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A New Day in Court

Despite reforms, whopping jury verdicts still give companies fits in protecting themselves.

1Sep

It was a runaway record for punitive damages. In 1978, a California jury awarded $125 million to a boy injured when his Ford Pinto was rear-ended and its gas tank exploded. Using internal Ford memos, plaintiffs' attorneys convinced the panel that the automaker saved less than $15 per car by going with a hazardous fuel-tank design.


How things have changed. Last July, Los Angeles jurors slapped General Motors Corp. with a new record punitive award, again on behalf of victims of a fiery rear-end crash. Internal GM memos helped those plaintiffs make the case that the location of the Chevy Malibu's fuel tank was unsafe. The penalty this time: $4.8 billion in punitive damages.


If the number of digits on the checks has grown significantly over the past 21 years, the job for companies has remained constant: to seek ways to protect themselves against those ever-larger judgments. True, a host of judicial rulings aimed at reforming courtroom procedures have clamped down on flimsy science and curtailed the use of class-action suits for blackmail. And judges continue to pare awards they consider the most outrageous. (Ford's 1978 punitive penalty eventually was cut to $3.5 million; GM is planning to appeal the Malibu verdict.)


"Nevertheless," says broker Dennis Connolly of Marsh USA Inc., in New York, "the picture is definitely not one in which [executives] should relax."


Indeed. One has only to look at the daily diet of jury verdicts, settlements, or potential lawsuits in the news to see that more Malibu cases are on the way. Within days of the gargantuan verdict against GM, in fact, yet another California panel gave $295 million to the survivors of a Ford Bronco rollover, for example.


"Management, including CFOs and CEOs, really needs to understand that the playing field is not level right now. It's tilted against them," says corporate defense attorney John Winter of New York­based Patterson, Belknap, Webb & Tyler. Companies continue to settle the great majority of cases out of court. "If a product causes harm for which a manufacturer is liable, people should be compensated," Winter allows. But when a trial is forced on them, he argues, corporate defendants these days face increasingly well-armed plaintiffs' attorneys and a court system sympathetic to victims.


And companies are starting to prepare for more product-liability suits, an ironic result of the Supreme Court's effort to limit class- action litigation, says economist Robert Hartwig of the Insurance Information Institute, which conducts research and lobbies on behalf of insurers. The limits may lead to hundreds of individual suits clogging the court system, he says, and "it's not within the court's capacity to deal with these cases."



Hot Dogs and Soda Pop

To varying degrees, every manufacturer or distributor of goods and services fears severe repercussions if plaintiffs can demonstrate that the company deserves blame for personal injury. Last December, Sara Lee Corp.'s BilMar unit recalled tainted hot dogs and packaged meats, which were responsible for the deaths of 15 people. (The food poisonings took a toll on the company's earnings--Sara Lee reported the recall was a factor in its 5.9 percent decline in the fiscal fourth quarter, ended July 3.) And Coca-Cola is holding its breath over what suits might arise out of the illness suffered in June by scores of people in Brussels, allegedly from tainted soda pop.


"Product liability is far and away the most important aspect of property and casualty," says CFO Joseph Apuzzo of Terex Corp., in Westport, Connecticut, which supplies hoisting equipment to the construction industry. Worries about liability, he says, affect nearly every component of his company's business, which includes building and marketing aerial platforms for construction, and training personnel in their use.


The worries are especially acute among the ranks of companies relying on self-insurance. This group has been growing in recent decades, as many companies have chosen that course to reduce premiums. More and more, though, this has exposed corporate treasuries to the vicissitudes of the court system.


While the cost of losing product-liability cases has skyrocketed, other developments on the legal front have forced companies to be inventive. Five states, including the two largest in terms of population, California and New York, prohibit companies from insuring themselves against punitive damages. The idea is to prevent companies from receiving compensation for wrongdoing. But insurers and companies have routinely arranged such coverage, using offshore connections. They believe these arrangements will hold up in court, although the legality of the approach has yet to be tested in a case, and Internal Revenue Service treatment of resulting insurance proceeds is unknown. (Of course, normal insurance limits would fall far short of covering the most enormous penalties.)



