Ted Enright of Nusbaum Insurance
From manufacturer to distributor to retailer, every party involved in the production to the final sale of a product bears that product’s liability.
Especially in a challenging economy, it is important that business owners carefully examine their insurance coverages with their broker to confirm that their policies indeed protect their company from potential claims arising from product liability, and that their limits are adequate.
In order to examine the reasoning behind the importance of adequate product liability protection, one first should first have a clear understanding that, in order for a third party to bring a successful lawsuit against a business owner, that party only needs to show that the product in question is/was unsuitable for its intended use, and injury resulted. Granted, this liability should fall on the producer/manufacturer; however, there is not always a clear path to find protection from a manufacturer’s insurance policy, even with contractual agreements in place.
For example, what if the failure of a product does not surface for several years, and the manufacturer has since let its insurance policy expire, or has gone out of business due to economic conditions? Or maybe in an effort to save money, a manufacturer chose inadequate coverage within its own insurance program for the product it sells. In both cases, a distributor and/or retailer cannot necessarily rely on the manufacturer’s policy for protection.
It’s no secret that many of the products, or components of products we purchase as consumers are manufactured outside of the United States. This isn’t just a result of companies trying to cut costs in a down economy, but also of companies trying to meet a surge of demand in a robust economy. In many cases these sources are foreign based companies with no assets in the United States. This presents an interesting dilemma for a domestic distributor in that it likely will bear the entire responsibility for a certain product’s liability even though the distributor may have had nothing to do with the physical manufacturing of the product.
Think back to the issue of Chinese drywall (see footnote) imported, distributed, and installed in homes across the United States between 2004 and 2007. A combination of a housing construction boom and an unexpected demand for housing repairs due to an active Gulf Coast hurricane season led to a severe shortage of building supplies, including drywall. The short-term solution was to purchase drywall from foreign companies. A host of problems related to bodily injury and property damage was discovered after a period of time.
As it turns out, the imported drywall was not made quite the same as domestic drywall. Many vendors in the U.S. relied on assumptions that testing standards in China were equal to those in the U.S. The problem is that a U.S. distributor has almost no control over what methods and means go into the production process. It is equally difficult to monitor quality control efforts that may have been agreed upon originally between the foreign manufacturer and domestic distributor. What may be reprehensibly unacceptable in terms of domestic regulations can often pass as standard for foreign production facilities. Because there is little to no recourse against a company based in a foreign country, the U.S. distributor will have to be held accountable for unexpected injuries sustained in the normal use of the product it has sold.
In this case, it is important that the exposure is understood by all parties involved in the insurance program for the distributor, and coverage is appropriate for the risk. Certainly, when raising this issue, many carriers will shy away from the risk, and/or the insured might have to pay a higher premium for the right coverage. In the long run, it makes more sense to acquire the right insurance for the exposure than to leave it up to chance.
Whatever the case may be, any company that has sold, or intends to sell a product, should regularly review their product liability insurance for exclusions and restrictions which may limit the very coverage they intended to have in the first place. One cannot always predict how a slow economy may affect a supplier of a component or manufacturer of a final product. Nor can one count on a foreign manufacturing company to fall back on if their product fails after it is sold domestically. It is these uncertainties, and many other unpredictable circumstances, why an adequate insurance program is necessary, and why product liability coverage should never be taken for granted.
Footnote: Many other ongoing issues and problems regarding liability and coverage availability surround the debate
over Chinese drywall which are not represented in this essay.
