Product Liability Insurance Blog

The other day we were delivering a policy for American Safety Indemnity Company and we notice an endorsement we have never seen before. This endorsement is called Sub-Manufacturers and Suppliers Warranty or ES 98 100 05 04.

 We requested a copy from the underwriter and were completely surprised to find out that this endorsement had the power to remove product liability insurance coverage if the following conditions were not met:

1. All sub-manufacturers and suppliers that supply any goods or products to you must have Product Liability insurance with limits no less than $1,000,000.
2. You must have Certificates of Insurance from all sub-manufacturers and suppliers.
3. All sub-manufacturers and suppliers must name you as “Additional Insured” and must be evidences on the Certificates of Insurance provided to you.

 This endorsement goes on to state “ the insured (you) agrees that this insurance policy has been issued upon the above representations and warranties and that this insurance will not apply to claims arising out of work or operation performed by any sub-manufacturer and supplier unless all of the above conditions are met.

 If all of the above conditions are not met product liability insurance will not apply.

 The scary word in this endorsement is “all”.  A more reasonable phasing of this endorsement would be “endeavor to” meet the above conditions.

 If you have this endorsement in your policy, make sure you contact your insurance agent to have it removed or find another insurance policy that does not have this endorsement.

The CPSC has announced a voluntary recall of over two million drop down cribs.  The companies affected by the recalls are as follows:

• Child Craft (out of business)
• Delta Enterprise Corp of New York, NY
• Evenflo of Miamisburg, OH
• Jardine Enterprises of Taipei, Taiwan
• LaJobi of Cranbury, N.J.
• Million Dollar Baby of Montebello, Calif.
• Simmons Juvenile Products, Inc. of New London, Wis.
   

Apparently, drop down cribs have a long history of problems and are known to be less structurally sound than four fixed side cribs.  In the last 5 years, more than 9 million drop down cribs have been recalled from the market.  They are also more suscetible to age related wear and tear and incorrect assembly than the fixed side cribs.

If you want to know more about crib safety, go to JPMA Crib Safety.

Now more than any other time in history we are seeing more manufacturers refusing to name their clients as Additional Insured on their product liability insurance policies or going the other extreme and asking their clients to name them as Additional Insured on their product liability insurance policy. 

Why this is extraordinary is because in the past, manufacturers have used additional insured vendors endorsements as a way to entice retailers and wholesalers to sell their products.  By being additional insured on the manufacturer’s product liability policy, the retailers and wholesalers were reassured that they were protected in the event they were shotgunned into a products liability lawsuit for a manufacturing defect of the product.

This reversal by the manufacturers is due, in my opinion, to two different factors. The first reason may be because more manufacturers are using high self-insured retentions and loss-sensitive rating plans to save money on product liability insurance premiums. When using these methods to reduce their premium costs, manufacturers are likely to be required to come out of pocket for a large portion of the defense costs.  By eliminating clients as Additional Insureds, the defense costs would have to be covered by their client’s product liability insurance policy, thus, saving them a significant amount of money.

The second reason manufacturers may be reluctant to name their clients as Additional Insured is the manufacturers are not always the designer of the products they are manufacturing.  There are 3 legal theories of recovery in a product liability lawsuit – 1) Manufacturer Defect, 2) Design Defect and 3) Instruction and Warning Defect.  When a manufacturer names a client as Additional Insured on their product liability policy, the manufacturer’s policy is primary to their clients product liability policies and the manufacturer’s policy would have to respond to all product liability lawsuits, even if the reason for the lawsuits were for Design or Instruction and Warning defect.  When manufacturers are contracted to build products designed by others, they are not responsible for the design or instructions and warnings of the products and, therefore; do not feel it is their responsibility to cover these types of claims on a primary basis.  This type of manufacturer is often called a third party manufacturer because they are simply building products based on the specifications provided to them by other parties.

Since these third party manufacturers are not responsible for the design or the warning labels or instructions, we are seeing many of these third party manufacturers asking their clients and vendors to name them as Additional Insured on their policy.  The logic the third party manufacturers use to justify this request is that since they are making products to the specifications of their clients and not responsible for warning labels or instructions, they should be covered on the clients Product Liability policy. This is a very convincing argument and not without merit.