A Way to Cut Premiums

With product recalls becoming an everyday event, companies now can avail themselves of "third-party" recall insurance. This insurance protects companies that supply their products to another company, when a defect in these products requires the customer to recall the end product. While general liability policies often cover component products that are inseparable from end products - such as artificial sweeteners in a can of soda - they may not cover defective parts that can be removed. "If your bolts go into a combine and injure the farmer's leg, recall expenses are not covered," says Geoff Gregory, senior vice president, excess casualty, at American International Group (AIG). But recall insurance is limited, too; it principally covers costs allocated to the recall, not overarching liability claims.


Bargains abound in the soft insurance market that has persisted since the late 1980s, however. A range of new insurance products can sharply lower the tab for general liability protection, which normally encompasses product- liability exposures. DuraTech Industries, an agricultural and industrial manufacturer in Jamestown, North Dakota, not only lowered its premiums, it also lowered the deductibles and raised the coverage ceiling, according to CFO Ron Siwa, after it responded to a cold call from an insurance broker in Alabama promising a deal better than any the company's existing broker could match. When DuraTech signed up, St. Paul Cos. allowed DuraTech management credit for its heightened attention to quality and safety, and gave the company a 5 percent price break. "It seemed better than possible," declares Siwa, who says DuraTech's savings on annual premiums totaled between $20,000 and $30,000.


"Now is an excellent time to look at multiyear policies," says insurance broker Tim Boge of McGriff, Seibels & Williams, the Birmingham, Alabama, firm that persuaded Siwa to try something different. Although it's rare to find premium slashing as deep as DuraTech's, insurers are increasingly flexible on coverage and terms, Boge says. Clients may not yet qualify for, say, three-year, noncancellable policies, but they can strike exceptional multiyear deals today. Three-year renewable plans are available now, as long as losses don't exceed 70 percent of premiums. And at lower levels, insurers may agree to renew at the same rate. Meanwhile, by raising coverage limits on primary policies inexpensively in the current market, companies shrink the cost of catastrophe umbrellas.


The Marmon Group, a closely held, diversified manufacturer in Chicago, recently locked in rates for three years with its insurance company for product liability, along with other types of coverage. "We prefer a stable program," says Marmon risk manager Bill Sweeney, even if he sacrifices somewhat better rates in the short-term. The soft market allows for plenty of flexibility, although the flexibility isn't unlimited. When he overhauled his coverage in 1996, Sweeney notes, rates for three-year deals went down just after he signed up. "We were able to make an adjustment on that, but not to market rates," which also fell. Still, he says, "we made the right decision at the time with the information available."



The Avoidance Strategy

The best insurance, of course, is to stay out of disputes. But with product-liability lawsuits seemingly inevitable in the current environment, attorneys on both the defense and plaintiff sides have suggestions about how firms can lower their exposure to litigation-- and they often agree, at least philosophically. Among their most frequent suggestions:





  • Constantly test products.

  • Refuse to settle for minimal testing standards.

  • Post consumer warnings if needed.

  • Disclose defects immediately.

  • Settle legitimate claims before they go to court.

  • Make sure the defense attorney's interests are aligned with those of the company.


"Ignore the minimum" in testing products for possible harm, warns plaintiffs' attorney Randall Rhodes, of Douthit, Frets, Rouse & Gentile, in Kansas City. "Set standards based on the real world." Relying on minimum federal standards, he says, is like telling your child you are proud of a D-minus. And in product- liability suits, meeting the bare minimum in testing doesn't mean you've done your best to turn out a defect-free product.


Minimal testing also rarely wins the sympathy of the judge or the jury, as Rhodes's firm proved in the $900,000 judgment it won in the U.S. District Court in Kansas City, Missouri, last year against Spaulding & Evenflo Corp., a Tampa-based maker of automotive child-safety seats that contributed to a child's injury in a collision.


Spaulding & Evenflo's vulnerability increased when certain evidence was tied to what became known as "the missing warehouse," Rhodes reports. Unknown to the plaintiffs at first, Evenflo had collected and stored seats that parents had exchanged for new ones after car accidents, whether or not the seats sustained any visible damage. The warehouse came to light when an inexperienced defense witness spilled the beans, according to Rhodes's account. "Had they said, 'Yes, we have it' [about the warehouse], it might not have been such a big deal," says Rhodes, who believes the defense might have even found a way to use the evidence to support its own case. But the opportunity was lost as the company "dug a hole in the ground, and dirt just kept falling on its head." Evenflo's response? It insists that the warehouse did bolster its defense. "Several plaintiffs' attorneys and their experts have been given carte blanche access to the warehouse, only to leave disappointed because the contents...only endorse the safety of Evenflo child restraints," a company spokesman says.



