Product Liability Insurance: Can You Not Have It?

Today's economy depends heavily on the enormous range of products that are sold daily to consumers. Indeed, consumer demand for both the necessities and conveniences of life ' everything from lawn mowers and ovens to trampolines and espresso makers ' drives many manufacturers constantly to develop new products to sell. In today's litigious society, however, virtually every product sold represents at least the potential for product liability exposure. Jury awards and settlements frequently make headlines ' everyday household appliances, such as coffee makers, fryers, and blenders, have yielded damage awards or settlements as high as $2.25 million. Injuries from lawn mowers have generated awards or settlements as high as $2.6 million. Even furniture has the potential to yield awards or settlements in excess of a million dollars. Moreover, product liability exposure has ruined certain industries, eg, asbestos, and small companies without adequate insurance protection could face bankruptcy from a single product recall.

Product liability exposure is a fact of life for any entity that is a link in the chain running from the initial manufacture of a product, including manufacturers of component parts, to the end link retailer who sells the product to the ultimate user. Increasingly, jury awards and settlements for product liability claims involving personal injuries and/or property damages have become significant risks that prudent companies must take into account as a cost of doing business. The prudent company will be proactive in taking steps to ensure that it has done all that it can at least to minimize its exposure due to product liability claims. One important component of this business plan is product liability insurance coverage.

It is true that some companies have a greater need for product liability insurance than others. Clearly, the manufacturer of a product is typically readily identified as the first target of a product defect claim. However, far more companies have exposure than one might think at first glance. For example, consider who is implicated in the sale of a children's backyard 'jungle gym' ' the rope manufacturer that sells climbing rope to a wholesaler; the seat manufacturer that sells swing seats to the wholesaler; the wholesaler itself, which uses the climbing rope, the swing seats, and numerous other parts to put together the 'jungle gym' set and then ships it to the retailer; and finally, the retailer, who not only sells the 'jungle gym' but may also in some cases assemble it for the consumer. Each of these participants has a need for some degree of product liability insurance.

One need only look at the warning labels now commonly present on nearly every product to appreciate how important product liability insurance has become. The impetus for many warnings has been a lawsuit filed by someone who claimed not to appreciate the potential for harm arising out of misuse of a product. For example, who would think that one would need a label on a toilet brush that reads 'Do not use for personal hygiene,' or that consumers need a warning label for a scooter informing them that 'This product moves when used'? How about the 5-inch fishing lure with three steel hooks that has a warning cautioning the user that it is 'harmful if swallowed'? Or the Batman Halloween costume warning that reads 'cape does not enable wearer to fly'? Yet, these and other similarly implausible warnings now routinely accompany many consumer products sold throughout the United States.

Although most companies understand and appreciate the need for basic insurance coverage, some may not give adequate attention to insurance coverage for product liability exposure, including coverage for both litigation defense costs and recalls, until it is too late. The time to give thought to a company's product liability insurance needs is before a problem arises. Even for companies with a track record of few or no claims based on defective products, in today's litigious society there is simply no guarantee that the future will be as kind.

A company should ask itself a series of questions to assess whether it is properly prepared should it become the recipient of allegations of a defective product. First, does the company play any role in the process of putting a product into the marketplace? Potential liability could fall to those entities that are involved in any of the following processes: initial product design and/or development; product testing (including independent testing laboratories); manufacturing the product; manufacturing or otherwise supplying any component parts; development of warnings, labels, and/or instruction manuals; assembly of the product; and distribution of the product to middlemen and/or end users. The degree of exposure that rests with each of these processes may differ, but the key point is that involvement at any of these stages creates at least some degree of exposure that should be recognized and acknowledged by the company.

The second question a company should ask itself is what type of insurance coverage it currently has in place. Does it have just the basic CGL coverage? Has it obtained any supplemental coverage that is expressly designed to cover product liability-specific issues? Does the policy exclude coverage for the common types of claims for which the company needs protection?

The third question a company should ask itself is whether its current insurance coverage is adequate for its current needs and potential exposure. Should supplemental coverage be obtained that will clearly cover claims and potential litigation, including attorneys' fees and costs, based on allegedly defective products? Are limits exhausted by amounts paid for costs of defense? Does the current coverage extend to product recall situations, including possible voluntary recalls, or is supplemental coverage needed to insure for this possibility? Are the current policy limits adequate for today's climate, when one looks at recent jury verdict damage awards and settlements in product liability cases involving products similar to the one(s) with which the company is involved?

