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Manufacture at Your Risk: Vendor's Insurance Coverage Afforded by Manufacturer's Liability Policies and Broader Risk Shifting Considerations

February 25, 2009The VoiceRelated Practice Areas: Insurance
Brandon J. Kroft

One of the first considerations of any claim specialist or defense attorney when reviewing the facts of a new case is whether the defendant’s liability should be born by another party. The ability to “shift the risk” varies according to industry and the type of claim. In modern product liability law, both the manufacturer and distributor of a product can be liable to a plaintiff for a product defect which results in injury or damage. As a consequence of potential exposure to otherwise innocent vendors who merely acted as conduits between the manufacturer and the consumer, many states allow vendors to shift their risk to the manufacturer through either common law theories of implied indemnity, or through application of provisions in product liability acts. Hulsey v. Sears, Roebuck & Co., 705 So.2d 1173, 1178 (La. Ct. App. 1997); AMERICAN LAW OF PRODUCTS LIABILITY §§ 52:72 & 52:83 (3d ed. 2009).

Recognizing that manufacturers often have ultimate liability in product cases, general liability policies issued to manufacturers frequently contain broad form vendor endorsements which name vendors as additional insureds on the manufacturer’s policy. These endorsements serve multiple purposes, including encouraging the buying and selling of products and avoiding unnecessary litigation between vendors and manufacturers. LEE R. RUSS IN CONSULTATION WITH THOMAS F. SEGALLA, COUCH ON INSURANCE § 130:3 (3d ed. 2008); see Mitchell v. Stop & Shop Cos., Inc., 672 N.E.2d 544, 545 (Mass. App. Ct. 1996). These endorsements are standard form in most manufacturer’s policies and are provided for little additional premium. Both the grant of coverage and the exclusions and limitations contained in the vendor endorsement are intended to provide vendors coverage for injury or damage caused by the product, while excluding coverage for the vendor’s own acts of negligence. American White Cross Laboratories, Inc. v. Continental Cas. Co., 495 A.2d 152, 155-156 (N.J. Super. Ct. App. Div. 1985).

Vendors are additional insureds for injury or damage “arising out of” the named insured’s products, “distributed or sold in the regular course of the vendor’s business.” ISO Properties, Inc. Form CG 20 15 07 04 (2004). Courts have found the phrase “arising out of” to be broad and vague and will construe it in favor of the vendor. Sportmart, Inc. v. Daisy Manufacturing Co.¸ 645 N.E.2d 360, 363 (Ill. App. Ct. 1994). For a claim to fall within the endorsement, there must be “some causal connection” between the product and the underlying damages and a “but for” analysis may be employed to determine whether the injury or damage would have occurred “but for” the product. Fund Ins. Co. v. Twin City Ins. Co., 200 Fed.Appx. 953, 954 (11th Cir. 2006); St. Paul Fire & Marine Ins. Co. v. Antel Corporation, 899 N.E.2d 1167, 2008 WL 5235372 at *6 (Ill. App. Ct. 2008).

In cases where a court found the causal connection lacking, the injuries were caused by some independent act of the vendor unrelated to a product defect. Hulsey, 705 So.2d at 1179; Mitchell, 672 N.E.2d at 546. Moreover, several cases have found that the “distributed or sold” language utilized in the endorsement encompasses a broad range of operations necessary to distribute and sell goods, including marketing and promoting the products. Home Depot, U.S.A. v. Federal Ins. Co., 241 F.Supp.2d 702, 707-708 (E.D. Tex 2003); Makrigiannis v. Nintendo of America, Inc., 815 N.E.2d 1066, 1069 (Mass. 2004). In these cases, the courts found coverage under the vendor endorsements for allegations that shoppers suffered injuries at the hands of a display case, floor model or other in-store promotional items.

The vendor endorsement does contain several exclusions which purport to limit the coverage afforded. These exclusions are typically intended to further the general purpose of the endorsement, which is to provide coverage to vendors for the manufacturer’s liability and not for the vendor’s own independent acts of negligence. While the exclusions include contractual obligations assumed by the vendor, including any warranty the vendor provides, the more notable exclusions limit coverage for any modification to the product, including repairs and changes to the product’s physical make-up, labeling or packaging.

As with all policy exclusions, courts construe the vendor endorsement exclusions narrowly. Some courts have found there must be a “nexus” between excluded conduct and the injury or damaged suffered. Weaver v. CCA Industries, Inc., 529 F.3d 335, 341-342 (5th Cir. 2008); Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc., 78 Cal.App.4th 847, 868 (Cal. Ct. App. 2000). These courts hold the exclusions do not bar coverage where the vendor’s modification of the product did not cause the injury. It is also important to bear in mind that an insurer’s duty to defend is generally triggered where there are allegations of both covered and uncovered claims. As most product liability complaints will contain allegations of multiple causes of a injury, the manufacturer’s general liability insurer faces an uphill battle in avoiding a duty to defend the vendor through application of one of these exclusions.

Judge Posner of the Seventh Circuit Appellate Court states with respect to vendor endorsements that "[They are] a cheap add-on to products liability policies… and their cheapness makes the most sense if they’re limited to the case in which the vendor, being completely passive in relation to the harm giving rise to liability rather than the active author of the harm, would be entitled to indemnity from the manufacturer in the event that he (the vendor) was sued and held liable to pay damages." Hartford Fire Ins. Co. v. St. Paul Surplus Lines Ins. Co., 280 F.3d 744, 746 (7th Cir. 2002).

While perhaps “cheap add-ons” from a premium standpoint, the effect of these endorsements in product liability cases can be considerable. A vendor who succeeds in shifting its exposure in a product case to the manufacturer’s insurer, not only protects its own carrier, but also its premium rating. The vendor also creates an additional layer of protection for its personal assets to guard against catastrophic verdicts. Even where there are allegations that the vendor’s own negligence contributed to the injury, even shifting the defense of these cases can result in significant cost savings.

The coverage afforded by these endorsements should, therefore, be at the forefront of the mind of claim specialist and defense attorney alike.

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