Product vendors coverage
History of product liability shows a shift in
interpretation regarding vendors coverage
By Donald S. Malecki, CPCU
Rest assured that plaintiffs’ attorneys are likely to be devoting more of their attention to proving some partial fault of manufacturers in light of this recent change.
When products liability insurance was first introduced in the United States, it was probably a tough sell, since the legal basis for imposing liability was negligence, a difficult standard to prove. (Examples are defects in design or mislabeling.) This also was coupled with the fact that there was no privity of contract. This meant that if a consumer were injured by a product, his or her claim would have to be made against the vendor and not the manufacturer, because the transaction of the sale was between the consumer and ultimate seller.
It was not long after, however, that privity of contract, dealing with products, was struck down. In fact, it was the 1916 case of MacPherson v. Buick Motor Co., 111 N.E. 1050 (N.Y.) where the court held that a manufacturer could also be sued by the consumer.
When the legal basis for imposing product liability was broadened, first to encompass breach of express and implied warranties and, in the early 1960s, to include strict liability in tort (almost absolute liability), it became much easier to sell products liability insurance.
When the quality of some products began to decline, laws were enacted for the protection of consumers, such as the Federal Hazardous Substances Act, and the Consumer Product Safety Act, along with the enactment of tort reform laws. It took almost a half a century before insurers began to tighten up their underwriting. In fact, the products liability crisis reached its peak in 1975, with the unavailability of coverage with respect to many businesses continuing to be the order of the day.
Although underwriting was stringent during this period—and still is—what may have handicapped underwriters in their considerations was the fact that premiums for products liability were not reported separately from the general liability line of coverage. This finally changed in 1986.
It is uncertain precisely when product vendors coverage first became available. Based on the fact that most claims and suits involving consumers had to be funneled to the sellers of products, at least prior to the demise of privity in 1916, the vendors endorsement might have been introduced fairly soon after products liability insurance was introduced in the United States.
Whatever the case may be, underwriters first began to offer a limited form endorsement, which was meant to provide coverage but to restrict it to the vendor’s vicarious liability. This meant liability imputed to the vendors because of the manufacturer’s fault. As is commonly the case in the insurance business, the demand for broader coverage, coupled with soft markets and competition often creates coverage far beyond original intent. An example is the vendors broad form endorsement that soon overshadowed the limited form endorsement.
The difference between these two endorsements dealt primarily with coverage having to do with express warranties; in other words, the extent to which vendors were permitted to describe a product’s use or function and still be covered.
It was not too long before the limited form endorsement disappeared, at least with reference to use in conjunction with ISO standard commercial liability forms. It was in 1986, furthermore, when ISO introduced its new plain-English approach to commercial general liability forms and changed the vendors endorsement’s label of “broad form” to Additional Insured - Vendors.
Producers need to be aware that many insurers use their own independently filed policies and vendors endorsements that can be more limited in scope than even the once prevalent ISO limited form. To put it bluntly, standardization is becoming a thing of the past, as are its advantages, resulting in problems with interpretation.
Prerequisites to coverage
How vendors coverage applies in a given situation will hinge not only on the fact pattern, but also on the nature of the endorsement. While the original concept of the vendors endorsement limited coverage to the vendor as a “conduit” between it and the consumer, other broader endorsements not only covered the vendor as a conduit but also expanded protection to the vendor’s role as an “instrumentality.”
The difference between the two roles is that when the coverage is limited to a vendor as a conduit, liability attaches to the vendor solely because it is part of the stream of commerce and nothing more. In other words, but for the fact that vendor served as the “go-between” for the manufacturer and consumer, the vendor would not have been sued.
When the vendor is also an instrumentality of liability, coverage attaches for doing something or failing to do something negligently in relation to the identified product resulting in injury or damage to a consumer. For example, demonstration, installation, servicing or repair operations creating liability have been excluded under the ISO standard endorsement since 1986, except when such operations are performed at the vendor’s premises in connection with sale of the product.
This is not a forum for finding fault, but in a number of the court cases dealing with vendors, some insurers have attempted to deny coverage because of a vendor’s role as an instrumentality by maintaining that the intent of coverage is limited to the vendor’s role as a conduit. One such commonly cited case is American White Cross v. Continental Ins. Co., 495 A.2d 152 (N.J. Super 1985). The important message for everyone to heed is that it is the endorsement’s wording that counts in the final analysis and not what the insurer or others might believe is the intended purpose.
While readers of policies and endorsements commonly look to the exclusions section to determine the extent to which coverage may not apply, it is not unusual for many coverage forms to set out limitations in their insuring agreements. The standard ISO commercial crime forms, for example, condition most coverages on loss “resulting directly from” the coverage in question. A liability policy conditions coverage on an occurrence. The standard building and personal property coverage form first requires that there be “direct physical loss of or damage to covered property.”
