The implications of rising cross-border e-commerce on product liability insurance
Introduction
The fast development of e-commerce over the past decade has transformed the global trade and business landscape. It was estimated that in 2019, e-commerce already made up one quarter of global retail sales.[1] The outbreak of the COVID-19 pandemic added further momentum to e-commerce, with some markets reporting almost five-times faster growth in e-commerce sales in 2020, compared to the pre-pandemic level.[2] E-commerce has brought significant change to many lives, even becoming indispensable to many consumers.
Alongside this trend, we have seen the boom of cross-border B2C e-commerce, as consumers relish newfound freedom in being able to shop online anytime for products from anywhere in the world. Globally, the cross-border B2C e-commerce market is estimated at USD 793 billion in 2020 and is projected to grow at a CAGR of 25% to 2030.[3] This has helped many small and medium-sized enterprises to expand their revenue and customer base, as otherwise, they would be limited by high distribution costs when reaching overseas customers.
Figure 1: Online retail sales of goods and services, China
Source: CEIC
Development is most vividly captured in the fast growth of the sector in China. Domestic B2C e-commerce, as measured by online retail sales, reached CNY 13.1 trillion or USD 1.9 trillion in 2021 (see Figure 1). Moreover, both inbound and outbound cross-border e-commerce have witnessed substantial growth.
Product liability insurance
The proliferation of cross-border e-commerce has brought various liability issues, complicated by numerous distribution models and legal regimes. A significant share of cross-border e-commerce is believed to be transacted through online platforms, and operators increasingly require insurance cover for sellers on these platforms. Amazon, for instance, requires a minimum of USD 1 million per occurrence and USD 1 million aggregate limit of commercial liability insurance, including product liability insurance.[4]
Regulations on product defect and liability have evolved over the years, striving to balance the interests of both consumers and manufacturers; by offering consumers appropriate venues to redress any damage suffered, without stifling innovation or increasing costs for producers. Yet, relevant laws and regulations still vary significantly across the globe, and it is imperative that sellers in these markets, whether through e-commerce or traditional outlets, should be aware of the potential liability from defective products.
Furthermore, the nature of cross-border e-commerce brings with it some unique challenges. For instance, most sellers are SMEs from emerging markets, who otherwise would not be able to afford access to key overseas markets. They are likely limited by a lack of resources and knowledge of legal regimes in these destination markets, with most sellers not having a local presence on the ground. Many transactions are small in size, but large in the number of orders. The need for “speed to market” is often considered critical to success. These combinations could significantly disadvantage cross-border e-commerce sellers, should there be claims against them over defective products.
Considerations for exporters to the US and EU
The US and EU are among the biggest consumer markets globally, with retail sales hitting USD 6.6 trillion and USD 3.5 trillion respectively in 2021. As a result, many cross-border e-commerce sellers aim to move their products to the US and EU markets. Yet, sellers need to be aware of the differences in the US and EU liability regimes compared to their own. Below I highlight some unique features of the US and EU liability regimes (see Table 1 for a summary of the key elements of product liability regimes in the US and EU).
1. Defective products and strict liability
In the US regime, defects are distinguished into manufacturing, design, and warning defects. In the EU, a product is deemed defective when it does not provide the safety which a person is entitled to expect, taking all circumstances into account, including: (a) the presentation of the product; (b) the reasonable, expected use of the product; (c) the time when the product was put into circulation. Warning defect is largely missing from the EU definition, but courts in individual markets can still consider this.
While negligence is sufficient to warrant liability for defective products, the lack of it does not exempt the producer or the manufacturer from liability. Determining liability requires the following three elements: first, a defect in the product. Second, the consumer or their property suffers from damage. Third, there is a causal link between the defect and the danger or damage. Notably, this does not require the product manufacturer (or the seller) to show negligence in its own way. Both the US and EU regimes practice this kind of strict liability, which does not require the element of negligence to render a manufacturer or producer liable for defective products.
2. Jury system
The use of juries for civil cases like product liability is also common in the US. Juries are used in many jurisdictions, but usually, they are only used to deal with criminal and not civil cases. In the United States, juries are not only used in criminal cases, but also in civil tort cases. That means the jury decides whether the defendant is liable, and the size of compensation awarded to the plaintiff.
In many cases, the first award could come at a high level, eventually coming down to a more reasonable level after appeal. Yet, the jury system is commonly associated with rising claim costs and so-called “social inflation”[5] in liability cases in the US. Many factors could have contributed, including sympathetic juries siding with the plaintiff against large corporations, the increasing use of applied psychology tactics by the plaintiff’s bar, and the jury’s rising consciousness of social justice. Partly as a result of concerns about the risk of high awards sanctioned by a jury, many product liability cases are reluctant to go to trial and are thus settled out-of-court.
3. Joint and several liability
The appropriation of responsibility and compensation can also be disproportional in the US and EU product liability regimes. While the court would allocate responsibility to each defendant, the appropriation of compensation could be entirely out of step with each defendant’s share of responsibility. The concept of joint and several liability dictates that if several defendants are jointly liable for the damage suffered by the plaintiff, the latter can claim full compensation from any of the defendants. This means that a defendant who is only deemed to bear 20% of the responsibility could be liable to pay the full compensation. This is particularly the case when the other defendants lack the financial resources to reimburse the plaintiff.
