Germany: Increased exposure for product liability insurers

Germany from space
With effect from 1 January 2018, German law on manufacturers’ liability for disassembly and reassembly costs will be tightened. Whilst the seller’s duty to provide a product fit for purpose has been explicitly stated in the German Civil Code since 2002, it remained unclear whether there was a concomitant duty to reimburse the buyer for the costs of removing the defective product and installing the replacement.

In 2011 some clarification was provided by the German Federal Court of Justice (FCJ). Following a requested preliminary ruling of the European Court of Justice, the FCJ held that the seller of a defective product had to reimburse the buyer if the buyer was classified as a consumer. Ever since, under German law, consumers have been entitled to reimbursement for the costs of disassembling and reinstalling defective goods.

While good news for consumers, this created a problem for the sellers who had to reimburse them. Retail sellers were burdened with the costs, even though the defects in products were usually caused by the manufacturers. The sellers could only claim them back from their (wholesale) sellers if they could prove culpability, which often they could not.

The new law coming into effect on 1 January 2018 closes this gap in the delivery chain. Strict liability will apply throughout the entire supply chain and even non-consumer buyers will be able to claim against their retail sellers. The costs will be passed on along the supply chain. These costs may in turn be passed to those insurers involved in the supply chain.

This is the result of a change in the language of section 439 of the German Civil Code. It will be amended with a third paragraph stating that, if the buyer installed or connected the defective product with other goods in accordance with the nature and intended use, the seller must bear the costs of removing the defective product and installing or reconnecting the repaired or new product. Under a new section of the German Civil Code (section 445), the costs are passed on from the seller to his supplier and the supplier can charge the next tier in the delivery chain until the costs finally reach the manufacturer. In a final change to the law, there is a new limitation regime, whereby claims are time barred two years after delivery of the product, but not sooner than two months after the reimbursement of the costs to the buyer. The overall limit is five years from the point of delivery.

The only seller that will be protected from this strict liability in the future is one that qualifies as a consumer.

It is worth noting that the claim scheme only applies if the product was sold as new; used products do not qualify.

These changes signal a potential increase in exposure for product liability insurers, and will need to be taken into account for 2018 renewals.

Eva-Maria Goergen
Carmen Hübner