Category Archives: Additional Insured

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.

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.