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FUN TIMES

PRODUCT LIABILITY INSURANCE — A MUST!
By Larry Heller, Palomar Insurance Group

“Two kids riding a go-kart on a highway were hit from behind by a car. The kart rolled and the gas tank exploded. Both were seriously injured…”

“A little girl riding a go-kart got her long hair caught in the drive chain, resulting in serious, permanent injury…”

If you manufactured one of these karts, sold it, or even made a component part, there is a high probability you will be involved in a lengthy lawsuit. Your legal expenses alone could be substantial and claims exceeding $1 million have occurred. Your chances of winning a lawsuit against a seriously injured child are slim. In most states, all parties can be held jointly and severally liable, which could require you to pay the entire judgment, even if you did very little wrong. Thank heaven accidents like those above don’t happen everyday. However, when karting accidents do happen, they tend to be severe.

Product Liability Insurance protects manufacturers, distributors and dealers from losses like these. However, Product Liability Insurance is not all you need either. Comprehensive General Liability Insurance including Product Liability should be considered minimum protection.

Insurance is expensive and there is no physical product to examine to determine if you are getting good value for your money. For example, when you buy tires for a kart, you examine them to make certain the quality fits your needs, make sure the manufacturer will stand behind them, then seek the lowest price available. You should do the same with insurance. But how?

Insurance is very technical and this writer cannot tell you everything there is to know in adequate detail in this short article. You should know that there are two types of Product Liability Insurance:
1) Claims-made
2) Occurrence

The companies that provide this insurance are “non-admitted” or “surplus lines” carriers. They are largely unregulated, their policies are not standard (some are very restrictive), their financial condition is a primary consideration and premiums may vary widely.

If this sounds confusing, it is! Buying insurance based on price alone can be a mistake that may cost you your business. The following are some of the major areas you should discuss with your agent before you buy insurance.

Financial Ability—
Nothing is worse than paying a large premium, then discovering your insurance company is bankrupt when you need it the most. This happens. How can you protect yourself? The most widely used method is to ask your agent to tell you the ‘Best Rating’ of a selected carrier. Companies rated less than “A” or not rated at all may be cause for concern.

Occurrence VS Claims-made—
The difference between the two basic forms of Product Liability Insurance is in the time period of coverage. Neither covers accidents that happen before their effective date. You are covered under an Occurrence policy if the accident happened during the policy period. Claims-made requires that the accident occur and be reported during the policy period.

It takes months, sometimes years for manufacturers to be notified of an accident. This will sound confusing, but it’s fact: Claims-made coverage handles late-reported claims under future policies by establishment of a retroactive date, which is the date you first bought the Claims-made policy. Accidents that happened after the retroactive date are covered if reported during the current policy period. Occurrence coverage is preferred, even if the initial premium is greater.

Deductibles and Self-Insured Retention—
Kart manufacturers Product Liability policies commonly contain one of these. Both are ways to reduce your premium. Both are similar in that you pay for part of the claim, usually including legal expenses up to the amount selected. With a deductible, the insurance company pays the claim and bills you. With a Self-Insured Retention (SIR), you adjust the claim up to the level selected. Large SIRs require you to contract with a service to handle claims, and the insurance company may require a Letter of Credit.

Contractual Liability Coverage—
Purchase orders and other contracts may at times include agreements that you will assume someone else’s liability. If a product claim occurs, your policy may cover you liability, but not cover the liability you agree to assume. Contractual Liability coverage is designed to fill that void. It is inexpensive and is included in most Broadening Endorsements.

Vendor’s Liability/Additional Insureds—
Manufacturers can agree to insure their distributors for much of their Product Liability and name them as additional insureds under a policy. However, doing so results in splitting liability limits with the distributor. Adding the manufacturer of a component part as an additional insured has the same effect. Insurance companies usually charge an additional 15-20% to do this.

Punitive Damages—
In many states, juries can award these special payments as punishment. Some insurance companies specifically exclude these damages. While they don’t happen often and cannot be insured in some states, a policy with an exclusion is preferable.

Broadening Endorsement—
This is a package of commonly requested coverages, including Contractual Liability. Many insurance companies automatically include it, others charge extra. It is inexpensive and the coverage is important.

Limits—
Product Liability limits of $1 million per claim, $2 million annual aggregate are required, and represent the minimum you should consider. The aggregate is the maximum protection for more than one claim in one year. The amount sounds like a lot, but claims have exceeded even the minimum limit. Higher limits are available and should be considered. You can increase the policy limit but a better option may be to purchase an Umbrella Liability Policy.

Loss Adjustment Expense—
Attorney’s fees for your defense, the cost of the investigation, etc. are normally included in your policy in addition to the policy limit. In serious cases, these expenses may rage from $50,000 to $200,000 or more. Some companies include these expenses within your policy limit. Your $1 million limit could be reduced to $800,000 or less available to pay the judgment. Obviously, a policy where these expenses are included outside your policy limit is preferred.

Deposit Premium—
This is an upfront charge based on the estimated sales you list in the insurance application. Your premium will be adjusted after the policy expires t reflect your annual sales during the year. Understanding your sales will result I having to pay an additional premium plus the renewal policy premium at the same time.

Conclusion—
Remember, when you compare insurance policy prices, the lowest price may not be the best deal. Policies are not all the same and the financial condition of the insurance company is critical. Your policy doesn’t make good wallpaper, and it is not interesting to read. Make certain it is worth what you are paying for it. Your insurance agent should thoroughly explain each of these areas and the differences between policies to help you make valid comparisons.

Note: Additional Product Liability Insurance information is available from Palomar Insurance Group, PO Drawer 11128, Montgomery, Alabama 36111. Phone 800-489-0105.

END

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