When we think of products doing damage that a business might be held liable for, we often think of the most common examples: small children choking on mis-labeled toys, people blowing up Thanksgiving turkeys in a deep fryer due to poor manufacturer instructions, and cars suffering engine damage because of a defect on the production line-to name a few.
So, while it’s obvious that anyone who is involved in the sale of a physical product needs liability insurance, there are some more subtle “products” that can also incur liability. Imagine you programmed software that helps investors gauge the real estate market in order to decide where to buy and sell next. If a glitch in your software causes investors to lose money, then you could be held liable for their losses.
Even though we don’t typically think of a computer program as a product that could cause damage, it really is. Damage can be physical, but it can also be financial, emotional, social, and more. So the answer to the question Who needs product liability insurance for small business? is truly anyone involved in the sale of goods.
A manufacturer of induction furnaces was sued by approximately fifty people who alleged that injuries, disabilities and deaths of present and past employees of an army depot resulted from pollutants emitted from defective furnaces supplied by the manufacturer.
The furnaces were used at the depot to strip and burn rubber from the metal tracks of army tanks and armored personnel and missile carriers. It was alleged that the burning of the rubber released “….hazardous, dangerous and carcinogenic agents into the atmosphere which were then breathed, inhaled, absorbed or otherwise ingested by the workers employed in the rubber branch section.” Cancer and numerous respiratory problems were the alleged result. It was also claimed that the manufacturer failed to give adequate warning of the risks.
The insured’s comprehensive general liability insurance underwriter denied coverage for the claims on the basis of the current and widely used pollution exclusion. The policy included coverage for the “products/completed operations hazard.” The insured filed an action for declaratory relief and both parties moved for summary judgment. The circumstances of the case brought it within federal court jurisdiction.
The insured acknowledged that the exclusion would apply if an insured itself engaged in polluting activities or if pollution occurred at the insured’s place of business. But it argued that the exclusion does not apply when injurious particles are released into the atmosphere by a product (used by others) manufactured by an insured and result in injury.
The court found no ambiguity in the policy, stating that the pollution exclusion was “absolute,” specifically removing coverage where pollution causes damage. Furthermore, it said that there was no duty to defend when a claim is clearly excluded.
Judgment was rendered for the insurer and against the insured.
(PARK-OHIO INDUSTRIES, INC. ET AL., Plaintiffs v. THE HOME INDEMNITY CO., Defendant. U.S. Court, Northern District of Ohio, Eastern Division. No. l:90CV1046. August 6, 1991. 785 F.Supp. 670. CCH 1992 Fire and Casualty Cases, Paragraph 3760.)
Brazas Sporting Arms, Inc. was insured by a CGL policy from American Empire Surplus Lines Insurance Company for the period of 1992 through 1997. A dispute arose between the two parties due to lawsuits filed against the insured in 1995.
Brazas, a firearms distributor, was named as a defendant in two separate suits. In both instances, Brazas was one of various parties named and accused in making firearms available in an irresponsible manner. Specifically, Brazas, et. al., were accused of either making or distributing weaponry in numbers that ignored legitimate consumer need; in other words, creating an illegal market. The illegal firearms, in turn, were widely available to criminals for a multitude of acts that resulted in substantial bodily injury and property damage. While accused of contributing to this situation, none of the defendants, (including Brazas) was accused of making or selling any specific model or make of weapon, just producing and distributing firearms.
Brazas notified its insurer, American, of the suits, but the carrier denied any responsibility to either defend or cover the legal actions. Brazas asked a court to find that American was obligated to provide a defense against the suits and, should it be necessary, pay any related damages. Brazas appealed after the lower court ruled in favor of American, stated that it owed no obligation to defend or cover Brazas.
Both the lower and higher courts examined the policy language of the CGLs that covered Brazas. The policies were identical, modified by wording that excluded coverage for any BI or PD related to the Product and Completed Operations hazard.
The higher court reviewed all of Brazas’ arguments, specifically that American’s sale of a Comprehensive General Liability policy with the products/completed operations exclusion was misleading, that the policy provisions were in violation of state consumer protection law and that the carrier acted in poor faith by failing to give a detailed explanation of the grounds for denying coverage. The higher court disagreed with Brazas’ position. It found the policy wording to be clear, that the company actions did not violate state law and that the denial procedure was consistent with its interpretation of the modified CGL. The lower court’s granting of summary judgment in favor of American was affirmed.
Brazas Sporting Arms, Inc., Plaintiff, Appellant, v. American Empire Surplus Lines Insurance Company, Defendant, Appellee. No. 99-2055 United States Court of Appeals For the First Circuit, filed July 13, 2000 Firearms Litigation Clearinghouse.
Archer Daniels Midland Company (Archer) owned and operated a plant that used a fermentation process to produce high purity beverage-grade alcohol. They contacted Vogelbusch USA, Inc. (Vogelbusch) and asked the Insured to engineer and design a high purity ethanol dehydrator to install at the alcohol plant. The dehydrator would receive “raw alcohol” produced by the plant’s existing distillation process and produce dehydrated, beverage-quality alcohol as well as byproduct that could be used again in the plant’s distillation process. The Insured performed the job but Archer claimed that the unit did not produce beverage-grade ethanol because of the presence of a contaminant in the finished product. Vogelbusch filed a breach-of-contract action against Archer for nonpayment under the contract. Archer countered with its own suit alleging breach of contract, negligent misrepresentation, breach of implied warranty of merchantablity and breach of implied warranty.
Vogelbusch was covered under a commercial general liability (CGL) policy and a commercial umbrella policy, issued by two different State Farm insurance companies. Both policies were in force during the time period of Archer’s counterclaim. State Farm refused to defend or admit coverage under either policy and Vogelbusch sued them, alleging breach of contract. Vogelbusch asked for a declaratory judgment that State Farm had a duty to defend and indemnify against Archer’s counterclaim. The trial court denied Vogelbusch’s motion. Vogebusch appealed.
The appellate court reviewed the relevant language in the CGL and umbrella policies and concluded that they excluded coverage if the property damage was caused by a product that the Insured no longer possessed or by work that Vogelbusch had completed. The appellate court affirmed the trial court decision to grant State Farm’s motion for summary judgment.
(8049) VOGELBUSCH USA, INC., Appellant, v. STATE FARM LLOYDS and State Farm Fire & Casualty Co., Appellees. Texas Court of Appeals. No14-03-00600-CV. Filed July 13, 2004. Affirmed. 2004 CCH Personal and Commercial Liability Cases. Paragraph 8049.
We hope this article on product liability insurance for small business has been informative. Whatever stage of the stream of commerce your business falls under-manufacturing, distribution, retail (or all three!) – product liability insurance is one form of coverage that you can’t neglect.
You may have created the smoothest production line in the industry. You may have higher manufacturing standards than all of your competitors. You may double and triple check every product on your shelves. It doesn’t matter because accidents happen. When you deal in large volumes of sales, something eventually slips through the cracks. Machines malfunction, humans err, and customers do the unexpected.
If a person or their property gets damaged using one of your products, you want to know that your business in protected by the best product liability insurance policy available. That’s why you should give us a call or fill out our simple quote form and talk to one of the product liability experts at EK Insurance about finding a plan that works for you.