Don't Play Games

Shoddy product research is often the weak spot in a corporate legal defense. "Companies in the rush to market don't do enough validation testing," says Lin Johnson, a mechanical engineer who often testifies in cases involving allegations of flawed product design. Even when there is a lot of testing, he says, there often isn't acknowledgment in the testing process of the many changes in product design just before the product is shipped to market. "If you change one design characteristic, it has a spillover effect on the entire system," says Johnson. Proper testing takes time--the final round may take three weeks or longer, he says.


Taking pains to know a product thoroughly and to voluntarily post warnings can make a plaintiffs' attorney view a suit as a long shot. Since these attorneys are paid a contingency fee, they are not likely to take a case they don't think they can win - or settle out of court. Warnings should also be part of the design process from the beginning, and not an afterthought, notes Alvin Weinstein, a principal at Weinstein Associates, a safety consulting firm in Brunswick, Maine.


Sweeping defects under the rug to speed product release, or to sustain profitability, is an invitation to trouble - and litigation. So is allowing friction to grow between opposing risk-management executives and marketing. "Resolve tension in favor of disclosure," defense attorney Winter recommends. "Product-liability litigation generally revolves around what is known, or is knowable, about a product."


This is good advice in court also, according to plaintiffs' attorney Rhodes, who says the most important words in liability avoidance are "don't play games." In years past, when he was a defense attorney, Rhodes bombarded his clients with this advice. Nowadays, he sees his corporate adversaries routinely ignore it. "The whole trend is to stonewall and not give information," he says. Stonewalling is most perilous in cases that are likely to be litigated repeatedly, he continues. "You may win 10 cases in a row by being obstreperous and by stonewalling, but eventually it comes back to bite you." Had GM been forthcoming initially about an internal memo that established the low cost of making Malibu gas- tank fixes, Rhodes conjectures, the punitive judgment might not have been so staggering.



The Puzzle of the Jury Room

Awards often seem mysterious to Chris Campos, whose Teaneck, New Jersey­based CPA firm, Campos & Stratis, investigates product- liability claims on behalf of insurance companies. He finds even favorable outcomes puzzling, when emotions in the jury room overwhelm, or at least temper, the facts. "You're almost shooting craps," he says, noting one Indiana case in which Campos was acting on behalf of an insurer suing a manufacturer to recover damages. His client claimed $2.8 million in damages caused by the manufacturer. "Instead of $2.8 million, they came back with $2.1 million. No one could explain why."


Defendants, insurance companies, and defense attorneys say plaintiffs' lawyers enjoy a crucial advantage these days: a far-reaching network. John Schumacher, president of the excess-casualty division at AIG, cites two concurrent product-liability suits in New Mexico and New Jersey. Jurors in New Mexico reached their verdict first, a $17 million award to the plaintiffs. The very next day, he says, key technical elements featured in the New Mexico courtroom were introduced in New Jersey. Jurors there decided on a $15 million award.


The product-development process itself is often a potent legal weapon, Marsh USA's Connolly observes, when damning-sounding - but quite natural - differences of opinion are placed in evidence. "The system of pros and cons becomes fertile ground for plaintiffs' attorneys," he says. For every assertion by plaintiffs, "you can almost always find a memo by somebody who agrees with their point of view" if you look hard enough.


Critical memos that surface belatedly can cast companies in an even worse light. "Plaintiffs' lawyers are going to look for exceptions," warns corporate defense attorney Winter, who suggests that companies "err on the side of disclosure" in the courtroom. Otherwise, the door opens for the plaintiffs' attorney to appeal to the jurors' sense of outrage. "In personal-injury lawyers' closing statements, you'll invariably hear of punitive awards [as a means for jurors to] send a message back to the company," Winter says.


Attorney William Marler of Marler Clark, a Seattle law firm, represented plaintiffs injured by tainted hamburgers at Foodmaker's Jack in the Box fast-food restaurants in 1993. He and his current partner, Bruce Clark, who argued for the defense in that case, now specialize in filing civil actions against companies that distribute tainted food. But they have also set up a consulting organization called Outbreak Inc. to advise companies wishing to avoid mistakes that can land them in court.