One of the most difficult issues to address is the financial impact of hypothetical future claims taking into account policy limits and deductibles. Many policies contain both per-occurrence and aggregate limits, as well as per-occurrence deductibles. Courts differ as to what constitutes an occurrence. One court may hold that the decision to market a defective product was the occurrence. Here, if a company had a thousand claims, all defense costs and settlements associated with those claims would fall under one per-occurrence limit. In practice, in these jurisdictions, coverage could be quickly depleted. Other jurisdictions may hold that each injury to a person caused by the defective product is the occurrence. In this scenario, fresh limits would be supplied for each occurrence until the aggregate limit is reached.

Coverage for punitive damages also is an important issue. Many claims allege punitive damages, and coverage for punitive damages varies from state to state. Policies should contain a specific punitive damages endorsement providing, at a minimum, that punitive damages are covered to the extent insurable under applicable law.

It also is important to understand changes in the company's product offering ' either adding or removing products, or other changes in product-related activities ' since the last time an insurance audit was conducted. Any changes in activity should be considered to determine how they may affect the company's product liability coverage needs. For example, a component part manufacturer may have had a relatively clean record of few or no defect complaints based on the nature of the product for which it supplies parts. However, if the component part manufacturer has become involved with supplying parts used for a new product line that is significantly different in nature, this could increase the likelihood of claims activity depending upon the nature of the new product. For all of these reasons, the company should engage in a detailed insurance audit on each renewal to ensure that it is adequately protected in the event of any product liability claims.

The fourth question a company should ask is whether it has a good insurance broker in place. The company is wise to identify a knowledgeable, reliable insurance broker who can help it to conduct these periodic audits and can advise on specific types of supplemental product liability coverage that may be desirable to help protect the company better. The insurance broker should either already have a strong understanding of the nature of the company's business and industry, or demonstrate a willingness and interest to learn about and understand what the company does, how its products or services translate into potential product liability exposure, and what the current litigation landscape is in the relevant industry for those types of products.

The fifth question a company should ask is what other potential sources of insurance coverage may be available to it. For example, a retailer will likely seek indemnification from a product's manufacturer or distributor for any product defect claims and recall situations. In addition, a retailer may ask or require that a product's manufacturer or distributor name it as an additional insured under the manufacturer or distributor's existing policies for product liability-related insurance coverage. A retailer may want to consider requiring that the manufacturer or distributor maintain certain minimum levels of coverage for these types of claims. Utmost attention to vendor insurance requirements is paramount. Unfortunately, it is not enough to impose these requirements; the company also should request to be provided with a certificate of insurance noting its status as an additional insured. Furthermore, the company should assess the financial stability of the insurance carrier and have the ability to review actual insurance policies on request. Even with indemnifications and coverage from others in the distribution chain, however, there may be gaps that could leave the company at risk for some or all of the ensuing costs. For this reason, it is important for companies to design any risk transfer strategy in conjunction with an overall risk management plan.

The sixth question a company should ask itself is what is it doing to help to minimize the risk of product liability claims. Is it doing anything to help minimize the risk that its product will ever become the subject of a recall or litigation based on an alleged defect? Are there additional measures that can and should be implemented to further reduce this risk? Some examples of steps that a company should consider are implementing an annual audit of its existing product safety procedures; implementing or reassessing existing quality assurance measures; identifying potential design changes or other product alterations; implementing presale testing either internally or through an external testing lab; and conducting a review and assessment of warnings, labels, and instruction manuals. Does the company have a team in place that draws members from its various departments or divisions, who meet periodically to discuss and assess product safety issues, and to identify potential problems or recommend changes? Many product liability insurance carriers provide risk management services, which, if used, can result in lower premiums.

Going through these exercises initially, and thereafter on a regular, periodic basis, will help the company to be as well positioned as it can be for any product liability claims that may arise. Once the company is comfortable that it has assessed its insurance coverage needs specifically as they relate to product liability exposure and has taken the necessary steps to modify its insurance coverage accordingly, there is one final point to keep in mind. Whenever there is the first suggestion of a possible product defect claim or potential recall, the company must promptly decide whether to put its insurance carrier on notice. In some jurisdictions, if a policyholder forgets to tell its insurer of a lawsuit or an occurrence that could give rise to a lawsuit, it can forfeit coverage. In other jurisdictions, the insurance company must prove prejudice to avoid coverage on a late notice defense. Hence, a company should always evaluate each claim or occurrence potentially giving rise to a claim on an individual basis.

