The graphs above combine toy manufacturers and toy wholesalers since wholesalers usually have the same degree of responsibility as manufacturers and must pay the same products liability premium as a consequence. And most of these are non-employee enterprises! These non-employee enterprises may outsource all manufacturing to offshore manufacturers and all selling activities to manufacturers’ representatives. Even though they might never even touch the product, their exposure to loss may be enormous.

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The recall of the Thomas the Tank Engine was a shock. How could such a beloved toy be so potentially deadly? While the buying public holds toys and games targeted at the most vulnerable members of society to extremely high standards, the government agencies having oversight over such matters apparently did not. When the U.S. Product Safety Commission revealed the limited amount of product safety testing performed on imported goods, the public outcry was deafening. Changes are being made as more manufacturers and retailers conduct their own safety testing, but the products liability exposures presented by toys continues to be a coverage that is difficult to place.

Here is one possible claim scenario.

Paul Ponds developed an exciting new game. He played it with his children and they loved it. He got the same reaction when he tested it at his children’s school. Since everyone who saw the game was excited, he took the next step and met with a consultant to learn how to manufacture and sell it. The manufacturing was done in Asia and two different manufacturers' representatives added it to their product lines. Paul was amazed at a quote he received for products liability coverage but he accepted it as a cost of doing business. While his game launched successfully, the first claim arrived less than six months after the launch. A two-year-old lost the tip of his finger when he placed it inside one of the mechanisms. This was quickly followed by a second claim and a recall was ordered three weeks after that. It turned out that the Asian manufacturer made a minor adjustment that caused a faster snap, resulting in severed fingertips. The insurance company paid the claims but was unable to collect anything from the offshore manufacturer. Paul lost his investment, ceased operations and discovered that he had no recourse against the Asian manufacturer.

The products liability insurance marketplace for toys begins with the businesses that design them and ends with the retailers that sell them. According to Ken Laderoute, vice president-underwriting of Burns & Wilcox, “They’re all going to have different needs but the one thing they’re probably all going to need is product liability or they should at least consider it.”

Ken Kukral, president, CEO and chairman of International Excess agrees that everyone should buy products liability coverage and adds, “With much of the manufacturing being done internationally, it is more important to coordinate their domestic and international products liability programs.”

One of the markets eager to help with such coordination is Markel Shand. Nan Meyer, assistant vice president-product liability product line manager says, “All of our insureds are U.S. based, so an insured is often an importer of products from a foreign country. Our Markel International unit in London has a subsidiary, Markel Singapore, that uses a Lloyds’ syndicate to write non-U.S. manufacturers that export products to the U.S. and Canada.”

Every expert is concerned with products manufactured in China and other Asian countries and imported into the U.S. Any business that imports from these regions is underwritten as a manufacturer and not as a wholesaler. The key reason for this, according to Ms. Meyer, is “because China and other Asian countries, for example, have not signed on to the Hague Agreement. This basically means that any judgment made by a U.S. court against such a manufacturer is unenforceable.”

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