Risk Management 101: Insure and Protect (Part 2)
By Kristi Davidson
In November, we introduced the concept of product liability, explaining that anyone in the design, manufacturing or distribution chain is exposed to the risk of liability for design defects, manufacturing or production flaws, or inadequate warnings. In December, we considered one way to shift this risk to others in that stream. This month, we address shifting the risk to someone outside that stream: an insurance provider.
Damages awarded in product liability cases can be, and often are, substantial, including such things as medical costs, loss of income, emotional distress and sometimes even attorneys' fees or punitive damages. Just defending the claim can be expensive.
Different types of insurance exist to provide money to defend against and, if necessary, to pay damages arising out of product liability. Premiums are based upon the type of product, volume of sales, where you are in the manufacturing and distribution chain, what other avoidance or shifting mechanisms are in place, and other factors. In an application, you likely will be asked, among other things:
o To describe your products and services, and to explain how many years you have been involved with each product or service;
o To describe which products you make, distribute, install, service or repair;
o To state whether any products have been acquired through merger or purchase;
o Whether you retain liability for products or divisions that you no longer control;
o Whether any products have been discontinued and when;
o Whether your products are sold under another company's name or label;
o To provide sales history, import/export data and foreign operations information;
o Whether you hold suppliers or distributors harmless or whether they insure you;
o Whether you have a product recall plan and what it is;
o Whether you do your own design work; and
o How products are tested and labeled, and what quality control measures you have in place.
Answering these and other questions will direct you to the type of policy you may need. Perhaps the standard commercial general liability (CGL) policy written by the Insurance Services Office Inc. (ISO) will meet your needs. But should it be an occurrence-based or claims-made policy? What exclusions are appropriate or acceptable? Do you need a separate endorsement or rider, such as one for discontinued products? Should you consider purchasing first-party product recall insurance, which pays for costs associated with notifying customers, shipping replacement products or parts, warehouse and storage expense, disposing product and extra personnel needed to conduct the recall? Should you purchase third-party product recall coverage, which pays recall expenses of a third party that uses your product, business interruption (lost income and expenses) of third parties using your product, the cost to repair or rehabilitate third party's reputation, and/or the cost to purchase substitute products to replace your products?
Finally, if you are just starting your business, you may have experienced some difficulty obtaining insurance coverage. Rest assured, with the right broker it can be done. Be prepared to share your business plan with the broker and to make any financial backers available for questions or support. As long as you can demonstrate that you are a viable company with a marketable product, the right broker will help you find your way.
Kristi Davidson is a shareholder in the New York City office of Buchanan Ingersoll & Rooney. She can be reached at firstname.lastname@example.org.
Editor's Note: The comments are those of the author and are not necessarily views shared by HFN or Macfadden Communications.