For many of today's vast and growing industries, significant liability exposures can arise from their products and completed operations compared to their premises and on site operations. Product liability arises when a company can be held responsible for bodily injury or property damage caused by the products they sell, manufacture and or distribute. Completed operations liability results when the company can be held liable for property damage or bodily injury caused by work performed such as service and repairs.
Products and completed operations are often combined together within the insurance policy because they both address the fact that a problem has occurred once control has been relinquished and the product has left the insured's premises. Product liability insurance has quickly become one of the most important coverage's that can be obtained today. Constant headlines of defective or tampered products, large judgements and increased litigation has led to demand for safer products across all industries. The treat of mass litigation, and increased insurance costs has encouraged businesses to increase internal safety testing measures while producing safer products for the consumer.
Over the recent Christmas holidays, a large national retailer was in the news for pulling a baby formula from all of their 3000 nationwide outlets. The formula had been linked to an infant death and the chain decided to pull the formula as a precautionary measure until full facts regarding the case were made available. A move like this can cost the manufacturer millions of dollars from lost revenues, product recall, investigating the cause, litigation and potential damages awarded to plaintiff(s). Back in the early 1980's, six people were killed in Chicago after taking capsules that were found to be laced with Cyanide. The investigation later revealed that the deaths were not due to manufacturing but tampering of the product after reaching the stores. The manufacturer who at the time was unsure if this was a nationwide crisis quickly pulled all of their capsules across the country. This product recall cost them in excess of $100 million.
Most standard Commercial General Liability (CGL) policies provide coverage for Products-Completed operations. A general definition of this coverage is defined as:
The Aggregate Limit is the most the Insurer will pay under Coverage A for the sum of all damages arising out of the "Products and Completed operations hazard" in any one period of twelve months terminating on an anniversary of the inception date of the policy.
It is very important to take note that while most policies will cover property damage and bodily injury resulting from the products or completed operations, these same policies EXCLUDE coverage for the cost of the product recall. Product recall insurance can be purchased from a speciality carrier who will cover all the expenses incurred by a company that is forced to recall their product for any circumstance. Companies involved in pharmaceuticals, food/beverage, and toys have a much higher propensity for product recalls therefore making product recall insurance a vital cost of doing business.
Just as businesses are taking great care in manufacturing quality and safe products, insurance companies take similar precautions when assessing a potential risk for Products & Completed Operations. A prudent insurance underwriter will look at a number of key pieces of information before making a decision. The following is a brief list of checkpoints I used when analyzing large product manufacturing operations.
Potential Hazard of the product - what is the worst possible scenario if the product fails? A manufacturer of plastic bowls has much less risk compared to a manufacturer of lighters.
Packaging - Does the packaging properly protect the product from being damaged while in transit and is the packaging itself safe with proper warnings in place.
Product Manuals - are manuals thorough with illustrations and provide details in how the product is to be used safely with information on how to instructions and all possible warnings.
Internal Quality Control - has the manufacturer established an adequate program in place to monitor testing, design, inspection, safety measures.
Customer Complaints - a detailed procedure should be in place to include the following: A record of all complaints- date/time/outcome A record of each product that caused the complaint- make/model A detailed record of all lawsuits and claims A record of final responses and or actions taken to eliminate similar future cases Copies of notices/reports sent to press, associations, authorities
Detailed records - itemized list of all suppliers, distributors, manufacturers involved in the design, creation and distribution. Invoices should contain full information on quantity, batch numbers sent to distributors, outlets to assist in tracing the products history.
All the above channels of distribution play an integral role in reducing and or eliminating a mass product recall. Without them, a recall can become very difficult and costly. In a case where the manufacturer is unaware which product is faulty, then the entire line of products may have to be recalled causing additional time to locate the problem with the potential of more injuries/damages to occur until the problem has been identified.
A few years ago, a woman and her legal team successfully sued a retail chain for damages caused by a hair dryer she purchased at their store. The hair dryer caught fire and ended up burning the woman. The case alleged that the retailer sold an unsafe product failing to warn purchasers of any inherent dangers. She was awarded $186,000. It is certain that retailer would have tried to recover their losses by suing the manufacturer of the product in addition to pulling the product off their shelves in all locations.
Product liability concerns can vary drastically with each type of product. Previous losses within the company or in the industry are the best indicators of potentially large future claims. This is why insurance companies can spend weeks or longer evaluating large complex and dangerous risks. They invest considerable resources such as hiring firms to review financial statements & on site inspectors to be made aware of all factors before quoting and eventually insuring a risk. Companies requiring this coverage should seek out a broker that can offer multiple quotes from different carriers to compare pricing, wordings, restrictions. If one pricing seems too low compared to others, make it a point to ask how much experience the company has in the specific class of insurance. If they are relatively new than with little or no experience handling a large claim, then it may be best to seek out another carrier with proven experience in the industry.
