If you import foreign manufacturing materials, here’s how to protect your business

While it may seem like a supply and distribution issue, there are some major insurance concerns associated with using foreign materials in your operation.

Cargo containers

by Andrew Gress
Business Insurance Account Executive at State Auto Insurance

In today's global market, many manufacturers and distributors are choosing to import materials from outside the U.S. Foreign imports can be a sound business move, but it comes with some inherent risks. If your business is importing foreign manufacturing materials, it needs to be addressed in your risk management program.

While it may seem like a supply and distribution issue, there are some major insurance concerns associated with using foreign materials in your operation. 

One of the largest areas of concern with foreign materials is product liability. Why is product liability the big issue? My colleague Tina Jaeger wrote about the product liability problem, if you want the details.

There are a lot of key questions you want to ask up front when considering a partnership with a foreign company. These questions are focused on the product liability issue:

  • Does the foreign manufacturer have product liability insurance? Do they have or would they be willing to obtain a U.S. product liability policy?
  • Does the imported product meet all U.S. standards and regulations? Does the entity have a quality control program in place?
  • If there is a known problem with a manufactured product, will the foreign manufacturer contact you to inform you of the defect or issue, so that you may take appropriate action?
  • Has the foreign manufacturer ever had any prior products recalled or violated any U.S. regulation? 

Talk about these questions - and the answers you get - with your insurance agent and other professional advisors.

In our experience, we find the most successful partnerships between manufacturers and foreign suppliers have some common characteristics. At minimum, these steps are just good business practices, and at most, they could make the difference in protecting your operation.

First, establish a direct relationship with the foreign manufacturer/importer. Make sure you're directly involved and not relying solely on an indirect relationship.

Get to know the company really well. Your business is about to depend on theirs. Understand the financial capabilities, insurance standards, quality control/testing program and reputation of the foreign manufacturer.

Make sure you have a solid contract in place. And have your insurance agent review it, too. The contract should require the foreign company to:

  • Indemnify for costs arising from faulty products.
  • Request the importer to obtain a U.S. products liability policy.
  • Stipulate the country arbitration will take place if issues arise.
  • Provide proof of insurance, particularly product liability coverage.
  • Request to be named as an Additional Insured on the importer's policy.

Another reason to have your insurance agent review your plans with you - you may need to consider cargo insurance to cover your goods in transit.

If you pay for goods prior to receipt are they're damaged prior to arrival, insurance can provide protection for those goods. Cargo insurance can also potentially expedite the release of your items after arrival to the U.S. Some foreign products require a bond or deposit. Insurance allows the insurance carrier to assume responsibility for the property and can speed up the release of cargo.

This next one is in the category of a good business practice whether or not you import materials. Enforce your quality control programs.

Many aspects of the importing relationship require you to rely on the foreign importer to do the right thing. But a quality control program is completely within your control. 

You can handle your quality control program within your company, or bring in a third party vendor to help if you don't have the resources or the expertise to do it yourself.

A basic quality control program includes:

  • Inspection and testing of incoming products or materials
  • A process to handle items that do not meet standards(for products that have not yet been placed in the market)
  • Corrective procedures for handling of defective or recalled items( for products that have already been placed in the market)
  • Tracking system to identify product origin and purchasers

The Consumer Products Safety Commission www.cpsc.gov is an insightful resource on the importing process. They provide recall guidance and information on working with specific countries, such as China.

The risk involved when importing foreign manufacturing materials is another reason you need an independent insurance agent - someone with the expertise to help you work through these issues and make sure your business is protected.

This article first appeared on LinkedIn Pulse.