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Product Liability

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Question: How do we protect the group from product liability claims?

In order to develop an effective product liability protection program, it is important to first understand the legal basis for product liability. Most, if not all, states have adopted and imposed a product liability policy based upon strict liability. Recognizing that it would be very difficult for a consumer to prove that a manufacturer or a distributor was negligent in the manufacture or selection of a product, states with strict liability laws only require proof that the personal injury or property damage was caused by the defectiveness of the product. It is not a defense that the manufacturer took reasonable steps to assure quality control. Also, each distributor or reseller in the chain of distribution of such product can also be held liable for the harm caused by their part in participating in the sale of it. Again, it does not matter how much care they exercised in investigating or relying upon the safety measures implemented by the manufacturer. All the plaintiff needs to show was that the distributor or reseller had purchased and resold the defective product that ended up in the hands of the end user. The rationale behind imposing strict liability is that it is better to have those who are profiting from the manufacture and sale of the products to bear the cost of the damages caused by a defective product, as part of the cost of doing business, than to require the end user to meet the very difficult task of proving that negligence was involved somewhere along the line.

Given the state of the law, it is not surprising that when a client is injured or sustains property damage because of a defect in a product, that his or her lawyer will cast as broad a net as possible naming as co-defendants in the lawsuit the manufacturer and every distributor, reseller, retailer and installer who might have had a part in the sale and distribution of the product in question.

Given the state of the law, it is not surprising that when a client is injured or sustains property damage because of a defect in a product, that his or her lawyer will cast as broad a net as possible naming as co-defendants in the lawsuit the manufacturer and every distributor, reseller, retailer and installer who might have had a part in the sale and distribution of the product in question. All too often, if the defective product had been purchased in connection with an approved program of a buying group, the buying group itself will be named as one of the defendants. Our firm has overseen the defense of numerous product liability lawsuits which named our buying group clients as defendants over the years. So far, each of them has been dismissed as to the buying group without it being required to pay anything in settlement. Our basis for obtaining such dismissals is that the buying group neither purchased nor sold the defective product during the distribution process from the manufacturer to the end user. If one of our buying group clients had a central billing program in which it was invoiced for the product, the result would likely not been as favorable.

In our experience, buying groups who only arrange for the purchasing program for its members and are not involved in the actual purchase and sale of the products, but nevertheless are still named in the lawsuit are caught up in the web, because their trademarks were involved. One example is the buying group who arranges for the manufacturer to sell products under a private label or exclusive brand arrangement, whereby the products are branded with a trademark owned by the buying group, rather than that of the manufacturer. Naturally, if the plaintiff’s attorney discovers that the trademark on the defective product was owned by the buying group, it will assume that the buying group was involved in the manufacturing process and will include the group as a defendant. Another example is in the marketing group context in which the group provides a service mark for their members to use as a trade name. The idea is that by operating under the same name, they can pool their advertising dollars to develop national recognition in much the same way as a large retailer might do. Unfortunately, plaintiff’s counsel might misunderstand the group to be an actual national retailer, as opposed to being just a trademark licensor, and name the buying/marketing group as a co-defendant in the lawsuit.

Are we recommending that buying groups avoid central billing arrangements, exclusive branding arrangements and national marketing programs in order to stay off the radar of plaintiffs’ attorneys? Absolutely not! But it is important to understand that these activities involve risks of being sued. Protective measures should be taken to better position the group when it is becomes a target in a product liability case. There are several layers of a safety net that can be put in place. Many of them are discussed below.

Even though a buying group may have a solid defense against product liability, defending against a lawsuit, however unwarranted, can be very expensive. Having an insurance policy that will assume the defense of the case, will alleviate much of the expense. There are at least three key sources available for insurance coverage.

A good starting point is to consider the public liability insurance the group has in force. How much coverage is enough? It will vary given how likely the products sold are to cause injury, if defective. A group focused upon the purchase of gasoline containers would be more at risk than a group involved in the purchase of paper plates and napkins. That said, groups typically find coverage between $3,000,000 and $5,000,000 to be sufficient. Generally, it is more economical to have a basic policy for a lesser amount, with umbrella coverage to make up the rest of the coverage.

