it largely a symbolic gesture.

"You could see," he said, that a toy company "wouldn't be helped" by such a small amount of coverage in the event of a major problem.

Ultimately, much of the product liability is borne by the U.S. company through its own program, and Mr. Jensen noted that "how that is put together varies" depending on the company involved and their specific circumstances.

As they deal with an overseas supplier, he said, "all they can do is try to transfer risk."

Should the American company reach an impasse in its dealings with the Chinese company, Mr. Perez said that trying to seek a legal recourse would be difficult. If the Chinese company does not have a U.S. presence, the U.S. vendor would have to file its suit under the Hague Conventions.

This international agreement adds significant requirements to the process, such as having the complaint delivered in the manufacturer's home country and translated into their own language. The latter issue can be even more difficult in China, Mr. Perez noted, where there are "so many different local dialects."

While the recent troubles may create a "suspicion about importing products, especially from China," in the short term, Mr. Perez said there will likely not be any major long-term implications.

"China is too big a market for manufacturers to abandon," he said.

Additionally, he said, the Chinese government does not look kindly on their own manufacturers doing things that could hurt the country's image in the business world.

"The Chinese government is working to make the country a place where people want to come and manufacture their products," he said. Although the government has downplayed the recent spate of problems publicly, Mr. Perez said "you can bet that internally they're going to be looking at this very closely."