Author Archives: Paul

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

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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.

 

Are Claims-Made Product Liability Policies Cheaper? Yes And No!

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One of the primary reasons many businesses purchase a claims-made product liability policy is the perception that it is cheaper than an occurrence based policy. 

On the surface, claims-made policies can be cheaper than their superior counterpart, occurrence based policies.  However, when you examine claims-made policies closer, you may find, in the long run, they can cost more than occurrence based policies.   This is something many agents do not tell their clients because they either do not understand claims-made policies or know most applicants focus on the short-term cost and it is easier to make a sale by having the lowest premium cost.

The first question that comes to mind is why are claims-made policies initially cheaper than occurrence based policies?  One answer is your claims-made insurance carrier has the option to cut their losses should a product or products be defective and have the potential to cause bodily injury or property damage.  Remember for a claim to be covered by a claims-made policy you must have both the incident  involving your product and the claim during the policy period or the Extended Reporting Period.  With an occurrence based policy you only have to have an incident or occurrence during the policy period in order to be covered.  So if your business where to release a defective batch of products into the market place and a product recall was necessary or you had a claim that was reported to your insurance carrier, your claims-made insurance carrier could cut their losses by canceling or non-renewing your policy.  The end result could be that you have defective products in the market place in which several incidences or occurrences of bodily injury or property damage have taken place with no coverage because the claims-made insurance carrier has cancelled or non-renewed your policy.   The uncovered cost of discovery and defense cost alone could bankrupt most small to medium sized businesses should they experience this type of scenario.

Another reason claims-made policies may be initially less expensive than occurrence based policies could be a recent Retro-Date of the policy.  A retro-date is usually established as the first effective date of your first claims-made policy.  If an incident or occurrence occurs prior to the established retro-date on a claims-made policy, there is no coverage for bodily injury or property damage claims.  If your retro-date is less than one, two or three years old, your insurance carrier typically is providing a discounted premium because there is a limited amount of your products in the market place. However, once your retro-date is over three, four, or five years old, the insurance carrier may see each additional year of your policy as another year of products being added to the market place and a higher probability that more incidences or occurrences will occur involving your products.  At this point your policy may start to equal or exceed the premium of an occurrence based policy.  Get six, seven or eight years into a claims-made policy and your premiums could be much higher than a comparable occurrence based policy. You also may find it impossible to switch policies because no other insurance carriers will pick-up the retro-date of your policy. 

So the moral to this blog is – when you first buy a claims-made policy the premiums will be cheaper than a comparable occurrence based policy; however, the longer you own a claims-made policy, the more likely your premium is going to increase and eventually be higher than an occurrence based policy.

Also, it is of critical importance not to lose the retro-date of your claims-made policy by letting your policy lapse or when you are changing policies because you will lose all of your coverage for any incidences or occurrences involving your products.  Any good risk manager will tell you that you should never assume just because you have never had any claims, it does not mean you do not have any incidences or occurrences involving your products.

A Better Understanding of Claims-Made Policies

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In many industries that sell high hazard products such as medical and children’s products, claims-made policy forms are very common. However, it is important to note that not all claims made forms are created equal.  There are two distinct types of claims-made policy forms.  One of the policy forms is the “Claims-Made & Reported Form” and the other is the “pure Claims-Made Form.”

The most common form used for product liability policies is the Claims-Made & Reported Form.  This type of policy requires the “claim” be made during the policy or the designated Extended Reporting Period (ERP) and reported in the same policy period of the policy currently in force.  On the policy declaration (summary) page it may state: “This is a Claims-Made Policy. This Policy only covers those Claims first made and reported against the insured during the Policy Period or “ERP”, if applicable.”

The second type of Claims-Made Policy form and least commonly used is the “Pure Claims-Made Form.  With this type of policy form the insured only needs to report the claim “as soon as practicable.”  This policy form provides more flexibility because the phrase “as soon as practicable” provides more flexibility and may allow claims to be turned in after the policy term.

What Is A Claim?

Hence the name Claims-Made, it is important to understand what constitutes a claim.  Is a claim a notice received by the insured to hold the insured responsible for bodily injury, property damage, advertising injury or personal injury or is it the formal service of lawsuit or institution of arbitration proceedings against the insured?  The answer could be both. I recommend that you examine the “Notice of Claim” reporting provisions of the policy or the “Definitions” section of your policy to understand what constitutes a claim by your insurance carrier.  Please note that a notice could be something as simple and informal as an email or a letter from the alleged injured party or it could be something as formal as being served with lawsuit papers.  This is why it is important you understand the definition of a claim within your policy.

