Mutual Indemnification May Solve The Additional Insured Dilemma Between Mfgs & Distributors

In my 6/25/2010 blog, Why Manufacturers Are Refusing To Name Their Vendors As Additional Insured, I stated that one of the reasons manufacturers are reluctant to add their clients as Additional Insured onto their product liability policy is due to manufacturers not always designing the products they are manufacturing.  These manufacturers that build to other’s specifications and designs are often called third party manufacturers or contract manufacturers.

The dilemma for the third party manufacturers is, if they name the designers/distributors as Additional Insured on their product liability policy, the manufacturer’s insurance policy could become responsible for product liability lawsuits or claims involving design and instruction/warning defects which should be the responsibility of the designers/distributors.  From a third party manufacturer’s view, they should only be responsible for manufacturing defects and do not want their product liability policy responsible for claims outside of their control such as design or instruction/warning defect claims. 

The dilemma for the designers/distributors of products that are using third party or contract manufacturers to make their products occurs when they are purchasing product liability insurance. Simply put, the designer/distributor may save money on their insurance premium, if the third party manufacturer will name the designer/distributor as Additonal Insured on their product liability policy.  The insurance carrier for the designer/distributor become secondary on a product liability claim, when the designer/distributor is named as Additional Insured on the third party manufacturer’s product liability policy.  In other words, the manufacturer’s product liability policy is primary for all product liability claims, including design and instruction/warning defect claims.

So the dilemma for manufacturers is how do they satisfy their clients (designers/distributors) without having to be financial responsible for things they have no control over and the dilemma for the designers/distributors is how do they provide their insurance carriers a certificate of insurance showing them as additional insured on the manufacturers’ policy and save money on their premium?

The solution for the both the manufacturer and the designer/distributor could be a legal agreement called a Mutual Indemnification Agreement.

A Mutual Indemnification Agreement, used for product liability purposes, is a legal agreement that makes the manufacturer responsible for manufacturer defect claims and the designers/distributors responsible for design defect and instruction/warning defects.  In other words, each party is only responsible for those things to which they have control.

A common question we receive is, ‘what if we use a foreign manufacturer to build our products?’  Most of the time in the eyes of law and the product liability insurance carriers, you are considered the manufacturer of the product.  It simply is too expensive for product liability insurance carriers to try and recover from foreign manufacturers in foreign courts. The exception to this would be if the third party foreign manufacturer owns a true worldwide product liability insurance policy that will respond to claims within the U.S. and names you as additional insured on the policy.

Please note that a mutual indemnification agreement is not an insurance endorsement, nor is it written or provided by an insurance agent or insurance carrier. It is a legal contract that is prepared by an attorney of law.  In this day and age, most indemnification agreements may be lopsided to protect the party that has the most leverage in the business arrangement. A mutual indemnification agreement is a way of leveling the playing field and making businesses only responsible for those things in which they have control.