In general, companies tend to understand their potential exposure resulting from product liability litigation better than their potential exposure from a product recall. In a product recall situation, financial exposure can mount quickly. Whether the recall is voluntary or mandated by the U.S. Consumer Product Safety Commission findings, the costs associated with implementing the recall can be significant. These associated expenses can include any or all of the following: refunding the purchase price of the product; providing a replacement product (including costs associated with redesign and testing of the replacement product); mailings to consumers to inform them of the recall; costs of having the recalled product returned for destruction (which may also include the cost of mailing shipping/packaging materials to the consumers as well as providing prepaid return postage); storage and/or destruction of the recalled product (destruction/disposal of certain products, eg, batteries, may be more costly than for other types of products); costs associated with providing notice of the recall to consumers, including Web site postings, maintaining toll-free phone lines, and posting notices in retail stores; as well as legal fees and expenses associated with handling the recall. Furthermore, in some cases, the costs could even include claims for lost profits against the manufacturer and/or distributor by the retailer of the recalled product. There also may be costs arising from additional employee staffing and/or the need to contract with third parties so that the company can perform some or all of these tasks. The costs for all of these activities will be directly related to both the volume of the product subject to the recall and the price of the product.

Practical Tips

In summary, companies should use this checklist to help ensure that their current product liability insurance needs are being met:

1) Identify the company's role in the product distribution chain.

2) Identify the type and amount of insurance currently in place to protect against product liability claims.

3) Assess whether the existing insurance coverage is adequate in light of potential claims.

4) Work with a knowledgeable and reliable insurance broker.

5) Plan and implement a comprehensive risk management strategy, taking into account other potential sources of insurance coverage and indemnification.

6) Identify and implement internal product safety measures to help reduce the likelihood of product liability claims.

7) Promptly notify insurance carriers of actual or potential claims.

8) Repeat this process periodically.

Ruth A. Bahe-Jachna is a shareholder in the Chicago office of Greenberg Traurig, LLP. Among her areas of practice are product liability and recall counseling, class actions, and complex litigation. Mark E. Miller is a shareholder in the Washington, DC, office of Greenberg Traurig, LLP. His areas of practice include counseling clients on insurance programs, and prosecuting and settling complex insurance coverage disputes.

Today's economy depends heavily on the enormous range of products that are sold daily to consumers. Indeed, consumer demand for both the necessities and conveniences of life ' everything from lawn mowers and ovens to trampolines and espresso makers ' drives many manufacturers constantly to develop new products to sell. In today's litigious society, however, virtually every product sold represents at least the potential for product liability exposure. Jury awards and settlements frequently make headlines ' everyday household appliances, such as coffee makers, fryers, and blenders, have yielded damage awards or settlements as high as $2.25 million. Injuries from lawn mowers have generated awards or settlements as high as $2.6 million. Even furniture has the potential to yield awards or settlements in excess of a million dollars. Moreover, product liability exposure has ruined certain industries, eg, asbestos, and small companies without adequate insurance protection could face bankruptcy from a single product recall.

Product liability exposure is a fact of life for any entity that is a link in the chain running from the initial manufacture of a product, including manufacturers of component parts, to the end link retailer who sells the product to the ultimate user. Increasingly, jury awards and settlements for product liability claims involving personal injuries and/or property damages have become significant risks that prudent companies must take into account as a cost of doing business. The prudent company will be proactive in taking steps to ensure that it has done all that it can at least to minimize its exposure due to product liability claims. One important component of this business plan is product liability insurance coverage.

It is true that some companies have a greater need for product liability insurance than others. Clearly, the manufacturer of a product is typically readily identified as the first target of a product defect claim. However, far more companies have exposure than one might think at first glance. For example, consider who is implicated in the sale of a children's backyard 'jungle gym' ' the rope manufacturer that sells climbing rope to a wholesaler; the seat manufacturer that sells swing seats to the wholesaler; the wholesaler itself, which uses the climbing rope, the swing seats, and numerous other parts to put together the 'jungle gym' set and then ships it to the retailer; and finally, the retailer, who not only sells the 'jungle gym' but may also in some cases assemble it for the consumer. Each of these participants has a need for some degree of product liability insurance.

