For many of today’s vast and growing industries, significant liability exposures can arise from their products and completed operations compared to their facilities and on-site operations. Product liability arises when a business can be held liable for bodily injury or property damage caused by the products it sells, manufactures, or distributes. Liability for completed operations occurs when the business 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 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 coverages available today. Constant headlines for defective or altered products, major lawsuits, and increased litigation have led to the demand for safer products across industries. Dealing with mass litigation and rising insurance costs has encouraged companies to increase internal safety testing measures while producing safer consumer products.
During the recent Christmas holidays, a large national retailer was in the news for recalling a baby formula from all of its 3,000 outlets across the country. The formula had been linked to the death of an infant, and the chain decided to withdraw the formula as a precautionary measure until the full facts about the case were available. A move like this can cost the manufacturer millions of dollars in lost revenue, product recall, investigation of the cause, litigation, and potential damages awarded to plaintiffs. In the early 1980s, six people died in Chicago after taking capsules found to be laced with cyanide. The investigation later revealed that the deaths were not due to manufacturing but to the product being tamped after reaching stores. The manufacturer, unsure at the time if this was a national crisis, quickly recalled all of its capsules across the country. This product recall cost them over $100 million.
Most standard commercial general liability (CGL) policies provide coverage for finished goods 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 from the “Peril of Products and Completed Operations” in any twelve-month period ending on an anniversary of the start date of the policy..
It is very important to note that while most policies will cover property damage and bodily injury resulting from products or completed operations, these same policies EXCLUDE coverage for the cost of product recall. Product recall insurance can be purchased from a specialized carrier that will cover all expenses incurred by a business that is forced to recall your product for any reason. Companies involved in pharmaceuticals, food/beverage, and toys have a much higher propensity for product recalls, making recall insurance a vital cost of doing business.
Just as companies take great care in manufacturing safe and quality products, insurance companies take similar precautions when assessing a potential risk to products and completed operations. A prudent insurance underwriter will analyze a number of key facts before making a decision. The following is a short list of control points that I used when analyzing large product manufacturing operations.
- Potential Product Hazard – 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 adequately protect the product from being damaged during transit and is the packaging itself safe with adequate warnings?
- Product Manuals – These are comprehensive manuals with illustrations and provide details on how the product should be used safely with information on instructions and all possible warnings.
- Internal Quality Control – Has the manufacturer established an adequate program to monitor testing, design, inspection, and safety measures?
- Customer Complaints: A detailed procedure should be in place that includes 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 demands and claims A record of final responses or actions taken to eliminate similar cases in the future Copies of notices/reports sent to the press, associations, authorities
- Detailed records: detailed list of all suppliers, distributors, manufacturers involved in the design, creation and distribution. Invoices must contain complete information on quantity, lot numbers sent to distributors and points of sale to help track product history.
All of the above distribution channels play an integral role in reducing or eliminating mass product recalls. Without them, a withdrawal can become very difficult and expensive. In the event the manufacturer does not know which product is defective, the entire product line may need to be recalled, creating additional time to locate the problem with the potential for further injury/damage until the problem is 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 from their store. The hair dryer caught fire and ended up burning the woman. The case alleged that the retailer sold an unsafe product without warning buyers of the inherent dangers. She received $186,000. It is certain that the retailer would have tried to recover its losses by suing the manufacturer of the product in addition to removing the product from its shelves at all locations.
Product liability concerns can vary dramatically with each type of product. Past losses within the company or industry are the best indicators of potentially large future claims. This is why insurance companies can spend weeks or more evaluating large, complex, and dangerous risks. They invest considerable resources, such as hiring companies to review financial statements and on-site inspectors to learn all the factors before listing and ultimately insuring a risk. Businesses that require this coverage should look for a broker that can offer multiple quotes from different carriers to compare prices, terms, and restrictions. If one price seems too low compared to others, be sure to ask how experienced the company is in the specific class of insurance. If you are a relative newcomer with little or no experience handling a large claim, then it may be best to find another carrier with proven experience in the industry.