Three years ago, a spate of mysterious skin rashes began to affect thousands in the UK, with their leather sofas the cause. A co-ordinated response by the retailers’ insurers followed, resulting in a £20m payout. Insurance Times looks at how resolution was achieved and what lessons can be learnt

Back in early 2007, a number of people across the UK started to notice strange rashes in some rather embarrassing places.

At first, the number of cases was a trickle. Soon, it had turned into hundreds. A common factor emerged: leather sofas manufactured in China and sold by retailers such as Land of Leather and Argos, among others (see box, right).

Complaints by consumers made it onto the BBC’s Watchdog programme. But it wasn’t until the Sun newspaper splashed the story on its front page on 28 May 2008, under the headline ‘Toxic sofas burn 1,000’, that the issue really exploded.

Within weeks, thousands of affected customers had come forward and registered their complaint. The most heavily exposed insurers were Chartis, Travelers and Zurich. The claims related to product liability insurance claims for sofas sold by the Home Retail Group – Argos’ parent company – Walmsley’s and Land of Leather.

Confronted by this tidal wave of potential litigation, the insurers’ defendant solicitors decided that it made sense to work together.

They approached personal injury law firm Russell Jones & Walker (RJW), which was dealing with the largest share of the claims.

Regional claims manager Peter Vigar at Chartis, the most heavily exposed insurer, says: “We felt it should be settled as quickly as could be, and fairly to the people who had been injured.”

Both sides of the fence agreed that the claims should be handled through a group litigation order (GLO), the UK version of the USA’s more famous class action.

At the end of April this year, around 2,200 claims were settled following the biggest consumer product group litigation case in UK legal history. The value of the settlement is worth an estimated £20m. RJW senior litigation partner Richard Langton says: “In terms of product liability, it’s been a record breaker.”

The logistics

So how did the process work – co-ordinating a large-scale litigation, spanning multiple retailers, suppliers and insurers? And can the experiences of the key parties involved offer pointers for how similar cases should be handled in the future?

Langton, a former president of the Association of Personal Injury Lawyers, saw the value in taking the GLO route, having used them in his work with victims of transport accidents, such as the Paddington rail disaster.

Hugh Mullins, partner in the insurance litigation department at Chartis’s solicitor Halliwells, agrees: “The real virtue of a group litigation order is its flexibility.”

The GLO was applied for in May 2008, and was approved soon afterwards by the judge presiding over the case. The use of a group order was facilitated by the fact that many of the claims shared common features in terms of symptoms.

In addition, because the symptoms cleared up once exposure to the noxious chemical had ceased, the claimants had largely recovered.

And, crucially, while the defendants were unready to admit causation, they were prepared to give in on liability, smoothing the way for an agreement covering pain, suffering and loss of amenity.

But the process wasn’t all plain sailing. After admitting liability, the next step was to develop a tariff for the victims’ financial compensation.

Mullins says: “Having the tariff is important, because it narrows the possibility of disputes between the parties.”

Drawing up the tariff threw up headaches, and the negotiating process took over a year to complete. “The negotiations were extremely frustrating,” Langton says, “but eventually we were able to reach an agreement.” The agreed tariff ranged from £1,175 to a maximum payment of £9,450.

“We are keeping it to what is proportionate and cost-effective,” Mullins says. “But because it’s financially limited, I suspect that particularly nasty injuries will be treated in a more

traditional way.”

Agreeing the claims

After the tariff was agreed, the claimants and defendants’ solicitors then had to agree a claims-handling process. They decided to model the process on the new procedures introduced in April by the Ministry of Justice (MoJ) for handling low-value road traffic accident claims. Mullins says: “All parties were influenced by the MoJ reforms. We all thought it was the way to go.”

But like the RTA procedures, nobody will be forced down this route, he insists. “Everybody will have the right to opt out.”

Langton is equally adamant that claimants who used the process have not lost out. “Claimants will get exactly the same as if they went through conventional litigation,” he says.

Now the hard graft of agreeing individual claims has begun. Mullins hopes that the “vast majority” of the sofa burns cases can be settled within the agreed framework, but acknowledges that the proof of the pudding will be in the eating.

Chartis’s Vigar says he expects the agreement to deal with around 80% of the claims by the end of the year. And another 3,000 cases, in which liability was disputed, remain to be agreed.

Meanwhile, Zurich won a ruling in March that meant it did not have to pay compensation to 350 buyers of sofas from Land of Leather, which has since gone into administration. This was because of a dispute over the now defunct administrator’s policy with its Chinese manufacturer. The case has now been referred to the Court of Appeal.

A new framework

Langton believes that the GLO mechanism offers plenty of scope for improving the efficiency of future actions. “We should look at alternative methods of doing claims within the context of the GLO,” he says.

Mullins agrees that the process has been a worthwhile one. “Given the flexibility of the GLO, parties can develop a system of dealing with claims that should lead to significant efficiencies and cost savings.”

The alternative for Chartis alone would have been 1,500 individual claims, Vigar estimates.

But perhaps even more important than the potential savings on offer is the greater certainty that the new process offers to both claimants and insurers, they argue.

Settling the claims via individual actions would have been far more time-consuming and bedevilled with uncertainty, Mullins believes. “Each claim would have been processed individually at any time within the three-year limitation period,” he says.

In addition, the absence of an agreed tariff would have meant insurers and their legal teams dealing with a host of individual valuations.

“Given the issues involved, we are very pleased to have achieved what we have,” Mullins says. “We have an agreement that is clean, innovative and should result in more efficient settlement of claims.”

Vigar believes that the route the team took to handling the litigation can inform future cases. “It’s a way of getting out of the current adversarial system that everybody is forced down,” he explains. “We are very pleased with the outcome. We have built a framework that can be replicated.” IT

The chemical at the cause

The cause of the so-called sofa burns was DMF (dimethyl fumarate), a chemical that was used by the sofas’ Chinese manufacturers Linkwise and Eurosofa to inhibit the growth of mould while the sofas were stored and then shipped halfway across the world to the UK. The sofas were sold by a number of UK furniture retailers, including Argos, Walmsley’s and the now defunct Land of Leather.

After the sofas were delivered, the fungicide turned into a gas, which seeped out of the sofas, burning through clothes and skin. On exposure to the gas, skin becomes ridged and very hard.

The degree of injury tended to depend on how healthy and sedentary the individual was. When seeking to describe the injuries, Chartis regional claims director Peter Vigar couches his words delicately. “Because of where you sit, injuries are in a very personal part of your anatomy.”

Rashes were the most common complaint, but the gas also resulted in inflammation of the eyes and breathing difficulties.

However, while some claims involved hospital treatment, luckily for the complainants the ‘burns’ tended to go down once they were no longer exposed to the noxious chemical, which has subsequently been banned across the EU.