"I think that a lot of times, company executives are not really thinking of what cases are about," Marler says. Instead, the defense often gripes about attention-grabbing attorneys who yank jurors' heartstrings on the thinnest of pretenses. "They've got to get past that," Marler declares of the company executives and the attorneys on their side. "Jack in the Box poisoned and killed children; a child who survived is going to have long-term kidney problems," he declares, urging that companies accept even the harshest reality if it's the truth. So the right track for companies, Marler says, is to face up to legitimate claims, but stand firm beyond that.


"Fight bogus claims to the death; it doesn't benefit any of us to roll over," he argues. "But when you're caught with your pants down, settle."


----------------------------------------------- --------------------------------- A Long Line of Liability



Some products and plant problems that have exposed companies to major damage claims.


1974. Asbestos. An early case won by a worker who contracted asbestosis and later lung cancer; a federal appeals court rules manufacturers had known of the dangers since the 1930s.


1978. Ford Pinto. A record $125 million in punitive damages awarded in the case of a 13- year-old boy severely burned in a rear-end collision.


1979. Three Mile Island. A Pennsylvania nuclear-plant accident causes a panic.


1980. Flammable pajamas. A $1 million punitive award in the case of a 4-year-old girl who was burned when her pajamas caught fire leads the manufacturer to stop making the garments.


1982. Tylenol scare. Johnson & Johnson designs tamper-proof package after a national scare involving poisoned pain reliever.


1982. "Illusory Park" defect. Ford redesigns transmissions after two verdicts, one with $4 million in punitive damages, show that cars that appeared to be safely in park could lurch into reverse.


1987. Dalkon Shield. A.H. Robins recalls its intrauterine birth-control devices after eight separate punitive-damage awards.


1988. Toxic Shock Syndrome. Playtex, hit with a $10 million punitive award in the case of a Kansas fatality, removes certain types of tampons from the market.


1989. Exxon Valdez. Oil-tanker spill ravages wildlife and leads to major cleanup of Alaskan coastline.


1993. Tainted hamburgers. A two-year-old child who ate at Jack in the Box restaurants dies of E-coli poisoning; others become ill.


1998. Tainted hot dogs. Food poisonings caused by a Sara Lee unit's meat kills 15 people; leads to a costly recall.


1999. Chevy Malibu. General Motors hit with $4.8 billion punitive award in the catastrophic fuel-tank case.


1999. Ford Bronco. Fatal rollover case leads to $295 million punitive verdict in California.


Sources: American Trial Lawyers Association; press accounts


----------------------------------------------- --------------------------------- What If States Oppose Punitive Insurance?



Ignore it. Offshore policies appear exempt.


Can companies insure against punitive damages in states that oppose such coverage? Definitely, according to Chubb Atlantic Indemnity Ltd., a Bermuda-based firm that operates independently of Chubb Cos.


One of several insurance companies that market this type of insurance, along with the Star Excess unit of American International Group, Chubb Atlantic got the positive word from a legal opinion it sought from McCullough, Campbell & Lane, a Chicago-based law firm. "No single rule applies to every circumstance," warns attorney Richard Ryan, who helped write the opinion.


Before buying this type of insurance, each company should examine its own situation carefully. Generally, however, restrictions that exist in five states do not rule out the purchase of insurance. Instead, they strip companies of a state's legal protection in cases in which insurers become insolvent or refuse to pay.


For companies comfortable with their insurers, the law firm's extensive review of existing legal decisions, state insurance codes, statutes, and administrative opinions uncovered "no adverse legal consequences" from obtaining punitive-damage insurance from offshore insurance companies.


In most cases, these conditions must be met for the insurance to be valid, however:





  • The offshore insurance company must not be subject to U.S. insurance regulations.

  • All aspects of the marketing, solicitation, negotiation, and binding of the punitive-damages insurance must take place offshore, and the policy must be issued and delivered offshore. McCullough, Campbell cautions that involvement by a U.S. insurer or broker might hamper enforcement of a policy insuring punitive damages.

  • The policy must contain an arbitration clause selecting an offshore site for any arbitration proceeding.

  • The policy needs to contain an offshore choice-of-law clause, with a reasonable relation to at least one of the parties or the transaction.

  • The U.S.-based insurance buyer must not be subject to any applicable statute or regulation directly prohibiting a U.S.-based insurance buyer from purchasing damage coverage. Although McCullough, Campbell uncovered no such existing regulations or statutes, it noted that states can introduce them at any time.

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