The recommended simple rule for any insured with a claims-made policy is to always report any claim or potential circumstance that could lead to a claim for the insurance carrier.   All too often, when an insured fails to report a notice of claim, it is out of fear that the claim could have a negative impact on future premiums and, as a result, the insured waits, hoping that the notice never turns into a formal claim.  If the definition of a claim is notice (remember this could be a simple email) or threat to hold the insured for bodily injury, property damage or personal and advertising injury and you renew your insurance policy and fail to notify the insurance underwriter in the renewal application of knowledge of potential claim, this could be a reason for your the insurance carrier to deny a claim.  The insurance carrier could claim they would never have renewed the policy, if they had been aware of the potential claim or claims.

If you were to go out of business or the insurance carrier decides to non-renew or cancel the policy, it would be wise for you to purchase the Extended Reporting Period, particularly if you sell high hazard products.  ERP is a period of one, two or three years the insured can extend the reporting period of potential claims on their policy for an additional premium that is a contractually predetermined percentage of the premium of the last policy. In many claims-made policies the ERP for one year is 100%, two years is 150% and for three years it is 200% of the last premium paid.

3D Printers Will Change The World As We Know It

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 After reading an article, “The Printed World”, in the February 12th issue of The Economist, I was taken back at the possibility of a new world of innovation where it will be just as cheap to produce single items as it is to make thousands of items and therefore, undermine the whole concept of economies of scale and how businesses bring products to the market.

3D printing or additive manufacturing, as it is also called, is a technology that will change society so profoundly it defies the imagination.  Think of a world where products being made no longer have go through the start-up steps or costs to be manufactured, where anyone with an imagination can bring a product to reality and manufacture 10 units to determine if there is a demand for the product. No molds or lathes required, just a computer and a 3D printer.  Inventors and start-ups will thrive, as never before seen in the history of man because making and trying new products will become less risky and expensive. 

For example, under today’s standards of manufacturing, to make a plastic part you need to create the mold.  To make a completed product several molds may need to be made before the product is ever completed and brought to market.  To offset the fixed costs required to make the molds, assemble and deliver the product to market, a product must be mass produced and sold by the thousands, thus creating the economies of scale.  With additive manufacturing or 3D printing, you pull up the blueprint on your computer screen, make the necessary changes to the shape and color and then press print.  A machine or 3D printer builds the product by progressively adding on material, one layer at a time.  No molds or factories are required. 

Today, most 3D printers are used primarily to build prototypes and then current manufacturing techniques such as molds and reduction machining are used to build the final products. Currently, only 20% of the output of 3D printers are used to build the final products.  However, by 2020 it is estimated final products produced by the 3D printers will grow to 50%.  In 50 years, it is possible that complete planes, trains and automobiles and anything else you can imagine will be made entirely from 3D printers.

The other great thing about 3D printing is it not just limited to consumer products. 3D printing has already progressed into the areas of human health.  In the future, it may be standard practice to print replacement parts for the human body from layers of human cells.  A company called Organovo apparently has already managed to make blood vessels and cardiac tissue via a printer that dispenses cells instead of ink. 

From an insurance point of view, there are going to be some monumental hurdles to be cleared.  How does a business protect it’s intellectual property rights, if anyone with a 3D printer can make an exact replica of their product almost immediately after it has hit the market?  Because products can be duplicated so quickly, will this cause businesses to push to get products to market quicker; therefore, forgoing valuable testing to make sure the products are safe for the consumers?  How will the patent offices keep up all the new products? And will a businesses want to submit their products to be patented because of the risk of notifying potential competitors to their new products?

Many Broker of Record Letters Based On Deceipt

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Simply put, a Broker or Agent of Record letter allows an agent to take the quotes and work of another agent.  A BOR or AOR is a formal letter that gives an agent or broker authority to access insurance carriers that have previously been accessed by other agents or brokers and revokes those agents or brokers authority to deal with the insurance carriers on your behalf.

The letter will say something to the effect, “Please recognize (agency or agent with address) as my Broker of Record for all prior submissions. This authorization revokes any previous authorizations.”

Please note, I do not have a problem with BOR or AOR’s, if properly represented, but I am finding that more and more insurance agents are deceiving their prospects by asking them to sign a BOR letter and telling them it is standard operation procedure, when in fact, it is shrewd play to take the work of others.   

Below are some legitimate reasons you may want to provide an agent or agency a Broker of Record Letter:

  1. You are not receiving good service from your agent or agency.  If it takes days or weeks to get your agent to return your phone calls or it is difficult to get Certificates of Insurance to your clients, this may be enough to consider a BOR or AOR letter.
  2. You lack confidence that you agent or agency adequately understands your insurance needs.  Not all agents and agencies understand product recall or product liability insurance and as a result may struggle with providing the appropriate coverage and premiums.  The same could be said for contractors, trucking, doctors offices, etc.  Having confidence that an agent or agency specializes in your type of business may be reason to provide a BOR or AOR letter.
  3. A family member is in the insurance business. Let’s not be naive.  It is okay to support a family member and want them to do well in their profession.  However, it is not appropriate to seek other agents and agencies to do all the work with the intention of moving it over, after the work has been complete.  If the family member tried to help, but did not provide the best quote, it would not hurt my feelings or be unexpected for you to move your business with a BOR or AOR letter.

