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Risk Management
Manufacturer or vendor: Who covers whom?
Time and circumstances have changed the need for additional insured coverage
By Donald S. Malecki, CPCU
Occasionally, producers are asked by their retailer or wholesaler clients (named insureds) to add manufacturers as additional insureds on their named insureds’ liability policies. This is like putting the cart before the horse, because the vendor’s endorsement, which provides additional insured coverage, is intended to be issued in conjunction with the manufacturer’s liability policy.
The vendor’s endorsement was originally intended to be a way for the manufacturer to induce retailers, wholesalers and other vendors to sell its products. In exchange, these vendors would be protected by the manufacturer’s liability insurance if they were to be drawn into a claim or suit for having handled, distributed or sold an allegedly defective product.
In fact, the vendor’s endorsement also could serve as the only insurance available to the vendor when the hard market makes it impossible or too expensive to purchase products liability coverage. This, in fact, was one of the alternatives implemented during the products liability crisis of the mid-1970s. It is not a recommended approach in handling products liability exposures, but it is better to have some coverage, rather than none at all.
In recent years, however, a growing number of manufacturers have become reluctant to provide or even to offer protection to vendors in the event of a product-related claim. One possible reason is that many manufacturers maintain high self-insured retentions, loss-sensitive rating plans or even use fronting as a means to obtain product protection.
When any of the foregoing methods is implemented by manufacturers, a large part of the defense costs is likely to have to be assumed by them rather than an insurer. Even when pure insurance applies, the utilization of the vendor’s endorsement can also speed up the reduction of the products liability insurance aggregate limit.
It is for the foregoing reasons, perhaps, that manufacturers not only are reluctant to offer the use of the vendor’s endorsement but also are taking the reverse tack of asking the vendor for an additional insured endorsement to protect what insurance they may have for themselves.
The response of underwriters who receive requests from producers on behalf of vendor clients to add manufacturers as additional insureds may be negative, and for good reason. These requests may not be unheard of, but they certainly are likely to be viewed as unreasonable.
It might be better for the vendor in these situations to implement avoidance as the risk management technique; that is, refuse to add the manufacturer as an additional insured on its policy and look for another product to sell from a manufacturer that is more reasonable.
What the vendor must realize is that if an insurer were willing to add the manufacturer as an additional insured, the vendor’s liability insurance might be triggered more often with resulting reduction in product liability aggregate limits. In other words, what is viewed as being disadvantageous to the manufacturer can likewise adversely affect the vendor.
Scope of the endorsement
The standard ISO 2004 edition of the vendor’s endorsement may be commonly used today, but it is not the only one. How these endorsements may differ is difficult to tell without having the opportunity to review and compare them.
The reason for the change in the ISO endorsement wording in 2004 was that too many vendors were obtaining coverage for their sole negligence, rather than for the sole negligence of the product manufacturers. Coverage for the sole negligence of vendors was possible, however, because the endorsement used the words “arising out of.”
In many cases reference to “arising out of” has been interpreted to mean “originating from,” “growing out of,” or “flowing from.” Thus, if it can be said that a product user’s injuries originated from or grew out of the vendor’s negligence, rather than from the product, the vendor was still able to obtain coverage for its sole negligence.
Not all cases were decided with that result, of course. Enough of them did, however, so as to motivate insurers to change the endorsement wording. Referring to the 2004 edition of the standard ISO Vendor’s Endorsement CG 20 15, one will note that the insuring agreement still uses the words “arising out of.”
What changed with the 2004 amendment of this endorsement was the introduction of a new exclusion (h.) precluding bodily injury or property damage arising out of the sole negligence of the vendor, its employees or anyone acting on the vendor’s behalf.
What does the endorsement say?
One of the problems having to do with insurance coverage, including the vendor’s endorsement is that few people read the endorsement or become familiar enough with its provisions so as to be conversant about it.
For example, the fact that the 2004 edition of the vendor’s endorsement includes an exclusion having to do with the vendor’s sole fault does not mean that sole negligence is ruled out in every instance. The reason is that there are three exceptions to the exclusions of the vendor’s sole negligence.
In fact, those exceptions applied even with the pre-2004 edition of the vendor’s endorsement, at least with the standard ISO endorsement. One of the exclusions that long appeared in the vendor’s endorsement precludes coverage for bodily injury or property damage arising out of demonstration, installation, servicing or repair operations. Reading this exclusion carefully will reveal an exception to the effect that this exclusion does not apply to preceding operations performed at the vendor’s premises in connection with the sale of the products.
