Manufacturers that build to others’ specifications and designs are third-party manufacturers or contract manufacturers. One reason manufacturers are reluctant to add their clients as Additional Insured onto their Product Liability policy is they’re not always designing the products they manufacture.
The manufacturer’s dilemma in naming the designers/distributors as Additional Insured is they can become responsible for Product Liability lawsuits or claims involving the design and instruction/warning defects. This should actually be the responsibility of the designers/distributors. From a third-party manufacturer’s perspective, they should only be responsible for manufacturing defects, not for claims outside of their control.
The dilemma for the designers/distributors occurs when they are purchasing Product Liability insurance. Simply put, the designer/distributor may save on their insurance premium if named Additional Insured on the third party-manufacturer’s policy. The insurance carrier for the designer/distributor then becomes secondary on a product liability claim. The manufacturer’s Product Liability policy is primary for all Product Liability claims, including design and instruction/warning defect claims.
The solution for both the manufacturer and the designer/distributor could be a mutual indemnification agreement. A mutual indemnification agreement makes the manufacturer responsible for manufacturer defect claims and the designers/distributors responsible for design defects and instruction/warning defects. In other words, each party is only responsible for those things over which they have control.
A common question we hear is “What if we use a foreign manufacturer to build our products?’ Most of the time, in the eyes of the law and Product Liability insurance carriers, you are considered the manufacturer of the product. It’s simply too expensive for Product Liability insurance carriers to try to recover from 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. You would have to be names as additional insured on the policy.
Please note that a mutual indemnification agreement is not an insurance endorsement. It’s also not written or provided by an insurance agent or insurance carrier. It is a legal contract prepared by an attorney of law. 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.Posted By: Paul L. Owens
3014 Devine St.
P.O. Box 5866
Columbia, SC 29250
1-800-622-7370 Toll Free
© Copyright 2006-2017 Sadler & Company, Inc. All Rights Reserved.