Another primary source of coverage is from the vendors approved by the group. The contract with such vendor should not only require the vendor to maintain coverage of a minimum amount (as determined and specified by the group), but it should also require the vendor to name the group as an additional insured. Further, the contract should require the vendor to furnish the group an insurance certificate on an annual basis as evidence that such coverage is in place and that the group is named as an additional insured. Many times, a vendor may try to get by with providing a certificate that shows it is indeed insured up to the required amount, but there is no mention of the group being named as additional insured. When the group is sued as a co-defendant with the vendor, as an additional insured, it is able to tender the defense of the case to the vendor’s insurer who is contractually required to comply with such demand. That means the insurer will appoint counsel to defend the group in the case and will pay all the legal fees and costs involved. Without being named as an additional insured on the policy, the group has no right to make such a demand for its defense in the case. If the group has programs with many vendors, making sure all the insurance certificates are current and show proper coverage, can be a daunting task. Nevertheless, it can prove most worthwhile in terms of reducing the demands on the group’s own insurance coverage and thereby helping keep the costs of insurance coverage lower. Fortunately, the cost of being named as an additional insured is nominal. So, a vendor cannot legitimately complain about the extra expense involved in providing this coverage to the group. It is also wise to provide in the contract that the vendor must also name the members as additional insureds who purchase from them through the group’s program. As a compromise, the group might consider making this requirement applicable only when specifically requested by a member.

The third primary source of insurance coverage is from the members of the group.

The membership agreement should contain a provision requiring a minimum amount of insurance coverage and that the group be named as an additional insured on the member’s policy. The advantages and considerations of this arrangement with members is identical to those discussed above regarding the insurance coverage from the vendors.

Another important aspect of the safety net is to have a comprehensive indemnity provision in the contract with the vendor. In essence it provides that the vendor will be responsible for any damages caused by the products furnished by the vendor to the group’s members or for any other act or omission of the vendor. The importance of the indemnity provision can be readily seen, if for no other reason, that in our experience, it is almost always among the provisions that vendors choose to negotiate and water down. Consistent with the rationale of why strict liability exists in the first place, vendors need to protect the group through an indemnification covenant as part of their cost of doing business with the group and receiving the benefits of additional sales that the group as to offer the vendor.

Similarly, the group should include an indemnification clause in its agreements with its members. If the group is named in a product liability suit because of a product sold by the member, the member would be obligated to make the buying group whole as a result of any damages it incurred as a result.

The indemnity provisions in both the vendor and the membership agreement carry the added benefit of providing the vendor and member an insurable risk for their coverage. That gives greater justification to the insurance companies for adding the group as an additional insured on their policies. In the past when an insurance company has questioned whether it was appropriate to add the buying group as an additional insured, pointing to the contractual obligation of the indemnity has been useful in overcoming such objection.

The redundancy of coverage and protections proposed above, may seem like overkill, but it is not. In some cases, the plaintiff cannot identify the manufacturer of the product, but knows where it was purchased. The group can fall back on the coverage of the member. If for some reason, the member did not name the group as an additional insured on its policy, the indemnity clause will assist the group in recovering its damages from the member, which ultimately can be charged by the member to its insurer. Then, as a final fail safe, the group’s own insurance is available.

When the group is served in a product liability lawsuit, it should provide prompt notice to all sources of insurance coverage and then let the insurers sort it out amongst themselves. A full copy of the lawsuit should be included with the notice. Unless instructed otherwise, the notice should be given to the insurance broker who represents the insurer.

One final note. Sometimes it may not be clear to an insurance carrier as to whether it has a duty to cover the buying group in a product liability lawsuit. Rather than getting into a dispute up front as to whether such coverage exists, the insurer will issue a reservation of rights letter. In it they will outline their concerns as to why coverage may not apply, but agree for at least the time being to provide the defense of the lawsuit. They reserve the right to withdraw from defending or being responsible for the cost of damages if facts develop that indicate to them that coverage does not exist in that case. Even such an arrangement can be quite helpful, especially if no real grounds for holding the buying group liable exist in the first place. In such circumstances, the primary exposure to the buying group, the cost of defending the case, is covered by the insurer that has reserved its rights to withdraw.