One need only look at the warning labels now commonly present on nearly every product to appreciate how important product liability insurance has become. The impetus for many warnings has been a lawsuit filed by someone who claimed not to appreciate the potential for harm arising out of misuse of a product. For example, who would think that one would need a label on a toilet brush that reads 'Do not use for personal hygiene,' or that consumers need a warning label for a scooter informing them that 'This product moves when used'? How about the 5-inch fishing lure with three steel hooks that has a warning cautioning the user that it is 'harmful if swallowed'? Or the Batman Halloween costume warning that reads 'cape does not enable wearer to fly'? Yet, these and other similarly implausible warnings now routinely accompany many consumer products sold throughout the United States.

Although most companies understand and appreciate the need for basic insurance coverage, some may not give adequate attention to insurance coverage for product liability exposure, including coverage for both litigation defense costs and recalls, until it is too late. The time to give thought to a company's product liability insurance needs is before a problem arises. Even for companies with a track record of few or no claims based on defective products, in today's litigious society there is simply no guarantee that the future will be as kind.

A company should ask itself a series of questions to assess whether it is properly prepared should it become the recipient of allegations of a defective product. First, does the company play any role in the process of putting a product into the marketplace? Potential liability could fall to those entities that are involved in any of the following processes: initial product design and/or development; product testing (including independent testing laboratories); manufacturing the product; manufacturing or otherwise supplying any component parts; development of warnings, labels, and/or instruction manuals; assembly of the product; and distribution of the product to middlemen and/or end users. The degree of exposure that rests with each of these processes may differ, but the key point is that involvement at any of these stages creates at least some degree of exposure that should be recognized and acknowledged by the company.

The second question a company should ask itself is what type of insurance coverage it currently has in place. Does it have just the basic CGL coverage? Has it obtained any supplemental coverage that is expressly designed to cover product liability-specific issues? Does the policy exclude coverage for the common types of claims for which the company needs protection?

The third question a company should ask itself is whether its current insurance coverage is adequate for its current needs and potential exposure. Should supplemental coverage be obtained that will clearly cover claims and potential litigation, including attorneys' fees and costs, based on allegedly defective products? Are limits exhausted by amounts paid for costs of defense? Does the current coverage extend to product recall situations, including possible voluntary recalls, or is supplemental coverage needed to insure for this possibility? Are the current policy limits adequate for today's climate, when one looks at recent jury verdict damage awards and settlements in product liability cases involving products similar to the one(s) with which the company is involved?

One of the most difficult issues to address is the financial impact of hypothetical future claims taking into account policy limits and deductibles. Many policies contain both per-occurrence and aggregate limits, as well as per-occurrence deductibles. Courts differ as to what constitutes an occurrence. One court may hold that the decision to market a defective product was the occurrence. Here, if a company had a thousand claims, all defense costs and settlements associated with those claims would fall under one per-occurrence limit. In practice, in these jurisdictions, coverage could be quickly depleted. Other jurisdictions may hold that each injury to a person caused by the defective product is the occurrence. In this scenario, fresh limits would be supplied for each occurrence until the aggregate limit is reached.

Coverage for punitive damages also is an important issue. Many claims allege punitive damages, and coverage for punitive damages varies from state to state. Policies should contain a specific punitive damages endorsement providing, at a minimum, that punitive damages are covered to the extent insurable under applicable law.

It also is important to understand changes in the company's product offering ' either adding or removing products, or other changes in product-related activities ' since the last time an insurance audit was conducted. Any changes in activity should be considered to determine how they may affect the company's product liability coverage needs. For example, a component part manufacturer may have had a relatively clean record of few or no defect complaints based on the nature of the product for which it supplies parts. However, if the component part manufacturer has become involved with supplying parts used for a new product line that is significantly different in nature, this could increase the likelihood of claims activity depending upon the nature of the new product. For all of these reasons, the company should engage in a detailed insurance audit on each renewal to ensure that it is adequately protected in the event of any product liability claims.

The fourth question a company should ask is whether it has a good insurance broker in place. The company is wise to identify a knowledgeable, reliable insurance broker who can help it to conduct these periodic audits and can advise on specific types of supplemental product liability coverage that may be desirable to help protect the company better. The insurance broker should either already have a strong understanding of the nature of the company's business and industry, or demonstrate a willingness and interest to learn about and understand what the company does, how its products or services translate into potential product liability exposure, and what the current litigation landscape is in the relevant industry for those types of products.