So the next time you are seeking multiple quotes from different agents or agencies and they send you a BOR or AOR letter and tell you it is standard procedure to secure quotes, you may want think twice about working with that agent or agency.  Trust and honesty are the most basic requirements for any type of relationship.

Product Recall Expense Endorsements Becoming More Common

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A positive new trend is emerging for small businesses.  More product liability insurance carriers are starting to offer product recall expense endorsements to their product liability policies. 

The great thing about these add on endorsements are, they provide some product recall expense coverage at a much lower price than if a small business had to purchase a stand-alone or individual product recall policy.  Minimum premiums for a stand-alone product recall policy typically are in the $10,000 range per year and just too expensive for most small and start-up businesses to afford.  The product recall expense endorsements allow the small business owner to choose a smaller sub limit ($25,000 to $250,000) of their product liability limit to be used on for product recall and provides affordable premiums for 5% to 25% of the total product liability premium.  Some of the dietary supplement insurance carriers are offering $25,000 sub limits of coverage for as low as $500 or 5% of total premium, whichever is higher. 

Product recall or withdrawal is necessary when your product is deemed to have or suspected to have a defect that will potentially cause bodily injury or property damage.  The determination that a product needs to be recalled can be made by you or because a government entity has ordered you to withdraw your product from the market place.

Products recall expenses can include the following:

  1. costs of notification;
  2. costs of stationary, envelopes, product of announcement and postage or facsimiles;
  3. costs of overtime paid to regular nonsalaried employees and cost incurred by your employees, including costs of transportation and accommodations;
  4. costs of computer time;
  5. cost of hiring independent contractors and other temporary employees;
  6. costs of transportation, shipping or packaging;
  7. costs of warehouse or storage space;
  8. costs of proper disposal of “your products,” or product that contain “your products,” that cannot be reused, not exceeding your purchase price or your cost to produce the products.

The cost of getting this endorsement can vary greatly depending on limits of coverage you want, the type of products you sell and amount of product you have in the market place. 

If have any doubts about the need for product recall insurance, I highly recommend you go to www.recall.gov and look at the list of all the products similar to yours that are being recalled.  I believe you will quickly conclude that during the life of your business it is much more likely that your business will face a recall than a product liability claim.

Sub-Manufacturers And Suppliers Warranty Endorsement – One Scary Endorsement!

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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.

Sometimes It Is Not Your Product, But The Class Of Business

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Oh, the frustration! Why doesn’t anybody understand how safe my product is and give me a fair premium?

I get several calls a week from business start-ups, inventors, importers, patent holders, etc. that are trying to get product liability insurance for their product.  Many times I may be the sixth or seventh agent they have approached for a quote and they are getting frustrated because the premiums they receive are just too high and will not allow them to make a profit.

I feel your pain, but there is a simple explanation that many insurance agents, who do not sell product liability insurance on a regular basis, do not know how to verbalize.  It is not your product, but the class of business that is keeping you from getting the small premium. 

To make this easier for you to understand, think of the small business insurance as computers versus actual people.  Standard insurance carriers are the computers and the non-admitted or non-standard  insurance carriers are the actual people.

The business model for small business standard insurance carriers is to efficiently deliver quotes so they can hold costs down and deliver insurance inexpensively as possible. The Computers have the ability to generate thousands of quotes a day; whereas, an actual person (non-standard insurance carrier) may be only to generate 12 to 15 a day.  The standard small business underwriter is more of a manager that is assigned the responsibility to make sure your business fits neatly in the class of business the admitted insurance carrier has targeted. 

Another import point to understand about the small business insurance policies provided by a standard insurance carrier is the policies are very broad and meant to cover the entire business.  For example, if you are a small baby business that only sells art work for baby rooms and even though this product is not likely to ever be responsible for any type of bodily injury or property damage that could lead to a lawsuit, chances are a standard insurance carrier will not provide coverage for your business.  The reason is simple.  Their policy is so broad that if you later decided to start selling baby cribs your policy would provide product liability for the cribs also, even though the intent of the insurance carrier was to only provide coverage for baby art. 

I know you are wondering why doesn’t the underwriter simply put on the policy that only the baby art is covered under the policy?  Well, think about it. The business model is efficiency and low price. If the underwriter has to stop and write a special endorsement to only cover baby art, then they are not available to process the other quotes generated by the computer.

So if you sell a product or product within the sporting goods, health supplement, construction, energy, exercise, child, disabled, medical or elderly category, remember, it is not your specific product that is causing you to pay a higher minimum premium, but the class of business.

The Excess/Surplus or non-standard insurance market exists for the specific purpose of covering risks that do not fit neatly into the standard or admitted insurance market and have the ability to tailor a policy for your specific products and business needs.

Drop Down Cribs Being Recalled By The Millions

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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.

Why Manufacturers Are Refusing To Name Their Vendors Additional Insured

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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.