Most manufacturers purchase general liability insurance to help protect them from losses if their products or services cause bodily injury and property damage. And for good reason – bodily injury and property damage claims are well documented, especially when courts award sizeable damages. But what happens if a product doesn’t cause bodily injury or property damage and fails to perform and causes financial damage to the customer? Many manufacturers are exposed to this risk but many general liability or product liability policies won’t provide coverage unless bodily injury or property damage occurs.
This exposure can take a number of forms. So, for example be there may be an efficacy exposure if a third party suffers a financial loss resulting from the failure of the manufacturer’s product to perform its intended function (breach of warranty as to the fitness quality), either as a result of an error in the manufacturing process or through poor design, only if the manufacturer is responsible for both designing and manufacturing the product.
Potential claim scenarios and examples:
· A machine shop fabricates a part for a customer working on a tight contract deadline in order to provide a specific product. As the customer receives the parts and starts installing them, they realize they are not to their exact specs and cannot be used. As a result, the customer cannot provide the goods on time and loses contract. The customer sues the machine shop to recoup their financial loss.
· A conveyor belt manufacturer produces a new belt to their customer who installs it on their conveyor belt system. However, when the system is started, the new belt fails, causing the production line to shut down. No bodily injury or property damage occurs but the production line is out of action for a week resulting in lost business. The customer sues to recoup their financial loss.
· You manufacture a component that is incorporated into an end product of a third party and your product does not work in its intended manner through an error in your manufacturing process. Your faulty component does not damage the third party end product but renders it unusable and therefore unsellable. In this instance the third party end product seller will suffer financial loss through wasted production costs and halt in sales and, if the end faulty product is delivered to the customer, the third party may incur recall costs. Please note this policy does not provide cover for first party recall costs.
· Another example might be in the situation where your product is a component in a customer’s finished product. A short time after installation, it is discovered that the product isn’t working correctly because your component is faulty. Your customer has to recall their product to remove and replace your faulty component. Further, many customers are unhappy and do not want replacements. Your customer suffers unforeseen expenses and lost profits as a result, and they sue you to recoup their financial loss.
· Your product is a device that regulates portion control within the automated production line of one of your customers. Your device was not calibrated correctly, and it is several weeks before it is discovered that their product was being portioned at a higher volume than it was supposed to be. As a result, your customer's profit margin suffers on the affected batches, they incur extra expense to correct the problem, and lose revenue due to the down time. Your customer sues you to recoup their financial loss.
· Your factory fabricates a part for a customer with a tight contract deadline in order to ship a product. After your customer receives your parts and starts installing them, they realize that the parts are not to their exact specification and cannot be used. Since there isn’t enough time to re-fabricate the parts, your customer cannot ship their end product in time and as a result they miss the deadline and lose out on the contract. Your customer sues you to recoup their financial loss.
In all of these cases a standard general liability policy would not protect an insured against the claims while a tailored manufacturers’ E&O policy could.