This “deep-pocket principle” emerged in response to cases where defendants went bankrupt and left the plaintiffs unable to recover their due share of compensation. For better consumer protection, the principle requires those who can afford it to make up the deficit from those defendants who could not pay.
4. Class action
The use of class action is more prevalent in the US, while the absence of such recourse in the EU has prompted considerations to revise the “collective redress procedures”. Class action is particularly relevant to cross-border B2C e-commerce, which is dominated by a large number of transactions of relatively small values. This fits the use of class action to redress damages to customers in case of defective products.
Wherever there are numerous victims suffering relatively minor damages, a class action litigation could be chosen to avoid over-burdening the legal system. Some features in the US could potentially raise the likelihood of class action and inflate compensation. The first is linked to the contingency fee system of lawyers, which incentivizes litigations, particular those with the potential of a high award. The proliferation of litigation funding in the US also enables the emergence of more class action litigation.[6]
In the EU, the European Parliament and Council adopted the EU Directive 2020/1828 in November 2020. This will pave the way for the standardisation of mass torts across the EU, and more representative actions for injunctive measures could emerge upon the enactment of the Directive in 2023. Nonetheless, the Directive also strives to balance the interest of consumers against that of the producers. This is done through measures to limit abusive litigation, avoid awarding punitive damage, and lay down rules on the designation and funding of qualified entities.[7]
Conclusions
This is a long explanation for why Amazon would require sellers to take out product liability insurance, but here we are. Even though our daily lives are gradually returning to normal as societies adjust to the evolving pandemic, the shift to online shopping is widely expected to set to stay. Consumers expect seamless and personalised shopping experiences. The mix of distribution channels will become more diverse, including BOPIS (buy online – pickup in store), social commerce (consumers using social media to make online purchases) and D2C (direct-to-consumer brands). All of these will in turn support more cross-border e-commerce in the years to come.
This would represent new and exciting business opportunities for enterprises along the e-commerce value chain. Insurers, for instance, will likely see more demand for product liability insurance, as well as other solutions that can help to address sellers’ pain points (see Figure 2). Yet, it is also imperative, as explained earlier, that insurers and their clients are well informed of the local regulatory requirements and liability regimes.
Figure 2: Most problematic pain points in cross-border e-commerce
Source: Cross Border, the disruptive frontier, Accenture Post and Parcel Industry Research 2019, Accenture.
Underwriting overseas product liability insurance for clients selling to the US and EU comes with typical challenges, including the lack of historical data, internal underwriting capacity and capability, and significantly, the long-tail nature of the business. Indeed, it would be a grave mistake to assume that US liability will be curtailed in one or two years. For a case to work through the US judicial system typically takes a very long time, sometimes taking five years or more. For instance, the discovery period could take up to two years, with both sides of litigation working through evidence. This is one of the reasons settlements prove popular, saving parties from going through lengthy and expensive litigations. However, for cases with large (or outsized) awards, settlements can take more than two years, as quickly reaching an agreement on large claims is challenging.
It also helps if we keep up-to-date with evolving consumer behaviours and expectations in different markets, ensuring we have the necessary expert knowledge of different markets and liability regimes.
Table 1: Key features of the US and EU product liability regimes
Note: Some sectors are governed by dedicated regulations like food and drugs safety regulations.
[1] Source: “Solving the paradox of growth and profitability in e-commerce”, McKinsey & Company, 30 December 2021.
[2] For example, in the UK, e-commerce growth increased almost fivefold in 2020 compared to the 2015-19 average. Increases averaged around two times in Germany, India, France and Japan, and three times in the US. See “How e-commerce share of retail soared across the globe: A look at eight countries”, McKinsey & Company, 5 March 2021.
[3] Source: Cross-border B2C e-commerce market, May 2022, ReportLinker.
[4] Source: Amazon Services Business Solutions Agreement, amazon seller central.
[5] Social inflation is deemed a lesser problem for product liability insurance than other lines like commercial auto, medical malpractice and directors & officers liability.
[6] Litigation funding companies typically invest in litigation by funding legal action in return for a share of successful awards. It is estimated that the market for third-party litigation funding (TPLF) amounted to USD 17 billion in 2020, of which half was invested in the US. Source: US litigation and social inflation, Swiss Re Institute, December 2021.
[7] Directive (EU) 2020/1828 of the European Parliament and of the Council of 25 November 2020 on representative actions for the protection of the collective interests of consumers and repealing Directive 2009/22/EC (Text with EEA relevance), EUR-Lex
[8] See: Liability of defective products, European Commission
[9] Strict liability means if a defective product results in damage to consumers or their property, the producer or manufacturer has to compensate the consumers irrespective of whether there is negligence or fault on their part.
[10] Patrick Corcoran, “Collective products liability actions in the European Union and the United States: A Vioxx case study”, Journal of International Law and Politics, 6 December 2020.
[11] Where several agents are liable for the same damage, a plaintiff can claim full compensation for the damage from any of them. See Council Directive (85/374/EEC).
