Risk managers must prepare now for EU Product Liability shakeup

The EU Product Liability Directive (PLD), due to be implemented by member states over the next two years, marks a significant modernization of product liability law in the European Union (EU). Enacted in 1985, the current PLD pre-dates global supply chains and many of today’s digital technologies (it was enacted more than 20 years before the launch of the first smart phone (iPhone)).

Part of a wider EU regulatory program (that includes AI Act and the EU’s Representative Action Directive), the new PLD broadens the scope of products and organizations covered by product liability law – encompassing software, AI and supply chains - while at the same time increasing consumer rights and access to justice. In the digital realm, it is crucial to understand the implications of the pending AI Liability Directive legislation. Negotiations regarding the revised proposal from the European Commission on AI liability are set to commence this autumn.

Taken together, these changes will make for a very different product liability and litigation environment going forward. Consumers will have wider grounds to sue, find it easier to litigate, and do so collectively. As a result, product liability litigation in the EU is almost certain to increase, both in the number of claims, their value, and cost. Consumers are expected to benefit from increased safety as updated, harmonized standards encourage manufacturers to improve product safety to avoid liability.

Expanded scope of liability

The revised PLD, formally approved by the European Parliament in March, significantly expands the scope of product liability law in the EU. Notably the definition of a product is extended to include software and digital manufacturing files (such as CAD files used to create 3D-printed goods), while strict liability will now also apply to defects from software updates and Artificial Intelligence (AI). The definition of defect is also extended to include safety-relevant cyber security requirements and software updates.

The new directive also covers a more extensive range of potentially liable parties, reaching further into the product supply and distribution chain. In addition to manufacturers and sellers of white label goods, the new PLD will in certain circumstances also now apply to online marketplaces, fulfilment service providers, intermediaries and manufacturers authorized representatives in the EU.

Shift in burden of proof

Significantly, the PLD aims to increase consumer access to damages and make it easier to seek redress in the courts. For example, the directive expands the range of damages to include medically recognized psychological health and damage to data, while extending the expiry period for latent injury/damage claims from 10 years to 25 years.

Notably, the updated directive introduces significant changes to the burden of proof. As before, a claimant must demonstrate the existence of a defect, damage, and a causal link between the two. However, in contrast to the current PLD, the new directive increases the burden of proof for manufacturers, effectively shifting the burden to manufacturers in many cases.

Another important change to the PLD is the new disclosure requirements aimed at enhancing transparency and fairness in litigation. Claimants are granted the right to request evidence from defendants during litigation and courts will be able to order discovery of documents at an early stage in the litigation.

Risk management considerations

Risk managers have an important role to play in preparing their organizations for more stringent EU product liability laws and a heightened risk of litigation. Top of the list will be the focus on product safety culture and quality control, which will be even more important going forward, both to prevent losses, and to defend potential litigation.

A one and done approach to implementing processes and practises to safeguard a business are not sufficient – the changes to the PLD highlight the need to live and breathe a safety culture. A business must be able to demonstrate they have product safety plans in place, but also evidence that they are executing on these plans, day in, day out.

In addition to understanding the implications of the changes for their business, risk managers should consider conducting product risk assessments against the new PLD, reviewing the product life cycle and the use of AI and software, including the need for updates. Manufacturers should also review the quality of their supply chains, while distributors and retailers need to look carefully at the quality of the products they distribute.

Mounting a robust defense

Robust documentation practices and rigorous defence strategies will be critical when defending claims, given the higher burden of proof and new disclosure requirements under the new PLD. Business will need to show the evolution of a product and the controls in place to protect consumers, from design through to distribution, and even after the point of sale (software may be considered defective due to a lack of updates, including for cybersecurity). By ensuring that documentation is comprehensive and organized, companies can better navigate the increased disclosure obligations and mitigate the risk of adverse claims or legal outcomes.

As with any product liability litigation, communication with consumers – such as product information, instructions and warnings – throughout the life cycle of the product, is critical to a successful defense. Courts will look at the quality and accessibility of that information, and whether it can be easily understood.

Insurance implications

From an insurance perspective, increased product liability litigation under the PLD is likely to impact the frequency and severity of claims, with potential implications for future premium rates, limits and deductibles. Underwriters are therefore likely to focus on how an insured is responding to the PLD, with close attention to its ability to defend a claim and demonstrate robust safety and quality controls.

Insurers will, however, be there to guide companies through the implementation of the PLD, which is likely to vary by member states, as well as future interpretations of the legislation by the courts. Zurich’s risk engineering and underwriting teams, for example, are already supporting customers, helping adapt product safety controls and ensure they have the defense strategies and quality of documentation needed to mitigate the impact of potential litigation.

Time to prepare

EU product liability law is not changing in isolation. Many products are being reshaped by technology and climate change, while social media and consumer expectations around sustainability make for a more challenging environment all round. At the same time, the EU’s Representative Action Directive and growing influence of third-party litigation funders will pave the way for collective product liability litigation: There are now more than 100 litigation funders operating in Europe, according to Insurance Europe.

The good news is that companies and risk managers have time to prepare. Member states have two years in which to implement the PLD. Companies should use this time wisely, and ensure they have a safety culture and defense strategy fit for tomorrow’s more litigious product liability environment.

Originally published in Commercial Risk on August 27, 2024.