While the vendor is often the primary point of contact with the plaintiff, the vendor often has very little to do with the product alleged to have caused the harm; the vendor almost certainly had no control over its design, the manner of its manufacture, its packaging or even its intended end user. As a result, the vendor is usually reluctant to accept any liability for harm purportedly stemming from the product.
The following discusses the notion of risk transfer in this distribution chain, the underlying rationale of vendors in seeking to transfer risk, and the possible considerations applicable to affixing liability along the distribution chain. The ultimate question of scope of coverage is generally determined by the underlying facts and applicable contractual and policy wordings, and so it is important to assess each case individually. As well, the manner of risk transfer can differ, and policy wordings are not consistent. Finally, the individual circumstances unique to either the product or the parties can impact upon any eventual coverage assessment.
The Significance of Risk Transfer
Almost everything we buy is sold through a distribution chain. This means that the end consumer has very little (or likely no) direct relationship with the original manufacturer. It also means that the product's vendor (who sold the product to the end user) had little to no involvement in the product's creation. Yet, when a party is injured that party generally seeks recourse against those with whom it had the closest relationship; in this case, the vendor.
It may be that almost everything we buy and consume has the potential to do harm; and some things certainly have a higher propensity to harm than others. On occasion, even things that we generally consider harmless also can cause harm. As a result, parties who make and parties who sell all manners of products are routinely sued by parties who suffer all manners of injuries resulting from the purchase and use of a product.
The existence of product liability claims therefore necessitates responses by parties, and their risk managers, to reduce risk so as to minimize liability exposure. In order to distribute this litigation risk, or perhaps allocate it more efficiently amongst at-fault parties, distribution chains maintain contractual risk transfer agreements as part of their usual operations.
As noted above, a product's vendor (and usually its distributor) has no original control over the design of the product. Unless they are insulated from liability exposure such parties therefore can be unwilling to facilitate that product to market, and hence such parties fail to promote the manufacturer's business. In order to facilitate the marketing and distribution of a product manufacturers often employ some manner of risk transfer to serve as an assurance to the vendor (or distributor) that it will not bear liability exposure for problems with a product that are outside its control. At the same time, end retailers are increasingly likely to require indemnities from the manufacturers whose products they sell. In this way vendors (and distributors) are better insulated from the potential exposures that can accompany a defective design of a product.
These contractual risk transfers are generally best reflected in liability policies through the incorporation of vendor endorsements. Vendor endorsements operate to provide products liability coverage to vendors that sell products.2 Any party with such a vendor endorsement as part of its liability policy can offer its vendors "additional insured" status under its own liability policy. In a "perfect" world, this protection should insulate a vendor from having to expose its own liability policies to litigation arising in relation to the manufacturer's product. In addition to constituting a risk transfer mechanism, by offering such protection manufacturers can ensure they are better situated to attract retailers and distributors to their products.
Scope of Coverage
The existence of a vendor endorsement offers protection against claims derived from harm resulting from a product's sale and use. However, it is rare that a claim will clearly allege harm that derives simply from the specific use of a purportedly defective product. Often the claim in question will lead to a broad pleading that includes allegations of independent negligence of a vendor in addition to the defective product claim. These claims may be distinguished within the pleadings, but may not be so easily separated between responsible parties by their respective insurers. Frequently, the claim will be drafted in such a way that all named defendants are equally facing negligence claims, and the facts supporting the negligence and product liability claim as against each defendant may not be readily identifiable.
This failure to identify the facts giving rise to distinct types of claims presents a problem for the vendor, who may have believed another party would respond to all product liability related claims. It can also pose a difficulty for the manufacturer (or its insurer), who is now largely unable to decipher the specific nature of the claim made against either defendant. The defendants may be left to wonder if they are named in the action because of a discrete independent act of negligence (such as in the manner of marketing, inspection, or repair) or if they are named defendants wholly based on the failure of the specific product in issue.
Unless the acts alleged against the vendor are somehow unique and distinct, the scope of the vendor endorsement is generally broad enough to capture the allegations raised against the vendor. If so, the manufacturer (or rather its insurer) will be obliged to defend the vendor.
Barring allegations of unique or distinct actions by the vendor, the primary benefit of being an additional insured pursuant to a vendor endorsement is the flow-through defence obligation that it creates. For a vendor endorsement to definitively respond to a claim, the circumstances must constitute a vicarious liability claim against the vendor for another's negligence; e.g. the defect of a product.
Still, the endorsement contains language that extends to the vendor's "additional insured" status for bodily injury or property damage claims "arising out of" the particular product at issue so long as it is sold "in the regular course of" the vendor's business. The phrases "arising out of" and "in the regular course of" have been interpreted broadly by courts.
Recall too that an insurer's duty to defend a claim is broader than its duty to indemnify. An insurer is obliged to defend a claim if facts are alleged in the pleadings that, if proven true, would require the insurer to indemnify. The mere possibility that a claim may fall within the policy is sufficient to trigger the duty to defend.
Certainly, the intended scope of coverage is for the protection of an additional insured against the negligence of the named insured, which in this context stems from the problematic product. The additional insured's own negligence is not intended to fall within coverage. However, because of the way courts generally interpret insurance policies (broadly) and exclusions (restrictively), the additional insured can still end up with coverage for claims based largely, but not wholly, on its own negligence.
