As a manufacturer, you are well aware of the numerous liability exposures you face on a day-to-day basis, including slips and falls that occur on your premises. However, there are liabilities that go beyond what may meet the eye, some that we will discuss here.
Many “Job Shop” manufacturers mistakenly believe they don’t have a product liability exposure because “they haven’t actually designed the product.” Their customer designed the product, provided all specifications, dimensions, etc. As a job shop, they followed the specs as provided, and the product even went through a QC process that was signed off by the customer. Subsequently, however, the customer is being sued for property damage as a result of a product defect and all subcontractors are being named in the lawsuit. Even though the job shop manufacturer didn’t design the actual product or was not involved in making the component part that failed, the shop still needs to defend itself in the suit. This is where Product Liability coverage steps in, providing protection against bodily injury and property damage losses arising out of some defect in a manufactured product. The policy will pay for defense costs as well as any settlements if the insured is found responsible. Another area of concern involves tier 2 and tier 3 manufacturers involved in aircraft products. Some manufacturers believe they have aircraft product coverage as part of the standard Commercial General Liability (CGL) policy, which is not typical, or they believe they are fully indemnified by the government, by the prime manufacturer’s coverage, or protected by federal regulations.
Protections afforded in the past are eroding as the government and prime manufacturers are figuring out they can’t shoulder the full load of some of the programs they lead. To protect shops with high-risk product exposures in the fields of aircraft and related aerospace products manufacturing, Aircraft Products Liability insurance is required.
It’s critical for manufacturers to always understand how and where the component parts they are manufacturing will be used in order to assess their actual product’s liability exposure. This is particularly true for job shops. What may appear to be a simple component part job, could expose the manufacture to costly aircraft products claim, including fleet grounding.
Manufacturers Errors & Omissions
Product Liability claims arising from bodily injury or property damage are the first thing we may think of when considering a manufacturer’s exposure to risk, but what if a product fails to perform because of negligence in design or faulty materials that results in financial loss to the customer without causing bodily injury or property damage? Many manufacturers are exposed to this very risk, but may believe that they have coverage for this exposure under Commercial General Liability and Product Liability insurance. It’s important to note that this is not the case and separate coverage is required.
Manufacturers that provide any form of design assist work, engineering, raw material selection, assembly, and potentially advice as part of their services or contract are subject to errors & omissions exposures. However, it may even be simpler than that.
For example, let’s say you manufacture 7,000 component parts for a customer that will then be assembled with other parts into a completed product. It is later discovered the stock you used to make the parts were defective or did not meet your customer’s specifications, and now the finished products cannot be sold. Let’s consider another possibility, maybe it’s later discovered that the component parts you delivered were incorrectly machined and your customer is unable to assemble a completed product before contract deadlines, resulting in the loss of a major contract.
There was no property damage or bodily injury, therefore CGL/Products Liability insurance would not respond. A Manufacturers Errors & Omissions (E&O) policy is needed to respond to the claim of financial loss.
E & O insurance is designed to fill the gap in product liability. It provides coverage for a legal obligation to pay the financial damages caused by and arising out of the manufacturer’s products or services. It provides for legal defense expenses and liability costs up to the amount of the policy.
Another exposure that needs careful evaluation is product recall. No organization is immune to the risk of a product recall—even those with the best safety records, manufacturing, and operational controls. A significant reason is human error. Yet, many companies don’t face the possibility that human error will affect the quality of the goods they manufacture. Headline after headline, however, shows that product recalls are pervasive, and the cost of a recall without the proper insurance coverage can be significant. There is the actual cost of pulling the item out of the stream of commerce, and, depending on the facts and circumstances, the product must be destroyed, disposed, and replaced.
Product Recall insurance is available for manufacturers of components used in non-consumable merchandise such as cars, machinery, and airplanes. There are three coverage triggers — the use of the product has caused bodily injury or property damage, the product poses an actual and imminent danger of causing bodily injury or property damage, and the product has impaired property. Coverage is designed to reimburse the financial costs resulting from an insured event, which includes the actual physical recall expenses, as well as loss of profit, product replacement costs, extra expenses, and rehabilitation expenses. Coverage may also include an option to insure third-party losses, such as a customer’s loss of gross profits, rehabilitation and/or its extra expenses. In addition, coverage can be secured to also provide crisis management consulting services on both a pre- and post-incident basis to limit the adverse impact on a manufacturer’s reputation.
These are but a few of the liability concerns manufacturers need to examine closely. Precision Manufacturing Insurance Services (PMIS) focuses on insuring manufacturers throughout Southern California and is available to review your insurance program to determine if any liability gaps may exist and to offer recommendations on how to close these gaps. Our mission at PMIS is to protect the future health of the manufacturing sector and ensure that you have the right programs in place to mitigate and transfer your risks. Give us a call at 855.910.5788 to speak with one of our manufacturing insurance professionals.