Product Liability Insurance

Product Liability

The Insured is indemnified against legal liability to pay damages and claimants costs, in respect of accidental bodily injury and accidental damage to material property, occurring during the period of insurance and caused by or arising out of Products supplied in connection with the business. This means not only goods but also packaging, containers and labels.

The supply situation embraces: sale, supply, delivery, alteration, testing and storage. The Business Description in the policy should take account of any discontinued goods, for which a run-off liability may exist.
Cover is for injury or damage, (failure to perform is not included).
No defect in the product is required, so the harmful effect can come about in a number of ways, (e.g. misleading instructions as to use).

This is expressed as a maximum for any one period of insurance. A single accident or occurrence limit is difficult to apply, as one original act of negligence could create multiple claims, therefore the limit has to be realistic. The insured’s own costs (subject to consent) being payable in addition.

Products Liability InsuranceTERRITORIAL LIMITS
The Injury/damage can occur anywhere in the world but the Products have to be supplied in or from Great Britain, Northern Ireland, the Channel Islands, the Isle of Man.
Consequently, exports and items purchased by tourists are covered. Where supply is from overseas, special negotiations may be necessary and the question of jurisdiction arises. Insurers may insist upon a UK jurisdiction clause, requiring that the action is brought in the UK courts.

You must ensure that the fullest description of the products is given to the Insurer. You must include discontinued product ranges as retrospective cover may be needed. Indemnity should take account of full potential (particularly USA) exposure.
You must notify any changes in the risk to the Insurer immediately.

The ‘long-tail’ nature of some forms of injury or damage has in recent years highlighted difficulties associated with the traditional ‘losses occurring’ wording. Insurers have found themselves meeting claims for injury / damage they could not have anticipated when accepting the risk, while insured’s have found themselves underinsured in terms of indemnity limits that could not easily have anticipated the developments in terms of risks, awards, etc.
Consequently, the market sought to move towards a ‘claims made’ wording, in both public and product liability policies.

The strength of that movement has declined a little but the differences between the two approaches should be appreciated. When ‘claims made’ cover is arranged, a retroactive date is fixed (usually inception). A potential problem is that of the run off risk when a claims made policy lapses and careful enquiry should be made as to the facilities for extended cover. If the products liability cover is arranged by extending the public liability policy it is undesirable that one should be ‘claims made’ and the other ‘losses occurring’.

The insurance indemnifies the insured following the failure of the product to fulfil its intended function. The market is limited. Cover is most likely to be sought for plant and equipment designated for a specific purpose, where the losses will be serious in the event of failure to perform – such covers are often sought to cover warranties and other contractual commitments.
The insured is indemnified for legal liability to pay damages to claimant’s costs in respect of:

Removal, repair, alteration, treatment or replacement of the product and consequential loss in the event of the product being harmful or defective or failing to perform its intended function. There is cover for the insured’s own costs if incurred with the insurers consent.

The harmful nature of, or defect in, a product may not have been discovered until after many such products have been widely distributed. The cost of recalling such products is likely to be heavy and the purpose of product recall is to meet these costs. Cover operates in connection with goods whose consumption or use may cause a legal liability to attach to the insured.

Excluded are products recalled solely because of

  • government or local authority intervention
  • products not distributed
  • misdelivered or misdirected products

Any fines or penalties imposed are also excluded if the recall decision of the insured is disputed by the insurer, the conditions provide for arbitration.

Legal Defence Costs
Provides indemnity in connection with the costs of defending criminal proceedings and the prosecution costs, awarded against the insured when the related product liability risk was covered. Fines and Penalties are not covered.

Financial Loss
This provides cover for liability in respect of accidental financial loss caused by defects in goods supplied in circumstances where there is no accompanying injury or material damage. The cost of replacing or recalling the goods is not covered. Insurers seek an excess or coinsurance clause when this extension applies.

Retrospective Cover
The ‘long tail’ potential of some products (e.g. pharmaceuticals), created a demand for this extension. The cover does not operate if the insured’s inability to recover under an earlier policy is due to a restriction, breach or exhaustion of indemnity limit. The injury / damage must have occurred prior to inception.

Indemnity to Other Parties
If the insured has offered an indemnity to vendors of his product a special indemnity may be sought to overcome the effects of any contractual liability exclusion.

Contractual Liability
Excludes liability assumed under an agreement (or contract) that would not have otherwise have attached, thus limiting the cover to statue and common law. Any agreements that vary this position should be investigated, including those under which the insured fits into the chain of supply. Suppliers and / or purchasers may seek to be indemnified by the insured. Such requests, depending on the nature of the contractual liability exclusion, may call for policy extensions (e.g. vendors liability extension). In any event, such indemnities, agreements and waivers become issues of disclosure.

Replacement of Goods
Replacements, reinstatement, recall, guarantee of performance are excluded being the subject of extended or separate cover (product guarantee and product recall)

Efficacy RiskProducts Liability Insurance
When a product fails to perform its intended function, some insurers exclude all loss or damage arising from the failure.

Advice, Design, Specification
Wordings vary among insurers but the intention is to exclude the professional negligence risk.

Liability for Goods Installed in Aircraft / Ships Practice varies among insurers but the aviation market caters for aircraft component manufacturers. Some insured’s may not know the ultimate destination of their products and ought to be able to obtain their cover by amendment or absence of the exclusion. Also the exclusion should be overridden if the goods (e.g. soft furnishings etc) do not affect the safety or navigation of the craft.

Excluded Property
The cover does not apply to liability in respect of property in the insured’s custody or control, or held in trust, or hired or loaned to him. This exclusion usually does not apply, however, to employees, directors or visitors property.

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