Post written by: Ed Botos
For an agent or an underwriter, a distributor is not typically a difficult risk to evaluate. The client buys products from a manufacturer or another distributor, stores them in a warehouse, and re-sells them to retailers. If there is a U.S. product liability claim, normally the distributor will bring the manufacturer of the product into the case as a defendant (if the plaintiff has not already done so), and claim indemnity from the manufacturer as the party at fault.
Sounds pretty simple, right? Not always…
In today’s global economy and spirit of entrepreneurship, understanding a distributor has become much more involved. Two common situations faced in the evaluation of a distributor are whether a client directly imports goods from a manufacturer based in a foreign country or if private labeled products are distributed. Often, both will exist. The phrase, “the insured has stepped into the shoes of the manufacturer, is used to describe these situations.
Distributor Liability: Imported Goods
When a distributor imports foreign goods, the full burden for product liability may fall on them if the manufacturer does not have a legal presence in the U.S. (e.g. a U.S. subsidiary, a U.S. plant, offices, etc.) or has not agreed by contract to be subject to the jurisdiction of U.S. courts. It would be prudent for the distributor to verify that all imported products conform to U.S. standards.
“The United States has some of the most stringent product safety standards in the world. When goods are produced overseas, they do not necessarily comply with these standards. When a wholesaler-distributor imports products from a foreign manufacturer who does not carry U.S. product liability coverage, they can assume the product liability exposure.” — Wholesaler-distributors may be held liable for product defects, National Association of Wholesaler-Distributors
Distributor Liability: Private Label Goods & Product Recalls
The second instance, the distribution of private label goods, also places the full burden for product liability on the distributor. A product is manufactured under contract by either a domestic or foreign firm. The distributor takes on the liability of the manufacturer even though there is no direct involvement in the process.The distributor is, therefore, also responsible for establishing product specifications, and ensuring that quality control is maintained and adequate records are kept (from raw materials to the finished goods).
There may also be the additional burden of bearing the responsibility and expense of a product recall. The distributor who sells goods under their own brand name should exercise due diligence to assure that there is no infringement of patent or intellectual property rights.
For a distributor, the best way to protect against losses from these exposures is by obtaining the right insurance coverage and through contractual risk transfer. The standard commercial general liability (CGL) form that includes products liability coverage is the starting point.
“Commercial general liability is a standard insurance policy issued to business organizations to protect them against liability claims for bodily injury (BI) and property damage (PD) arising out of premises, operations, products, and completed operations; and advertising and personal injury (PI) liability. The CGL policy was introduced in 1986 and replaced the “comprehensive” general liability policy.” — Commercial General Liability, International Risk Management Institute
Additional protection such as product recall coverage may also be recommended. A sound risk transfer program would include obtaining current certificates of insurance from all manufacturers or other suppliers, as well as a requirement that they name the distributor as an additional insured on their general liability policies, and a contractual agreement that contains an indemnification clause and insurance requirements that at a minimum equal the distributor’s coverage and limits.
Your independent insurance agent and legal counsel should be consulted to provide needed guidance.
Learn more about Westfield’s Signature Series Distributor Program, designed specifically to meet the needs and exposures of distribution companies and employees.