Exclusions
As indicated, the vendor endorsement is not as straightforward as applying to all matters involving products that are sold in the regular course of a vendor's business. These endorsements frequently contain a variety of exclusions intended to limit when the "additional insured" status will apply to a vendor, and so when coverage can extend to that party. In this way, the wordings in these exclusions help to delineate the independent actions of the vendor from the actions of others in the supply chain. These exclusions therefore allow for some restrictions on the scope of the endorsement's coverage when the alleged harm stems from the vendor's independent actions rather than stemming from the product itself.
For example, exclusionary language that can void coverage for a vendor under the endorsement include: changes by the vendor to the product; repackaging or relabeling; failures to perform inspections, adjustments, tests or servicing normally associated with the sale of the product; or deviations from the sale to performance of installation, service or repairs not connected with the product's sale.
Lastly, keep in mind that courts will read exclusions restrictively. Any insurer intending to rely upon exclusionary language must clearly demonstrate the application of the exclusion. Any ambiguity in the application or meaning of the exclusion will be interpreted to the benefit of the insured. If the circumstances giving rise to the claim do not clearly fit into one of the excluded activities, it is very likely that a court will find that the coverage applicable to an additional insured through the endorsement would still apply.
Additional Coverage Considerations
There are a variety of coverage considerations that can arise in the distribution chain. Some of these are obvious coverage concerns that can arise in any "additional insured" context, while others can be specific to vendors.
The "Missing"Manufacturer
Perhaps the most obvious coverage concern for a vendor is the timely identification of available insurance. Normally, the vendor ought to have received confirmation of the vendor endorsement insurance and so should be able to identify the responsible insurer. However, we need not assume that will always be the case. An absentee manufacturer is another difficulty that can arise in the distribution indemnity chain, particularly for products with slower turnovers or those that are shipped from remote locales.
Vendors should therefore refuse to accept on faith that a manufacturer complied with its insurance requirements to procure sufficient liability insurance by virtue of a suitable vendor endorsement. Failing to confirm that appropriate insurance coverage was obtained in the first instance could leave a vendor without recourse, particularly if the manufacturer is no longer a viable entity.
In addition, vendors tend to carry more than one brand of a specific product. Improper identification of a product upon initial receipt of a claim may cause the vendor to seek indemnity from a manufacturer who is merely the competitor of the intended target. Obviously, that manufacturer's insurer will not respond for another manufacturer's similar product. Therefore properly identifying the product and the corresponding supply chain in the first instance can save much grief and delay for all.
The "Missing" Product
The absence of a product is not necessarily fatal to a plaintiff advancing a product liability claim. However, that absence of a product can pose difficulties for a vendor's insurer and a manufacturer's insurer in properly assessing the appropriate response to a vendor's request for a defence. Without the product it may be impossible for parties to ascertain whether the true nature of the claim stemmed from a defect within the product, or from some secondary alteration to the product, possibly by the vendor.
If it was the vendor who lost the product after the injured plaintiff reported the claim and attempted to return the product, then there may be a real concern about the rationale behind that product's "loss". Furthermore, this lost product may require parties and the court to consider what implications stem from the product's disappearance, and what inferences (if any) may be drawn from its disappearance. These issues can potentially have ramifications for the coverage entitlements vendors seek.
Eroded Limits
Another issue could be that the manufacturer itself has already expended all of its liability insurance. In that instance, which could easily occur in the context of mass claims, the vendor can no longer resort to the manufacturer's insurance unless it had separate and distinct limits. In normal circumstances a manufacturer's limits would not apply separately to a vendor.
Contractual Indemnity Differs from the Vendor Endorsement
In some circumstances the vendor may require a manufacturer to complete a stated vendor agreement that outlines the terms of the indemnity the latter provides to the former. In addition to the separate contractual indemnity, the vendor agreement will usually state too that the manufacturer must obtain a vendor endorsement on its liability policy that covers the vendor.
However, because the vendor agreement is a separate contractual arrangement than the resulting vendor endorsements under liability policy, the scope of the contractual indemnity may not match the vendor endorsement. A vendor may wish to have a contractual indemnity in which the manufacturer covers it for all loss, regardless of who was negligent. In contrast, the manufacturer might procure a vendor endorsement that contains some of the above referenced exclusions.
On this scenario, a gap in coverage could then arise if a resulting claim involves a product that the vendor, for example, repackaged independent from its sale. The manufacturer's insurer may refuse to extend to that vendor the additional insured status granted by a vendor endorsement. Furthermore, the manufacturer policy's contractual liability clause may not extend to claims that were not caused by the manufacturer. This means the vendor could be without coverage under either a vendor endorsement or a contractual liability clause, while the unsuspecting manufacturer is still facing the vendor's contractual indemnity which it executed in the separate vendor agreement. Therefore, a prudent manufacturer would prefer to take opportunity to assess its vendor agreements and ensure consistency with both its vendor endorsements, and its contractual liability clause.
Conclusion
As evidenced above, the coverage entitlements flowing along the distribution chain are important elements of risk allocation for both manufacturers and vendors. Vendors are reluctant to expose their liability policies to claims derived from another's product, while manufacturers are often required to indemnity their vendors and can use the indemnity to enhance the breadth of their product's exposure. The claims themselves will determine how coverage entitlements flow and there are many issues to consider before passing resolution on conflicting coverage entitlements.
The problems of coverage, some of which are briefly alluded to above, suggest that those involved in risk allocation along a distribution chain should carefully assess coverage entitlements prior to any claims arising. Doing so will ensure a better understanding of potential exposures and a more efficient and directed response when the product liability claim is inevitably served.
1 Unless otherwise noted I hereafter distinguish only between vendors and manufacturers, and for the purposes of much of this discussion equate manufacturers and distributors.
2 For example, a common vendor endorsement is the ISO CG2015 form. .
