Litigating product liability claims with foreign entities

It’s bad enough when an insurance company wrongfully refuses to pay a claim and a policyholder is forced to resort to coverage litigation to vindicate its rights. It’s even worse when a policyholder seeking to enforce its policy must initiate coverage litigation against a foreign-domiciled insurance company in an unfamiliar forum on the other side of the globe.

Dick’s Sporting Goods v. PICC

Yet as a federal court recently explained in Dick’s Sporting Goods, Inc. v. PICC Property and Casualty Company Limited Suzhou Branch [Case No. 2:16-cv-01635-DCS-RC, W.D. Pa., July 28, 2017]: “International commerce creates international consequences. One such consequence is litigating a garden-variety insurance dispute on the other side of the world.”

As Dick’s Sporting Goods (DSG) recently learned in a dispute with its foreign insurer, forum selection clauses in insurance policies are generally enforceable, and U.S. courts will not hesitate to send policyholders abroad to resolve their disputes.

DSG was named as a defendant in a products liability suit arising out of its sale of a Fitness Gear stability ball at a store in Pennsylvania. A Chinese company, Dalp’s & Leisure Products Supply Corporation (Dalp’s), manufactured the ball. Before the alleged injuries occurred, Dalp’s had obtained a $5 million product liability insurance policy from a Chinese insurer, PICC Property and Casualty Company Limited Suzou Branch (PICC), and the policy listed DSG as an additional insured. Thus, DSG asked Dalp’s to refer the underlying lawsuit to PICC for coverage.

PICC failed to respond to DSG’s request for coverage in any way, and never provided DSG with a coverage position. Therefore, DSG initiated coverage litigation in the U.S. District Court for the Western District of Pennsylvania for PICC’s breach of its duty to defend and indemnify DSG in the underlying litigation.

Shortly after DSG filed suit, PICC filed a motion to dismiss for lack of jurisdiction, asserting that DSG’s suit in Pennsylvania was barred by the forum selection clause in its policy. That clause states:

“All disputes under this insurance arising between the Insured and the Company shall be settled through friendly negotiations. Where the two parties fail to reach an agreement after negotiations, such dispute shall be submitted to arbitration or to court for legal actions. Unless otherwise agreed, such arbitration or legal action shall be carried out in the place where the defendant is domiciled.”

Because PICC is domiciled in China, PICC argued that it could only be sued under its policy in China, and that DSG’s lawsuit in Pennsylvania should be dismissed.

Ultimately, Magistrate Judge Robert Mitchell agreed with PICC, holding that the case should be dismissed and that if DSG wanted to sue PICC, it must file suit in China. In reaching this conclusion, the Court rejected DSG’s argument that the forum selection clause did not apply to DSG because DSG was an “additional insured,” reasoning that the entire policy applied to DSG. Citing the U.S. Supreme Court’s three factor test from The Bremen v. Off-Shore Zapata Co. [407 U.S. 1 (1972)], the court also rejected DSG’s arguments that enforcing the forum selection clause would be unreasonable as a matter of law.

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Read the fine print

The DSG decision is a good reminder that policyholders should always carefully review forum selection and choice of law clauses when purchasing policies. Many foreign jurisdictions do not afford the same pro-policyholder protections available in the United States, and litigation outside the U.S. can be costly, time consuming and unpredictable.

DSG pursued coverage as an additional insured under the Dalp’s policy, and presumably did not have an opportunity to negotiate the arbitration agreement in the policy. While an additional insured under a foreign manufacturer’s insurance policy like DSG may not have the opportunity to re-negotiate a pre-existing forum selection clause, U.S.-based companies should always be cautious when attempting to shift product liability exposures to foreign companies that may lack assets in the United States to satisfy a judgment in the event of a complex product liability suit.

Paying close attention to forum selection clauses and insurance requirements when negotiating supply contracts and distribution agreements, can improve your chances of a successful insurance recovery in the event of a catastrophic product liability claim.

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Carefully reviewing forum selection and other dispute resolution clauses (e.g., arbitration or choice-of-law clauses) is just as important when a policyholder is building its own insurance program. These dangers are amplified when companies purchase “towers” of excess insurance above their primary insurance to protect themselves against catastrophic product liability claims.

While each of the excess policies often “follows form” to the primary policy, excess insurers sometimes attempt to insert their own dispute resolution provisions that may differ from those found in the underlying policies. When this happens, the benefits the policyholder receives by having its entire insurance tower governed by a single set of terms, conditions and policy language is diminished.

It is easy for the risk manager to focus on big-picture items when building an insurance tower — such as premiums, policy limits, and policyholder-friendly terms and conditions — but overlooking the need to harmonize dispute resolution clauses opens the door to serious risks, including parallel litigation with various insurers in the tower, higher costs, delayed recoveries and inconsistent judgments.

For example, if a policyholder’s insurance tower includes a primary policy and four excess policies, but two of the four excess policies contain arbitration agreements, the policyholder may not be able to maintain a single lawsuit against all five insurers if a coverage dispute arises. Similarly, if three of the policies have New York forum selection clauses, one has a California forum selection clause, and one provides for litigation of all disputes in London, then the policyholder might face the need to initiate three or more coverage lawsuits in separate courts, and perhaps have different substantive law applied in each of those lawsuits.

While lawyers often view forum selection clauses and arbitration agreements as “boilerplate,” these provisions are usually negotiable, and failing to heed them can have significant real-world consequences.

Partner Shelby Guilbert (sguilbert@kslaw.com ) and associate Nicholas Hill (nhill@kslaw.com ) are members of the Trial and Global Disputes practice at King & Spalding. They frequently represent policyholders in high-stakes, cross-border insurance coverage disputes, and they have successfully recovered hundreds of millions of dollars from insurers in the U.S., London, and Asian markets.