China Ramps Up Consumer Protection Rights - Proceed With Caution
Punitive damages have not been an issue for liability insurers doing business in China – but that’s about to change. On 15 March, new laws aimed at toughening up consumer protection rights come into effect with amendments that raise the limit of punitive damages for producers of defective goods in China.
Article 55 of the new law imposes big increases in the punitive damages that business operators face for causing economic loss to consumers due to fraud, and causing bodily injury to other individuals due to knowingly providing defective products or services.
And although punitive damages are usually explicitly excluded in liability insurance policies in China, there are exceptions: Some of the liability insurance policies for products exported to the U.S. or Canada do not exclude punitive damages, even at the request of the insured and the insurance broker, and may specify the scope of punitive damages coverage according to laws in the jurisdiction of the third-party claims.
As punitive damages now have huge impact on the underwriting risk in both Chinese and North American jurisdictions, we decided to take a look at the differences between China and the U.S. in terms of legality, insurability and potential severity of loss.
- The vast majority of North American courts can impose punitive damages. However, many states have legislation that limits the ability to receive the punitive damages and/or the allowed amount.
- Civil law countries pursue purely compensatory civil liabilities, emphasizing that the amount of compensation should be commensurate with the actual loss. Although China is a country of civil law, its legal practitioners and theorists generally support punitive damages.
- Currently, most U.S. states, such as the major business centers of California, New York, Illinois and Pennsylvania, all allow insurance of punitive damages, and only a handful of states disagree.
- In China it is less clear, but it appears that because punitive damages are recognized by Chinese law they can be covered by liability insurance.
- Currently, U.S. states that recognize the legitimacy of punitive damages limit the award by providing maximum amounts and/or its highest multiples as compensatory damages.
- In China, Food Safety Law and the new Consumer Protection Law set the amount of punitive damages to a certain multiple of the price of the product or service. If the serious bodily injury is due to knowingly providing defective products or services, the amount of punitive damages can be as high as double the compensatory damages.
The new tort law in China provides for punitive damages, and insurers will have to consider the possibility that Chinese courts might affirm their insurability. And while the level of compensation for personal injuries is relatively low, it will grow annually – and so will the level of punitive damages.
As a result, we suggest that liability underwriters continue to exclude punitive damages in domestic liability insurance policies – as well as exercise caution when writing liability insurance contracts for exported products involving jurisdictions of the U.S. and Canada.
Read my full article for further details of the new Consumer Protection Law and their implications for insurers in China and North America.