Growing liability risks threaten business sustainability

By: Manisha Chiman Executive Head: Liability Underwriting at SHA Specialist Underwriters

The liability risks that South African businesses face as a result of possible product defects, are increasing by orders of magnitude with each passing year, and SHA’s Specialist Risk Review has revealed that as many as 21% of businesses have been faced with a product liability claim in the past five years. Nevertheless, many businesses are still not applying appropriate risk management measures against possible liabilities.

This is according to Manisha Chiman Executive Head: Liability Underwriting at SHA Specialist Underwriters, who says the market is becoming increasingly litigious, and that claim amounts have steadily increased in recent years. “The advent of the Consumer Protection Act and the rise of social media have had a particularly significant effect on this trend. Customers are not only becoming more aware of their rights in the event that they suffer damages, but social media platforms have enabled individuals to connect and become involved in class-action suits at an unprecedented rate.”

Looking at examples from SHA’s own claim data, Chiman says that product liability claims have shot up from an average of R1.65 million per claim in 2016, to around R14.25 million by 2018.  “During that same time span, personal injury claims have grown from an average of R172 600 per claim in 2016, to R270 690 in 2018.”

With this in mind, Chiman says that it is absolutely vital for businesses to make sure that their liability risks are adequately managed. “A single liability incident has the potential to cripple a company, which is why having adequate insurance cover in place is critically important. In addition to broadform liability cover, product liability cover (which only an estimated 30% of businesses currently have) is crucial as well.”

Lastly, she adds that businesses have an obligation to mitigate their risk of incurring liabilities as much as possible, by putting the correct procedures in place within their organisations. “SHA’s research has found that just 44% of businesses conduct their own quality control audits and only 43% ensure that their supplier and client risks are managed through adequately worded contracts, and even fewer (36%) conduct due diligence to confirm that their suppliers have sufficient liability cover. These three measures are absolutely vital in protecting one’s business interests and insurers are increasingly going to insist on seeing proof that their policyholders are doing that.”

Having a product recall strategy is another often neglected element of risk management that insurers will increasingly focus on. According to Chiman, it is still far too common to see businesses with no recall strategy in place, with the prevailing sentiment being that one only needs to think about it when it happens. However, when there is a major product defect that could cause litigation in future, recalls need to be put into effect as rapidly as possible, leaving no time to develop a plan.

“Liability is currently the biggest risk to the long-term survival of any business, and merely having a single insurance policy in place to cover the growing risk landscape is simply not good enough anymore. Business owners need to have the conversation of broadform liability with their broker on a regular basis, and ensure that all necessary risk management measures are effectively implemented,” Chiman concludes.