Product liability trends and their effect on insurance claims

Many people expected product liability claims to mushroom following the implementation of the Product Liability Directive, 85/374/EEC, which was implemented in the United Kingdom in 1988 by Part I of the Consumer Protection Act 1987. In fact, no European member state has experienced an increase in claims following implementation of the Directive. There are still only a handful of reported decisions on the Directive throughout Europe. It could have been proved, for example, that the change in the law to introduce strict liability alongside liability in negligence (fault) and in contract had a significant effect on the incidence of claims, since the Directive was implemented into member states at different times over a 10 year period. However, in no member state have there been reports of increased claims following implementation. One therefore concludes that whilst strict liability undeniably increases the risk of claims, by extending the law to introduce what was a new legal theory in most European jurisdictions, it has itself not had a major impact on the level of product liability claims.

Could it be, despite consumer lawyers’ protests, that many products are safe and becoming safer? That was the conclusion I reached in the European Commission’s 1995 study, principally as a result of increased European product regulation, standards and quality systems.

Strict liability has, of course, existed in USA for 50 years. Why is it that there are many more product liability claims in USA than in Europe? The reasons lie with structural factors relating to the litigation and court systems, notably:

The ability of lawyers to advertise. This can lead to lawyer-led litigation, particularly the development of multi-party claims (what are referred to in USA as class actions or in the UK as group actions) involving a large number of individuals suing in respect of similar injuries caused by similar products. It is significant that there is extensive advertising by lawyers in USA (any visitor to that country will have seen extraordinary and potentially inflammatory advertisements on television) but this is not permitted in European jurisdictions - other than the UK: the Law Society’s rules were relaxed to permit advertising by solicitors in the late 1980s. It can only be a matter of time before advertising is permitted in other European states.

Specialisation by lawyers. England and Wales have, unlike many European states, developed an identifiable and increasingly expert group of plaintiff lawyers, who are generally members of the Association of Personal Injury Lawyers (APIL). Most of them are members of the similar US organisation, the Association of Trial Lawyers of America (ATLA). Attempts to interest colleagues in Europe have not met with huge support but the US and now UK phenomenon of a polarisation between plaintiff and defence lawyers is likely to spread. Aggressive plaintiff lawyers are actively looking for potential cases. Transport accidents and pharmaceutical cases are clearly here to stay. But lawyers jump on an increasingly diverse range of products - cosmetics, motorcycles, hi-fi, motor vehicles, tobacco, medical devices.

Are awards made by judges or juries? Juries make decisions in USA on both liability and quantum, at least initially. In Europe, all decisions are by judges. This must act as a deterrent to unmeritorious or badly prepared claims.

Levels of damages. Awards are generally significantly higher in USA than in Europe. There are confusing differences and complexities between the calculation of damages in European systems and this might have an effect on the incidence of claims. In general, awards in Ireland are generally the highest in Europe and can be low in some Southern or Northern European countries.

Punitive damages. Unlike USA, punitive damages are not available in any European jurisdiction. However, the Law Commission recommended in December 1997 that the law should be amended so as to permit exemplary damages in England and Wales. Whilst the proposals included some safeguards, any movements by the Government to implement this recommendation should be viewed with considerable alarm.

The loser pays rule. This rule has little practical significance in USA (although it is sometimes used), whereas it applies to a greater or lesser extent in most European jurisdictions. Clearly, the existence of this rule operates as a barrier to entry to litigation, based on the public policy of discouraging frivolous or low-value claims and also of encouraging early settlement.

Efficiency of the litigation process. Litigation procedures that are lengthy, complex and expensive may deter all but the most determined claimants with high-value claims. A number of governments and the European Commission have been pursuing the policy of increasing consumers’ access to justice. As a result, litigation procedural rules have been reformed in Italy and the UK. The Woolf reforms in UK are based on making litigation swift, simple, cheap and transparent in relation to issues, evidence and costs. A very important consequence of the introduction of the new rules in April 1999 will be that manufacturers and insurers will need to ensure that they have personnel and systems that are capable of responding to claims extremely quickly. Compliance with the new pre-action protocols will require immediate action in assessing claims and collating and disclosing documentary and oral evidence. Are people prepared to cope with the huge culture shock? Is it also time for insurers, manufacturers and consumers to join together in lobbying for European harmonisation of litigation procedure - would this not have a huge saving on costs?

Methods of funding plaintiff lawyers. The economic incentive for plaintiff lawyers to become involved in a claim - and particularly for them to seek to generate clients through advertising for claimants on a particular issue - is widely recognised as a major factor affecting the incidence of claims. The US contingency fee system clearly provides a huge incentive for lawyers. Not surprisingly, an arrangement under which a lawyer can receive upwards of 30% of the damages or settlement, and perhaps 60%, have led to considerable public unease when the lawyer’s fee in a class action (and the amount by which the claimant’s damages are reduced) can run into many millions of dollars. The current English pre-occupation with fat cat legal aid lawyers pales into insignificance by comparison! Within Europe, contingency fees are in fact allowable in a minority of European states but very rarely used. Instead, some form of state support for impecunious claimants is available in every member state, although the details differ. In some states, the Bar will allocate a lawyer to act on a pro bono basis. In other states, government funding (legal aid) remunerates the plaintiff’s lawyer, although the rules differ as to controls on financial eligibility of claimants and on the extent to which the merits of the case are scrutinised and must pass certain criteria.