The standard vendors endorsement, on the other hand, requires as a condition precedent to coverage that the scheduled product be one that was distributed or sold in the regular course of the vendor’s business. In one case, Hartford Accident and Indemnity Co. v. Bennett, et al., 651 So.2d 806 (Dist. Ct. App. Fla. 1995), a store owner was sued by an invitee who was injured by a model garden storage shed.
The manufacturer’s insurer denied the vendor coverage because the storage shed in question was a model and not the one that was sold in the vendor’s regular course of business. The court agreed with the manufacturer’s insurer, stating that coverage would have applied had the injury resulted from a full-sized storage building.
A broader perspective on coverage
The foregoing argument might have come as a surprise to the vendor. Admittedly, however, the insuring agreement’s restriction does have merit. Over the years, however, the courts have largely ignored such restrictions and, in many cases, have come to view the vendors endorsement as being virtually a separate and broad coverage for vendors.
A case in point is Makrigiannis, et al. v. Nintendo of America, Inc., 815 N.E.2d 1066 (Sup. Jud. Ct. of MA 2004), where a minor customer brought a negligence action against both a manufacturer of games and the retailer (vendor), after the manu-facturer’s interactive display unit fell at the vendor’s place of business. The manufacturer’s liability insurer refused to defend and indemnify the vendor, based on the allegations that the vendor had conducted negligent inspection, maintenance or installation of the product resulting in a dangerous and unsafe condition. The vendor, therefore, filed suit against the manufacturer.
Interestingly, the insurer pointed to the fact that the unit itself was not for resale to the general public, but instead was intended to be used solely for promotional purposes. A number of cases were cited, however, where coverage nonetheless was found even though customers were injured by display products. The previously cited Hartford A&I case holding against coverage was not raised by the insurer.
The insurer also relied heavily on rulings in other cases to argue that the vendors endorsement does not indemnify a vendor for independent acts of negligence. That may be true in some cases, but not with the ISO standard broad vendors endorsement. In the final analysis, the court ruled that the vendors endorsement covered the vendor for its own negligence thereby requiring the insurer to indemnify the negligent vendor.
New ISO endorsement
It may have been cases like the foregoing one that caused ISO to amend its Additional Insured -Vendors CG 20 15 endorsement, effective July 2004, in most jurisdictions. It still remains a scheduled endorsement that requires the vendor’s name and the named insured’s products involved with this particular vendor.
The exclusions of this new endorsement, CG 20 15 07 04, are virtually identical, except for one addition: (h). Newly excluded is bodily injury or property damage arising from the sole negligence of the vendor, meaning its own acts or omissions, those of its employees, or anyone acting on the vendor’s behalf.
This new endorsement’s exclusion, however, has two exceptions. First, it does not apply to exceptions contained in exclusions (d) and (f). Exclusion (d) bars coverage for repacking, except when unpacked solely for the purpose of inspection, demonstration, testing, etc. Exclusion (f), referred to earlier, precludes coverage demonstration, installation, servicing or repair operations, except those performed at the vendor’s premises in connection with the sale of the product.
Points to remember
It is important to keep in mind that, because of this new endorsement’s exceptions, it is not limited solely to a vendor’s liability as a “conduit.” Because of these exceptions, the ISO endorsement, at least, should be viewed as continuing to cover a vendor for its liability as an “instrumentality” to the extent of exceptions to exclusions.
If a claim or suit alleges a vendors’ liability when neither of the exceptions to exclusions (d) or (f) applies, defense and indemnity will likely be precluded if the court finds the vendor to be solely at fault. Had this new endorsement been in effect at the time of the above Makrigiannis case, the conclusion might have been different because the court found the vendor to have been 100% negligent.
On the other hand, if it can be shown that the manufacturer is at least 1% at fault, the vendor has the potential for coverage of up to 99% of its fault. Rest assured that plaintiffs’ attorneys are likely to be devoting more of their attention to proving some partial fault of manufacturers in light of this recent change.
Finally, keep in mind that the ISO standard vendors endorsement is not the only one being used today. A variety of endorsements will likely be used, making it necessary for vendors to determine the potential scope of coverage and not to assume that coverage is standard in the business. *
Donald S. Malecki, CPCU, has spent 45 years in the insurance and risk management consulting business. During his career he was a supervising casualty underwriter for a large Eastern insurer, as well as a broker. He currently is a principal of Malecki Deimling Nielander & Associates L.L.C., an insurance, risk, and management consulting business headquartered in Erlanger, Kentucky.