Products and Operations Completed – Recent Headline Case Provides Proof of Why This Coverage Is Vital
For many of today’s vast and growing industries, significant liability exposures can arise from your products and completed operations compared to your 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 results when the company 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 tampered products, major lawsuits, and increased litigation have led to demand for safer products across industries. The handling of mass litigation and rising insurance costs has encouraged companies to increase internal safety testing measures while producing safer consumer products.
During the last Christmas holidays, a large national retailer was in the news for pulling baby formula from all of its 3,000 outlets nationwide. The formula had been linked to the death of a baby and the chain decided to withdraw the formula as a precautionary measure until all the facts related to the case were available. A measure like this can cost the manufacturer millions of dollars in lost revenue, product recall, cause investigation, litigation, and potential damages awarded to plaintiffs. In the early 1980s, six people died in Chicago after taking capsules that were found mixed with cyanide. The investigation later revealed that the deaths were not due to manufacturing but to handling of the product after it reached stores. The manufacturer, unsure at the time whether it was a national crisis, promptly recalled all of its capsules across the country. This recall cost them more than $ 100 million.
Most standard commercial general liability (CGL) policies provide coverage for completed product operations. A general definition of this coverage is defined as:
The Aggregate Limit is the maximum that the Insurer will pay under Coverage A for the sum of all damages arising from the “Risk 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 cover property damage and bodily injury resulting from products or completed operations, these same policies EXCLUDE coverage of the cost of product recall. Product recall insurance can be purchased with a specialized carrier that will cover all expenses incurred by a company that is forced to recall its product for any circumstance. Companies involved in pharmaceuticals, food / beverage and toys have a much higher propensity for product recalls, which is why they make recall insurance a vital cost of doing business.
Just as companies are taking great care in manufacturing safe and quality products, insurance companies take similar precautions when assessing 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 checkpoints that I used when analyzing large product manufacturing operations.
Potential Product Hazard – What is the worst case scenario if the product fails? A manufacturer of plastic bowls has a much lower risk compared to a manufacturer of lighters.
Packaging: Does the packaging adequately protect the product from damage in transit and is the packaging safe with the proper warnings in place?
Product Manuals – These are comprehensive manuals with illustrations and provide details on how the product should be used safely with instructional information and all possible warnings.
Internal quality control – Has the manufacturer established an adequate program to monitor testing, design, inspection, and security measures?
Customer complaints: there should be a detailed procedure that includes the following: A record of all complaints – date / time / result 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 future cases Copies of notifications / reports sent to the press, associations, authorities
Detailed records: detailed list of all suppliers, distributors, manufacturers involved in the design, creation and distribution. Invoices should contain complete information on quantity, lot numbers sent to distributors, and outlets to help track product history.
All of the above distribution channels play an integral role in reducing or eliminating a mass product recall. Without them, a recall can be very difficult and costly. In the event that the manufacturer does not know which product is defective, the entire product line may need to be recalled, resulting in additional time to locate the problem with the possibility of further injury / damage until it has been identified the problem.
A few years ago, a woman and her legal team successfully sued a retail chain for damages caused by a hair dryer she bought 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 true that the retailer would have tried to recoup its losses by suing the manufacturer of the product in addition to removing the product from its shelves in all places.
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 know all the factors before listing and eventually insuring a risk. Businesses that require this coverage should look for a broker that can offer multiple quotes from different carriers to compare prices, wording, and restrictions. If one price seems too low compared to others, be sure to ask how much experience the company has with the specific class of insurance. If they are relatively new and have little to no experience handling a large claim, then it may be best to find another carrier with proven industry experience.