Overall, consideration of the above factors would clearly lead to the expectation that there would be more product liability claims in USA than in Europe - as is the case. These factors also explain another phenomenon, which is that of the class action.

Class actions

Class actions do occur in USA in product liability claims, but they are not particularly popular with plaintiff’s lawyers or judges. Lawyers can enjoy a significant income from trying a succession of cases involving a similar product over perhaps several decades, whereas the risks to income in a single class action are greater but probably unnecessary unless (for example with breast implant litigation) the cases are based on junk science and can be settled. US judges do not like class actions because they can be tied up in them for years.

In Europe, class actions have occurred as a major phenomenon in England and Wales and, to a lesser extent, Scotland and Ireland - but not in other member states. Of course, some class claims may occur throughout Europe as a natural phenomenon, such as haemophiliacs infected by viruses in blood products. However, the general absence of product liability class actions in many European states is striking. One reason for this may simply be weak consumerism in, for example, Southern European states. Another factor might be the relatively small size of many law firms in continental states and their consequently under-developed specialisation or focus on product liability or environmental or class claims. Another factor is undoubtedly the fact that professional rules for lawyers in, say, Germany, which regulate the amount that lawyers can charge, simply make the pursuit of low-value claims unattractive.

In any event, there is an identifiable group action phenomenon in UK. It goes back some 15 years and generally divides into the two categories of transport accidents (Lockerbie, Kegworth, Clapham Junction, Zeebrugge) and pharmaceutical or medical device products (vaccines, tranquillisers, various contraceptives). Both these types of claim are obviously likely to recur. Where they occur, they are likely to be dealt with as group actions in the UK and Ireland. The new English Civil Procedure Rules 1999 will shortly include, for the first time, a rule on multi-party actions. The general increase in efficiency brought about by the Woolf reforms would clearly tend to facilitate an increase in claims by making low-value claims more financially viable.

The impact of CFAs

Another major revolution within England and Wales is the Government’s deconstruction of legal aid and its replacement by conditional fee agreements (CFAs). The possible effects of this go both ways. On the positive side, CFAs may inhibit certain claims, since the claimant’s solicitor’s function changes from trying to persuade the Legal Aid Board to fund a claim based on the available evidence (which may be incomplete and insufficiently assessable so as to form a reliable view of the chances of success) to himself undertaking a risk assessment on the chances of success of the case. It is obvious that the latter situation may bring greater realism to bear on decisions as to whether to proceed on both high and low-value claims, particularly those that are not so strong. The continued existence of the "loser pays" rule would still operate as a similar spur towards realism - at least in theory. In practice, however, the availability of relatively cheap insurance for the costs risk should insulate the claimant. There may well be problems, however, with coverage systems where the insurer does not carry out his own risk assessment on a case but cedes the decision to the solicitor - is the solicitor subject to sufficient control or incentive to take sufficiently educated or dispassionate views?

On the downside, the Government’s recent decision to make not only premiums for after-the-event legal costs policies but also lawyers’ CFA success fees recoverable from defendants will clearly operate as a major financial factor favouring claimants. In effect, this replaces "legal aid blackmail" with "CFA blackmail" and, paradoxically, significantly undermines the effect of the "loser pays" rule by removing virtually all risk from claimants and significantly increasing their bargaining position in reaching settlements.

It is a striking feature of the English pharmaceutical group actions that upwards of 95% of plaintiffs have been funded by legal aid. Claimants say that this is because the middle class have been denied access to justice to litigate because they have not been able to afford the costs or take the risk. Defendants say that the middle class have carried out a sensible risk assessment and decided that these claims are simply not worth pursuing, whereas access to legal aid funding has been made far too easy. The example can be pointed to of the £35 million of public funds spent on plaintiff lawyers and medical experts in the benzodiazepine tranquilliser litigation which failed completely. Will class actions be brought in future? Because of their long lead time, the Government is committed to funding the significant pharmaceutical group actions (oral contraceptives, Norplant, hormone replacement therapy, antibiotics) that are proceeding now on legal aid them for as long as they last. Legal costs insurance currently excludes pharmaceutical or group action claims, but the experience of the Gulf War Syndrome plaintiffs shows that it is possible for costs cover to be arranged and the market for legal costs insurance is likely to develop over time - perhaps tentatively and perhaps with some insurance casualties.

Perhaps most fascinating is the current situation that plaintiff lawyers have succeeded in persuading the Government that they do not have the resources to take on major claims on CFAs. Accordingly, Government funding will continue to be available for any claim for which the legal costs exceed £100,000. That would include a number of significant product liability claims as well as every potential group action. Furthermore, availability will presumably be extended to all citizens rather than the poor who have hitherto qualified for legal aid. There is a mixture of good and bad in this. A lot depends on whether the Government applies the lessons which the Legal Aid Board has had to learn at considerable cost that informed and disinterested risk assessments on cases need to be carried out and continued?

If CFAs work, other European governments may find them attractive, since they lead to an increase in access to justice whilst cutting government expenditure on legal aid.

The overall message?

It seems realistic to predict a steady increase in product liability claims across Europe. The group action phenomenon will probably slowly spread from England to the rest of Europe. Be prepared.

Christopher Hodges is a Partner specialising in product liability claims with City solicitors Cameron McKenna. He is author of the European Commission’s 1995 study on the Product Liability Directive and of various books on product liability and product safety.

This article was first published by Post Magazine December 1998