What is odd about this dilemma is there is not overt Indemnification agreement or contract that simply declares that the third party manufacturer is responsible for manufacturing defect and the designer of the product, which is more often than not, also, the seller, be responsible for design and instructions and warning defect claims.

If anybody is aware of such an indemnification agreement, please email or fax me a copy.  We would love to be able to recommend this to our clients as a simple way of resolving this troubling issue.

How does the Graco and Simplicity product name survive and apparently continue to thrive, when it seems it has a major product recall about every other month?

Over the last ten years Graco and Simplicity has distinguished itself as one of the most embattled and recalled company’s in the history of the United States, yet it seems to be able to continue to live up to it’s business model of delivering inexpensive baby and children’s products.  During this time, products such as cribs (suffocation), strollers (finger amputations), high chairs (falls), car seats (choking), toddler beds, swings, walkers, baby carriers, bassinets and toys have been recalled by the millions.  The cost alone to handle all the recalls and product liability lawsuits has to have reached into the hundreds of millions of dollars over the past ten years.  I guess the Civil Penalty imposed by the CPSC of $4M for not reporting known product defects in a timely manner must have seemed like a small slap on the wrist.

I have to believe somewhere some college professor is teaching a class based on the business model of Graco.  You have to give Graco their props.  Despite it’s name being negatively being associated with baby and children’s injuries and deaths and spending hundreds of millions in fines, product recalls and product liability lawsuits they appear to not only survive, but to thrive and remain profitable.

This is the third blog in the series of “State To State Variability”.  The point of this series is to point out to the reader how particular state laws are statutes can impact the outcome of a product liability lawsuit and how they can vary so much from state to state.

 Statute of Limitations laws place a time limit on how long an injured party has to file a product liability lawsuit, after the time of the injury.  After the time limit has expired, an injured party loses the right to file a product liability lawsuit, unless a legal exception applies. For most states, a product liability claim must be filed within 2 to 4 years, after the injury.

 While the Statute of Limitations appears to have less variability from state to state than Joint And Several Liability and Statute of Repose, the real variability lies primarily with the legal exceptions.  When legal exceptions exist, it allows the Statute of Limitations to stop running. Typical legal exceptions are when a victim was a minor or mentally incompetent at the time of the injury or the defendant is in bankruptcy.  For example, in the state of New York, a minor has 3 years after their 18^th Birthday to file a product liability lawsuit. 

Claims-Made Policies and Children’s Products

Because most states allow, at least, until the eighteenth birthday of a victim to bring a product liability lawsuit, claims-made policies are not a good fit for businesses that manufacture, import or distribute children’s products. 

To state it as simply as possible, once a claims-made policy is cancelled or non-renewed, there is no product liability coverage for any prior injuries or incidences involving your products.  To have a claim covered by a claims-made policy two things must exist – you must have the injury and the claim during the policy period.  In other words, you must keep renewing your claims-made policy or, if you switch policies, you must have the new insurance carrier to endorse your new policy to include the retro-date (original effective date of our first claims-made policy) of your first insurance policy.

The other issue for children’s businesses is the large retailers of children’s products are all too aware of the legal exception for minors that stop the statute of limitations from running.  As a result, most of the large retailers will require providers of children’s products to have an occurrence-based policy.  Unlike a claims-made policy, an occurrence-based policy only requires an incident or injury to provide coverage.  So all prior incidences or injuries to the cancellation or non-renewal of an occurrence-based policy would still be covered by the insurance company.

In summary, while it is tempting to purchase a claims-made policy because premiums can be 30 to 40% less than an occurrence-based policy, most of the major retailers are aware of the legal exception for minors and, as a result, will contractually require their vendors to have an occurrence-based policy in order to do business.  Also, from a pure risk management point of view, the owners, principles and stockholders of a children’s business should be able to sleep better at night knowing the occurrence-based policy will still provide product liability coverage for incidinces or injuries prior to the policy being cancelled or non-renewed.

