Extended product liability insurance
A must-have for the supply industry
The second article in our three-part series on risk management as it relates to insurance law
Imagine that you are a manufacturer of glass bottles which you sell to a large number of different beverage producers. Being of insufficient wall thickness, some of the bottles burst on the premises of a customer while he is filling them with mineral water. Some of the beverage producer’s workers are injured, and there is property damage to the water which has been bottled, as it is now contaminated with splintered glass. At first, you breathe a sigh of relief, as the liability risks for personal injury and damage to property incurred by third parties are covered by your public liability insurance. But what about the costs incurred in the destruction of the raw materials, the manufacture of the bottles and the bottling of the water?
Or what happens when a supplier sells defective rubber seals, millions of which are then installed in car bodies worldwide? Being under obligation to supply his customers with seals which are free of defects, the supplier now has to deliver new products and bear the costs of doing so himself, since this risk cannot be covered by public liability insurance either. But what about the wage and labour costs incurred by the necessity of removing the defective seals from the car bodies on the customers’ premises and installing defect-free seals in their place?
These examples show that manufacturers and suppliers whose products are not end products, but instead undergo further machining or processing on the premises of the customer, are subject to special liability risks which are not covered by conventional public liability insurance, and these can occasionally constitute a threat to the existence of the company.
Insurance companies provide suitable insurance cover with so-called extended product liability insurance.
As well as conventional product liability risks, cover in extended product liability insurance can be extended to include certain contractual liability statuses and genuine pecuniary loss or damage. Loss or damage which can, for example, then be incurred in the compounding, mixing or processing of a product on the premises of the customer, but also the costs of removal and installation which may be incurred in the course of rectifying the defects, are then taken care of by the insurer in the case of a loss event.
For companies which do not manufacture end products, extended product liability insurance is a supplement to their insurance cover which makes good sense. A prerequisite is that they review their own liability exposure at regular intervals and adapt it to cater to altered circumstances, so as to be prepared in the case of a loss event. Account should also be taken in this context of the fact that the products may have to go through several completely different manufacturing stages on the customer's premises, so that a combination of several extension elements may be required in order to cater to all the risks.
[February 21st, 2018]