Whether you are a business bringing a new, exciting product to market or a 20 year-old firm selling the latest version of a successful product line, certain risks face you. Users of the product may suffer injuries or damage to their property. These accidents may stem from inappropriate use of the product, such as using a lawn mower to trim hedges. However, some products may be dangerous under normal use by untrained or inexperienced operators. Furthermore, vendors or contractors who sell or install a product may modify it or otherwise affect its performance. These changes can increase the chances that the product will cause injury or damage, and that can land the manufacturer in a courtroom. However, there are steps the firm can take to transfer the risks of financial loss from these incidents.
First, the manufacturer should require, as part of its contracts with contractors, that those parties name it as an additional insured on their liability insurance policies. If the contractor is at least one percent liable for the accident, the endorsement gives the manufacturer rights to coverage under the policy for amounts necessary to settle a lawsuit. Perhaps more importantly, it covers the cost of defending the firm against the suit. These costs are often substantially higher than the cost of the settlement. The contracts should require the other party to give the manufacturer certificates of insurance showing that the liability policies include this coverage.
Assume, however, that either the other party neglected to have the manufacturer added as an additional insured or for some reason the insurance company denied coverage under the endorsement. If the company pays for the settlement on behalf of its insured (the contractor), it has a legal right to try to recover its payment (subrogate) from the manufacturer or its insurance company. To prevent that from happening, the contract between the manufacturer and the other party should require the contractor to waive subrogation rights. The waiver of subrogation will bind the insurance company, preventing it from going after the manufacturer. The ISO liability insurance policy implies that the insured can waive subrogation rights at any time before a loss occurs. However, if the manufacturer wants no doubt as to whether a waiver applies, it should require the other party to add a specific endorsement to its policy, waiving the insurance company’s subrogation rights.
One commonly used technique for transferring liability is requiring a contract to include an indemnity agreement, also known as a hold harmless agreement. Such an agreement will require the contractor to indemnify the manufacturer for the costs of any suits resulting from that party’s work for the manufacturer. For example, assume Contractor A installs a turbine made by Manufacturer B in a power plant and the turbine malfunctions, injuring several employees. Under this agreement, A would indemnify B for the costs of the ensuing lawsuits. Contractor A’s liability insurance should provide coverage for this if it does not contain an absolute contractual liability exclusion. An experienced contract attorney can help develop the appropriate language for this agreement.
Because some of these techniques involve modification of insurance coverage, the manufacturer should consult with an insurance agent. Some insurance companies may require the manufacturer to have these techniques in place before they will offer coverage, while others may accept the account without them but may offer reduced premiums if they are in place.
Contractual arrangements are no substitute for providing a safe, quality product. However, since accidents are possible no matter how many precautions are taken, manufacturers are well advised to use these techniques to lower the chance of financial loss.