A common theme in many of my blogs is the impact individual state laws or statutes can have on the outcome of a product liability lawsuit.  It is, in my opinion, possible to take the exact set of circumstances of a product liability lawsuit and have different outcomes in different states.  Product liability laws or statutes are created by state legislators and can be very different from state to state.  While there have been attempts to create federal preemption for medical products, all too often state laws continue to prevail over the federal preemptive defense.

One of the state laws that can have a major impact on the outcome of a product liability lawsuit is the Statute of Repose.  The Statute of Repose prevents product liability lawsuits against the manufactures, importers, designers and distributors of products based on the age of the product.  However, only 19 of the 50 states have Statute of Repose laws to protect businesses from product liability lawsuits.  Most of the states that have Statute of Repose laws limit product liability lawsuits somewhere between 5 to 12 years after the sale of a product.  Two states, Arizona and Rhode Island, have found Statutes of Repose laws for products unconstitutional.

One of the industries that is very familiar with Statute of Repose laws and the impact they can have on a product liability lawsuit is the Tree Stand industry.  For example, if a kid where to die or become a quadriplegic in a state with a 10 year Statute of Repose law and the age of the tree stand was 11 years from the date of sale, the manufacture, designer and sellers of the tree stand could be protected from a product liability lawsuit because of the 10 year deadline was exceeded.  However, in another state that did not have a Statute of Repose law, the manufacture, designer and sellers of the tree stand could find themselves named as defendants in a product liability lawsuit and, at the very least, incur discovery and settlement costs and, at the worst, large monetary judgments by a sympathetic jury.

I just read an online article, “Retailer Pulls Supplements with Alleged Steriods”, in which online retailer Bodybuilding.com is having to recall lots of 65 dietary supplements that are believed to contain steriods such as androstenedione, superdrol, madol and tren.

This article supports a previous blog I wrote, “Health Supplements Biggest Problem – Undeclared Substances”.  In this blog I reference a study that indicates that up to 25% of all health supplements in the market could contain undeclared substances.  This study did not indicate that all the undeclared substances were harmful, but it is, just the same, disconcerting not knowing what is going into your body when you take a health supplement.

What I find fascinating is that while the folks at bodybuilding.com maintain that they were not aware of any unlawful substances going into their health supplements, I cannot help but wonder, since they were in the body building business, if they were trying to gain an unfair advantage over their competitors.  If you go to their website, you will see grandpa’s before and after pictures.  In the after picture, grandpa has a body most 26 year old guys could only dream of.  Give me what he is taking! On second thought, I think I will pass.  If steriods were unknowingly in his health substances, he could have an increased risk of heart attack, stroke and death, not to mention acute liver damage, shrinking testes and male infertility.

I wonder what Bodybuilding.com’s product liability insurance carrier is thinking.  My bet is their product liability policy has either been cancelled or they have been notified that they will be non-renewed.  The policy was more than likely a claims-made policy and once cancelled will not cover any of the  prior or future incidences by their customers such as liver damage, stroke, etc. that may have been caused by unknowningly ingesting steriods. 

I, also, wonder what person liability will be assigned to the owners or stockholders of the company in the future, if it turns out that there was knowledge that steriods were being used in their dietary supplements.  Every General Liability policy has an exclusion for intentional acts and even if a product liability lawsuit was filed against the company, it is likely their insurance carrier could deny coverage.  With no insurance coverage for the company, plaintiffs may have a case to go after personal assets of the company principles.

If you are a business selling products in the U.S., nothing exemplifies better how state laws can impact your business more than Joint and Several Liability.   

We know from my previous blog, “Why Naming Multiple Defendants In A Lawsuit Is Common Practice”, that it is typical for the plaintiff’s attorney to name as many defendants as possible, when there is a product liability lawsuit.   However, what may surprise you is that even if you have only marginal ties to the product that is responsible for the product liability lawsuit you could potentially be responsible for paying the lions share of the damages or even paying all of it. 

How can this be? This is not fare! What kind of law would allow this to happen?

