Liability & Product Liability | General Liability

Introduction: Case Scenarios

The first line of defense for every company to protect themselves from financial liabilities is to implement and maintain sound safety and risk management practices. Even with these in place, accidents can happen, and protecting yourself from losses caused by other parties should be a regular part of your risk management practices. Consider:

• A painter's scaffold collapses resulting in severe injury to the painter and a pedestrian. The painter did not have a written agreement with the building owner. The building owner is held liable for all losses.
• A cabinet installer puts a long screw into a wall. It punctures a water pipe causing water damage. The installer did not have insurance in place at the time of the loss. The homeowner sues and recovers damages from the kitchen remodeler who subcontracted with the installer.
• A small motor manufacturer provides a component for a machine manufacturer. The motor fails due to a manufacturing defect, and the machine manufacturer is sued for a fire loss. The machine manufacturer’s purchase order for the motors did not address risk transfer.
• A plastic pipe manufacturer requires a resin supplier to create a custom blend for their products used with swimming pools. The formula has been designed and tested to resist the harsh effects of sun and pool chemicals. The pipe manufacturer’s contract does not specifically prohibit the supplier from making changes to the compounding formulation. Without the pool manufacturer’s knowledge, the supplier changes the formula to use a cheaper ingredient. The change makes the pipes vulnerable to the elements resulting in sudden failures. The vendor’s contract had risk transfer language, but the blender’s insurance limits are inadequate to deal with the losses.

Many businesses depend on others to produce a finished product or service. Without proper planning and review of exposures these relationships create, a business can encounter unexpected claims. The intent of implementing a contractual risk transfer (CRT) program is to reduce the likelihood that your business becomes financially vulnerable to damages and claims due to acts, errors or omissions caused or contributed to by others. A CRT program should be designed to uncover, remove and/or minimize exposure. When effective risk transfer procedures are not present, decisions of liability are often made in court. It is beneficial to have such decisions made in writing, at the beginning of a business relationship.

Risk Transfer Techniques and Tools

For the purposes of this article, risk transfer refers to ways to protect your business from having to pay for mistakes associated with activities and products that third parties (business partners, subcontractors, suppliers, etc.) control. The goal is to have the party best equipped to control exposures assume the responsibility for the risk and to help ensure that they are financially able to pay for liabilities.

Key risk transfer elements include:

Hold harmless (HH) and/or Indemnity agreement. Should prevention efforts fail, contracts are the next best step in potentially minimizing your risks. Within a contract, Hold Harmless (HH) and indemnification language typically involves one party agreeing to assume liability or “hold another harmless” for liabilities involved under described circumstances. For example, a painter, hired by a building owner, provides the building owner with a HH agreement. The painter spills paint on a nearby car. This agreement would require the painter to take responsibility for the liabilites rather than the building owner. HH agreements can be found in standard contracts or included in less obvious documents such as a work order, purchase order, etc. Legal counsel should review the language of any HH agreement or indemnification language to ensure it is appropriate for its purpose and is consistent with jurisdictional law.

Insurance coverage. It is important to verify that third parties you do business with have sufficient insurance in place. Most companies request a Certificate of Insurance (COI) as a means of verifying that coverage is in place. This document, often produced by a third party's insurance company or insurance broker, provides information about which coverages the third party has in force, the policy limits by line of coverage and the term of the insurance (or expiration date). The COI may provide other important information, for example, whether a specific insurance endorsement, such as an Additional Insured endorsement, is contained in the policy.

The COI is a helpful indicator that insurance is in place at a particular point in time, but it is not a guarantee that the policies listed remain in force through the described policy period. Additionally, the policies referenced may exclude key exposures that would not be indicated on a COI. Depending on the type of product or service performed, reviewing the third party’s insurance policy with your agent may be advisable to assess coverage risks.

Vendors Coverage (VC). This is an endorsement, typically to a manufacturer's liability policy that says the manufacturer's insurance company extends its' product liability coverage to those who distribute or sell the manufacturer's products.

Risk Transfer Review Process

It is best to consider all of your transactions with third parties for risk transfer opportunities. You may decide to initially focus your risk transfer efforts on those entities that by their volume of business represent a significant percentage of your engagements with third parties or those whose products, components, materials and/or services are more likely to result in serious and/or frequent losses.

A company's need will vary based on what they do and the number and type of third parties with whom they do business. A risk transfer review process may include:

• A review and assessment of exposures retained by your business.
• A review of exposures from businesses, vendors, suppliers or contractors you work with.
• A hazard analysis to identify the key or critical third parties that provide the greatest risk of a third party harm.
• A process to review the language in business contracts, purchase orders and other agreements to confirm that your business is appropriately protected from risk and to help avoid giving up valuable legal rights.
• A process to establish risk transfer with new business partners and to obtain annually the necessary contracts, policies or other documents from all business partners prior to the expiration of the existing ones.

Risk transfer is a multi-disciplinary process, and it is best to include risk management professionals, your insurance broker and/or legal counsel familiar with contracts and product liability law in your review process activities. They can assist in determining what tools or combinations of tools are best to help protect you from the liability of others. Reviewing the implementation and effectiveness of your risk transfer mechanisms should not be a one time event but a process that is scheduled for periodic review and revision.

Developing strong, long term relationships with suppliers, vendors, subcontractors and other business partners can mean a vested interest in "doing the right thing" to protect your business relationship. Risk transfer programs may support legal recourse, but a strong business relationship coupled with an effective risk transfer program may help to avoid the risk and provide the best result if a loss occurs.

Conclusion

Good planning and sound legal counsel can help avoid surprises and make sure all roles and responsibilities are agreed upon and clearly documented by all parties involved in the event of an accident or loss.