To understand the implications of this exception, one must keep in mind that the traditional products liability exposure, apart from the sale and consumption of a products on a vendor’s premises, such as in a restaurant, involves a product that is relinquished (other than rented) to someone else with injury taking place away from premises of the vendor.
With the foregoing in mind, closer scrutiny of the above exclusion’s exception reveals that it is possible for a vendor’s endorsement to provide coverage to a vendor even in the absence of a products hazard. Take, for example, the exception to exclusion (h.) where demonstration, installation, servicing or repair operations on the vendor’s premises are not excluded.
Assume that while a retailer is demonstrating a product on its premises in an effort to make a sale, a prospective customer is injured. Even though the product had not yet been sold and not yet relinquished to the customer, the vendor can still be protected where its sole negligence was the result of the injuries, even in the absence of a product defect.
Understanding the implications of this exception and the other two that are given in the ISO endorsement could mean the difference between obtaining coverage or having to assume the costs in the event of a dispute. Interestingly, it appears that even insurers may not have a good understanding of this endorsement.
A case in point was the dispute between two insurers over a vendor’s endorsement in Allstate Insurance Company vs. Liberty Surplus Insurance Corporation, No. 63249-3-1 (Ct. App. Wash. Div. 1, 2010). The issue was over the proper application of what appears to have been the pre-2004 edition of the ISO Vendor’s Endorsement, which was not subject to the exclusion for sole negligence.
What happened here was that a vendor’s employee was demonstrating the safe use of a ladder. After being extended 19 feet, with the prospective customer on it, the ladder collapsed, injuring the customer. After the vendor’s insurer determined that injuries were caused by the apparent negligence of the vendor’s employee, it paid its limit of $1 million and other costs under the premises-operations hazard of its CGL policy and then sought recovery from the manufacturer and its insurer.
(The apparent reason the vendor’s insurer paid the claim under the premises-operations hazard was because it was not a products claim even though the vendor’s insurer maintained that the injuries “arose out of” the ladder. To trigger a products claim, however, the product must be relinquished and cause injury or damage away from the vendor’s premises.)
In making its argument that the manufacturer’s insurer should reimburse the damages and costs paid, the vendor’s insurer relied on numerous cases involving the “arising out of” wording that had upheld coverage in similar cases where vendors were solely at fault for injuries involving products.
The Washington Court of Appeals, however, could not agree. It explained that even if it were to interpret “arising out of,” as used in the CGL policy, to mean “originating from,” “growing out of,” or “having its origin in,” it still would find no coverage. The reason, it said, was that the vendor’s negligence was the exclusive cause of the fall and the injuries did not grow out of or have their origin from the manufacturer’s ladder.
The court also made an interesting observation between the premises-operations, and the products-completed operations hazards. In doing so, the court apparently viewed the vendor’s endorsement as applying solely to situations where injury or damage arises from a product, rather than from the acts or omissions of the vendor. This might be fine if there were no exceptions to the vendor’s endorsement.
Conclusion
One has to wonder why the vendor’s insurer did not introduce the argument that coverage applies under a vendor’s endorsement for liability of a vendor occurring when a product is being demonstrated on the vendor’s premises. This exception, in fact, does not even involve a products liability situation because it does not meet the criteria mentioned earlier.
As mentioned, not all vendor’s endorsements are the same. Even so, there are similarities among them and the exception of a vendor’s negligence while demonstrating a product on its premises is not a usual exception. If the court had been advised of this exception, perhaps the court might not have made the decision that a vendor’s endorsement is meant to cover liability growing out of product-related injuries and nothing else.
Of course, if the vendor’s insurer had been involved in some earlier case where it had argued against coverage, despite that exception to the vendor’s endorsement exclusion, it would be precluded from taking the opposite side here.
Whatever the reason, producers and others should keep in mind that the vendor’s endorsement likely has some exceptions which preclude it from being a pure coverage instrument involving product defects. The only way to be able to understand the endorsement’s scope, however, is to read it fully and in conjunction with the policy to which it is attached.
To simply ignore what the vendor’s endorsement says and instead rely on what the courts or others say about it, might in the end serve as a shortfall to the one who is relying on it for protection—and that would be primarily the vendors themselves.
The author
Donald S. Malecki, CPCU, has spent 50 years in the insurance and risk management consulting business. During his career he was a supervising casualty underwriter for a large Eastern insurer, as well as a broker. He currently is a principal of Malecki Deimling Nielander & Associates LLC, an insurance, risk, and management consulting business headquartered in Erlanger, Kentucky.
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