The Wall Street Journal, among others, has done a great job recently highlighting issues with the third party selling practices at Amazon. I wanted to highlight them today because there is a risk of significant insurance losses if the plaintiff’s bar decides to target Amazon.
Amazon sells products in two ways. First, they act like a traditional retailer where they sell branded products on behalf of producers. Second, they sponsor Amazon Marketplace where third party vendors can essentially rent shelf space on Amazon’s platform to advertise their goods. It’s not dissimilar to vendors offering their products in classified ads in the pre-internet days.
The big difference is that a newspaper wasn’t also selling a similar product as the classifieds did. There was no channel conflict. At Amazon, they will sell you a branded toy directly and a knock-off of that brand on Marketplace.
Often, the regular and third party items show up on the same page and the buyer is largely oblivious to which is which (usually, there is a small disclosure or a difference in shipping that might alert you). For example, go look up something basic like an HDMI cable and tell me if you can figure out who is selling it to you.
What Exactly Is The Problem?
As long as the third party vendors are selling quality product, there is no problem. The issue is that’s often not the case. In a series of stories, the Journal has exposed serious health and safety risks with many products on Amazon, specifically those sold through Marketplace.
These aren’t just minor risks either. These are toys with lead or clear choking hazards, medications with the wrong ingredients, and, tragically, motorcycle helmets that weren’t tested for safety and resulted in a fatality. Many of these products are falsely labeled as tested or certified when they are not.
Amazon says it is not responsible for what is sold by third party sellers. Again, if they were a magazine selling classified ads that might make sense.
However, these sellers choose to sell on Amazon partially because of the brand reputation of Amazon. Buyers have a trust factor with the brand that makes them willing to buy third party products that they wouldn’t if they were sold on some random standalone website. A buyer has an expectation that Amazon stands behind the products sold on its platform in the same way they would for a brick and mortar retailer.
Amazon’s stance is that internet regulation says that they are not responsible for the actions of others. While this may be technically accurate, it is morally reprehensible and regulations are subject to change.
The Birth of the FDA
The FDA as we know it today was born out of the Pure Food and Drug Act of 1906. This was a response to the obscene practices in the food industry in the late 1800s, including those famously documented by Upton Sinclair in The Jungle.
At that time, eating dinner was a risky exercise. You had no idea if the meat you were eating was old, rotten, or even meat at all (and no, I don’t mean it might have been Beyond Meat). Often, poisonous chemicals like formaldehyde were added to give food longer shelf life.
There were also a long line of snake oil brands that sold all kinds of foods as miraculous cures for all that ailed you without any documentation. Breakfast cereals were most famous for this as were many drinks including Coca-Cola.
As unscrupulous entrepreneurs pushed too far, the government eventually pushed back. This led to what we now know as the FDA and removed the fear that eating a meal could be fatal.
Do We Need An “Online FDA”?
History sure seems to be rhyming. Nefarious peddlers are abusing the system and their abuses are going unchecked. Every customer of Amazon (and other online re-sellers, this isn’t just Amazon) has an expectation that they are buying safe products and that someone is protecting them from getting sick or dying from something they buy online.
If Amazon won’t responsibly police themselves, then the government will surely step in and do it for them. In the mean time, they are exposing themselves to serious legal risk because this story has all the things lawyers dream about: sad stories, corporate negligence, and deep pockets.
What jury in America today is going to say to a family whose baby died from a poisonous product sold on Amazon that Amazon shouldn’t pay the family $1B…or more? This is easy peasy.
The Trump vs. Bezos Angle
OK, now let’s drop the wild card in to this situation. Trump hates Bezos. Trump is running for re-election. It’s not much of a leap for Trump to say “Amazon is killing people”. That will bring plaintiffs out of the woodwork better than any informercial can! One can also imagine AGs in red states suing Amazon similar to how state AGs have sued opioid manufcaturers or mortgage banks.
The Insurance Loss Potential
OK, let’s get to the ALERT. I see three places insurers will get hit on this.
First, there will be the liability losses from the class actions. Those will be limit losses. And it’s not just Amazon. There are plenty of sites that sell product of third parties. They may have much smaller limits available, but they also pay less premium.
Second, there will be E&O losses. As the Journal has demonstrated, Amazon was aware of many of these problems and did little to correct them. The downplaying of the scooter fire risk was particularly troubling.
One can certainly make a case that Amazon is acting as a broker of third party goods and therefore has the same fiduciary duty to its customer that an insurance broker has to sell you a policy from a solvent company and with policy language that is written properly. It is the same in every manner but the current legal standard.
Third, there will be full limit D&O losses. The stock will get decimated when the first $5B verdict is announced. It will go down further when Amazon announces its new policy to police third party sellers which crushes revenue. Oh, and then another drop when all the ESG indexes remove AMZN from the approved list! 😉 That’s an easy D&O suit especially when the directors are well aware of these risks and have chosen to let current practices continue.
If your company writes professional liability or GL for Amazon, I suggest you non-renew at 1/1. I’d also suggest putting up some extra IBNR for the coming lawsuits but we all know that’s not going to happen. I don’t know the total limit of Amazon policies for the last 3-5 years, but I’d suggest they’re going to be limit losses.
I’d also start combing the books for similar business models elsewhere in the portfolio. While much of the exposure has already been incurred, there is still the ability to limit future losses.