The fifth question a company should ask is what other potential sources of insurance coverage may be available to it. For example, a retailer will likely seek indemnification from a product's manufacturer or distributor for any product defect claims and recall situations. In addition, a retailer may ask or require that a product's manufacturer or distributor name it as an additional insured under the manufacturer or distributor's existing policies for product liability-related insurance coverage. A retailer may want to consider requiring that the manufacturer or distributor maintain certain minimum levels of coverage for these types of claims. Utmost attention to vendor insurance requirements is paramount. Unfortunately, it is not enough to impose these requirements; the company also should request to be provided with a certificate of insurance noting its status as an additional insured. Furthermore, the company should assess the financial stability of the insurance carrier and have the ability to review actual insurance policies on request. Even with indemnifications and coverage from others in the distribution chain, however, there may be gaps that could leave the company at risk for some or all of the ensuing costs. For this reason, it is important for companies to design any risk transfer strategy in conjunction with an overall risk management plan.

The sixth question a company should ask itself is what is it doing to help to minimize the risk of product liability claims. Is it doing anything to help minimize the risk that its product will ever become the subject of a recall or litigation based on an alleged defect? Are there additional measures that can and should be implemented to further reduce this risk? Some examples of steps that a company should consider are implementing an annual audit of its existing product safety procedures; implementing or reassessing existing quality assurance measures; identifying potential design changes or other product alterations; implementing presale testing either internally or through an external testing lab; and conducting a review and assessment of warnings, labels, and instruction manuals. Does the company have a team in place that draws members from its various departments or divisions, who meet periodically to discuss and assess product safety issues, and to identify potential problems or recommend changes? Many product liability insurance carriers provide risk management services, which, if used, can result in lower premiums.

Going through these exercises initially, and thereafter on a regular, periodic basis, will help the company to be as well positioned as it can be for any product liability claims that may arise. Once the company is comfortable that it has assessed its insurance coverage needs specifically as they relate to product liability exposure and has taken the necessary steps to modify its insurance coverage accordingly, there is one final point to keep in mind. Whenever there is the first suggestion of a possible product defect claim or potential recall, the company must promptly decide whether to put its insurance carrier on notice. In some jurisdictions, if a policyholder forgets to tell its insurer of a lawsuit or an occurrence that could give rise to a lawsuit, it can forfeit coverage. In other jurisdictions, the insurance company must prove prejudice to avoid coverage on a late notice defense. Hence, a company should always evaluate each claim or occurrence potentially giving rise to a claim on an individual basis.

In general, companies tend to understand their potential exposure resulting from product liability litigation better than their potential exposure from a product recall. In a product recall situation, financial exposure can mount quickly. Whether the recall is voluntary or mandated by the U.S. Consumer Product Safety Commission findings, the costs associated with implementing the recall can be significant. These associated expenses can include any or all of the following: refunding the purchase price of the product; providing a replacement product (including costs associated with redesign and testing of the replacement product); mailings to consumers to inform them of the recall; costs of having the recalled product returned for destruction (which may also include the cost of mailing shipping/packaging materials to the consumers as well as providing prepaid return postage); storage and/or destruction of the recalled product (destruction/disposal of certain products, eg, batteries, may be more costly than for other types of products); costs associated with providing notice of the recall to consumers, including Web site postings, maintaining toll-free phone lines, and posting notices in retail stores; as well as legal fees and expenses associated with handling the recall. Furthermore, in some cases, the costs could even include claims for lost profits against the manufacturer and/or distributor by the retailer of the recalled product. There also may be costs arising from additional employee staffing and/or the need to contract with third parties so that the company can perform some or all of these tasks. The costs for all of these activities will be directly related to both the volume of the product subject to the recall and the price of the product.

Practical Tips

In summary, companies should use this checklist to help ensure that their current product liability insurance needs are being met:

1) Identify the company's role in the product distribution chain.

2) Identify the type and amount of insurance currently in place to protect against product liability claims.

3) Assess whether the existing insurance coverage is adequate in light of potential claims.

4) Work with a knowledgeable and reliable insurance broker.

5) Plan and implement a comprehensive risk management strategy, taking into account other potential sources of insurance coverage and indemnification.

6) Identify and implement internal product safety measures to help reduce the likelihood of product liability claims.

7) Promptly notify insurance carriers of actual or potential claims.

8) Repeat this process periodically.

Ruth A. Bahe-Jachna is a shareholder in the Chicago office of Greenberg Traurig, LLP. Among her areas of practice are product liability and recall counseling, class actions, and complex litigation. Mark E. Miller is a shareholder in the Washington, DC, office of Greenberg Traurig, LLP. His areas of practice include counseling clients on insurance programs, and prosecuting and settling complex insurance coverage disputes.