When discussions arise regarding insurance and manufacturing, the primary concerns typically mentioned are the exposures related to the types and severity of bodily injury and property damage that can occur when products fail to function as intended. However, what is less often discussed is what happens when bodily injury or property damage does not occur, and instead, the product fails to meet customers’ needs resulting in their financial loss.
Simply put, there is no Commercial General Liability (CGL) coverage for the manufacturer’s product, or their work if it fails to perform its intended or warranted function when it does not cause any bodily injury and/or property damage. This is a very real risk for manufacturers of all shapes and sizes and can have a significant impact on the stability and future success of their business if ignored.
Example #1
A metal manufacturer produces door hinges for a customer who manufactures doors. It is subsequently learned that the hinges were not made to the correct specifications to work with the customer’s doors, and as a result, could potentially cause bodily injury by end-users. Consequently, the door manufacturer could not ship its product and missed delivery deadlines with its distributor. As potential injuries and property damage were avoided, the metal manufacturer’s CGL would not respond in this case. However, the metal manufacturer’s Errors and Omissions (E&O) coverage might respond strictly to those financial losses incurred by the door manufacturer due to the incorrectly manufactured hinges.
Example #2
A manufacturer produces a monitoring device, which regulates individual package volume for a customer that is a cereal distributor. However, if there is an increase in the cereal packaged due to the device not calibrating properly, not only would the cereal distributor’s profits be affected but the extra expense of correcting the problem would also arise. The cereal distributor would then pursue the device manufacturer for financial damages. In this example, the device manufacturer’s E&O insurance might help cover the cereal distributor’s financial losses up to the limitations of the device manufacturer’s E&O policy.
Example #3
A leather manufacturer that produces coverings for a steering wheel company learns that the leather they’re using is defective. The steering wheel company then recalls its completed products and replaces the steering wheels, resulting in associated costs. Not only does the steering wheel company lose income, but it also incurs other financial costs, such as replacing the steering wheels, among others. In this case, since bodily injury or property damage did not occur, the coverage that might respond to this financial loss would be the leather manufacturer’s E&O policy. Conversely, if the defective leather somehow resulted in causing bodily injury or property damage, the leather manufacturer’s CGL policy could respond.
Manufacturers are keen on making sure that their product is in good working order to paying customers. It is always a good idea to consider how they’ll cover and recover the costs of their product or their work if it fails to perform its intended or warranted function.