Joint and Several Liability was created to make sure the injured party or plaintiff was able to be made whole, even if one or more of the defendants are unable pay their share of the product liability monetary damages.  Many of the critics of Joint and Several Liability refer to this approach as the “deep pocket” rule because of the potential of a product liability lawsuit becoming a search for the “deepest pockets”.

Over time tort reform efforts have led to many states limiting the applicability of pure joint and several liability.  Currently states are using one of the following three approaches when distributing financial liability of defendants:

1. Pure Joint/Several Liability – Each defendant in a product liability lawsuit is responsible for the entire amount of the damages, regardless of amount responsibility or liability each defendant had.  Currently, 16% of states use Pure Joint and Several Liability, including my fine state, South Carolina.
2. Pure Several Liability – Each defandent is only liable for their assigned portion of the damages, based on their percentage of responsibility or liability.  For example, manufacture and designer of a faulty product would have a higher percentage of responsibility or liability than the retail distributor of the product.  Currently, 28% of the states use Pure Several Liability.
3. Modified Joint/Several Liability – This is somewhere between Pure Joint/Several Liability and Pure Several Liability and can vary greatly state to state.  Currently, 56% of the states use Modified Joint and Several Liability.

Overall, the point of this blog is that life is not fare and if you are a business that distributes products in all or most of the 50 states, the amount of monetary damages your business may be responsible for paying could largely depend on the state in which the product liability case is being tried. 

If you want to know which states use Pure Joint and Several Liability, Pure Several Liability or the Modified Joint and Several Liability, simply click on this chart.

I was reviewing the website, www.recalls.gov, the other day with one specific thought in mind – how many products are on the recall list that you would never classify as high risk, but are considered dangerous enough to be recalled or removed from public use?

Keep in mind that recalls are simply not for defective products that do not work as intended.  To implement a product recall there must be some evidence that the product presents an imminent danger to cause bodily injury or property damage.

The following items may surprise you to be on the product recall list:

• Denture cream
• Foot Warmer
• Car Floor Mats
• Coffee Mugs
• Office Chairs
• Candle Holders
• Women’s Robes
• DVD Players
• Flashlights
• Women’s Shoes
• Indoor Light Fixtures
• Key Chains
• Computer Batteries
• Entertainment Stands
• Window Blinds

The point I am trying to make is that all of the manufacturers, importers or distributors of these products could not have anticipated the type of problems they are currently experiencing. 

So the next time you feel like paying for product liability insurance is a rip off, I recommend you go to www.recalls.gov and look at all the products being recalled and ask yourself if your business could survive without product liability or product recall insurance, if one of your products ended up on the list.

Back in December of 2008 I wrote a blog “Insuring Nanotechnology Still Up In The Air”.

 In the article, I stated that because insurance carriers viewed nanotechnology as potentially the next “asbestos” it would be difficult to insure and that nanotechnology business development would probably be forced to ‘creep at a snails pace”.

It turns out that, maybe, I was wrong. According to Lux Research, a consultant on emerging technologies, Nanotechnology business is expected to increase thirty fold.  It is expected to increase from $100 billion in 2007 to $2.6 trillion in 2014.  It is thought that, as much as 15% of all manufactured products will rely on some type of nanotechnology by 2014.

The interesting part of the from a product liability insurance point of view is how many insurance carriers are going to line up to provide product liability policies for nanotechnology businesses.  Ultimately, larger companies, such as DuPont and 3M, could either self-insure or bring enough premium to the table to attract some insurance carriers to provide product liability coverage.  However, with some claims already being filed with some sunscreen companies that use nano particles in their products, it is my opinion that most of the insurance carriers are going to wait before jumping in to provide product liability coverage for the new emerging nanotech products.  The insurance carriers are going to want a proven track record of no claims before making product liability insurance policies available to small and medium size companies.

The insurance companies’ primary concern is that since nanotech particles can be smaller than a virus and can easily penetrate or be absorbed by human tissue, they may be handling severity related claims such as cancer, similar to the thousands of past and pending asbestos claims.

One thing that is a sure thing – product liability trial lawyers are already having seminars in far away exotic locations and are preparing their strategies on how to hit a home run similar to the home run hit with asbestos.