20 August 2020

CRE: EU’s collective redress directive to cause risk and insurance problems for manufacturers

Europe’s new collective redress directive, which is due to come into force by the end of the year, is a cause for concern for the manufacturing sector and poses both risk management and transfer questions, warns Sam Tacey of law firm Cooley.

Europe’s new collective redress directive, which is due to come into force by the end of the year, is a cause for concern for the manufacturing sector and poses both risk management and transfer questions, warns Sam Tacey of law firm Cooley.

The directive opens the door to consumer representative actions and allows not-for-profit consumer groups to bring cross-border actions against product manufacturers.

“The directive is likely to increase the risk of consumer claims against manufacturers, allowing, as it does, for large groups of claims to be brought together EU-wide,” said Mr Tacey.

He added that the directive will allow claims for damages arising from defective products, as well as the costs of repair or replacement of products.

 “Although the directive does not allow for the creation of US-style plaintiff attorney-driven class actions, it will make the prospect of large numbers of relatively low-level claims being brought more likely than before,” Mr Tacey said.

Manufacturing insurance buyers will hold product liability insurance and some may also hold product recall or product guarantee/efficacy insurance. But Mr Tacey warned manufacturers to consider the scope of cover in place, with many product liability policies excluding the cost of repairing or replacing products and the cost of recall.

 “While product liability insurance will be important if a representative action is based on some failing in a product that causes injury or damage to property other than the product itself, it is unlikely to provide protection in circumstances if the product is simply defective and requires repair or replacement,” he said.

Take-up of product recall policies is generally lower. But Mr Tracey advised that where they are in place, manufacturers should consider cover for first-party costs in product recall polices and think about taking out product guarantee policies, which cover products that fail their intended purpose and include the cost of replacement or repair.

 “Such policies may become more attractive if, as seems possible, the directive increases the number of consumer claims that trigger product recalls or merely seek the cost of a replacement product, as opposed to any more extensive damages,” Mr Tacey said.

With the directive due to come into force by the end of 2020, it will then move to member states to implement. “The potential for EU-wide mass products litigation, and all the attendant risk and cost, will increase. Now is the ideal time for manufacturers to consider the possible effects of the directive on their business and risk profile and to ensure that the insurance protection they have in place is fit for purpose,” said Mr Tracey.

 “If the directive does lead Europe towards a US-style class action environment, the potential for significantly increased premiums, the need for much higher limits of insurance and increased insurer scrutiny of claims cannot be ruled out,” he added.

CRE