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New China Law Expands Liability for Defective Products, Environmental Pollution

Source: Marsh

Posted on 23 Apr 2010

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Effective July 1, 2010, the new Tort Liability Law of the People's Republic of China expands consumer protection from defective products and introduces punitive damages for companies.

This landmark legislation creates a legal framework in China that is more in line with consumer-protection standards in the developed world. For example, the new law establishes punitive damages for mental distress for consumers as well as a product recall scheme that sets forth the obligations of producers and sellers of defective products.

"The law can potentially increase the power of consumers and significantly increase management costs and litigation costs for the manufacturers and sellers," noted Simon Ran, Product Risk Practice, Marsh China.

With regard to environmental hazards, the tort law shifts the burden of proof to the defendant, which makes it easier for the plaintiff, explained Lionel Mintz, Environmental Practice Leader, Marsh Asia.

"Defending against such claims can be costly. Since a non-fault principle (insureds indemnified for losses, regardless of fault) is applied to environmental pollution torts under the tort law, companies also need to be aware that they may face increased exposure to environmental claims despite being in full compliance with China's environmental law requirements," Mintz added.

In light of these significant changes, companies operating in China should assess their insurance programs, as well as other risk management measures, to ensure that they have an effective liability transfer mechanism.

The tort law appears to be a response to various product scares in recent years, such as the Sanlu tainted-milk incident in 2008, which reportedly left at least six infants dead and approximately 300,000 others suffering from lingering health problems.