Why Errors and Omissions or Professional Indemnity insurance is a must for designers, manufacturers, distributors & suppliers
A common misconception is Products Liability insurance will cover all financial loss arising from or in connection with a Supplier’s products. That is misconstrued.
A standard Products Liability Policy will cover a Supplier (the policyholder) for legal costs and expenses (to defend any claim made against them in connection with the products supplied) and for damages (claimants costs and expenses) where the Supplier is held legally liable for bodily injury and property damage in connection with its products. See here, our article outlining public and products liability insurance.
A Supplier will ordinarily make representations that their products (which may be components comprising a final product) will do or achieve something, be fit for purpose, conform with regulation, or be made to specific standards.
The professional recommending the product, the purchaser or end user of the product (User) will ordinarily rely on those representations in the course of recommending or procuring the goods.
What if the product does not function as intended, or otherwise regulations change and the product may, as a result be deemed unsafe or no longer conforming to code?
The User now must discard or remedy the product. It may look to the Supplier for loss. There is no injury or damage subject to the claim being brought against the Supplier: its products liability product therefore does not respond to cover the User’s loss.
Mitigation, recall, and business interruption
Where there is an imminent danger from the application or use of a product, remediation will be required to prevent harm as a common first step.
However, regulators may also direct a recall or other measures such as notifying the public of the product’s danger. The Supplier here may incur costs and expenses in a Regulatory proceeding that is brought against it by an Authority. Otherwise, it may sustain damage to its reputation in addition to interruption to its business generally. These being in addition to the cost of the recall and repair or destruction of the problematic products.
There is an insurance product to cover the above exposures, known as product recall insurance.
Financial loss: errors and omissions or professional indemnity insurance
A more common uninsured exposure has however emerged.
The User alleges that it relied on representations in the sale of a product. As a result of that reliance, they purchased the product which subsequently failed or is not up to specification and requires remediation.
A Supplier may also perform some design (in addition to the sale and supply) of its product. Often the case that the supplier has design components and charges a lump sum for its product. In those circumstances, professional indemnity and/or errors and omissions cover can certainly be secured; generally, an addendum is completed as part of the policyholder’s proposal which extracts design activities as a percentage of total turnover. Information must be provided to insurers as to who does the design and if they are external, the extent to which they are qualified, their quality assurance and reputation. It is untrue that professional indemnity or errors and omissions insurance cannot be procured if the Supplier does not charge a specific fee for its design.
It is important that suppliers of products have cover for legal costs, expenses and damages (particularly for financial loss) where a purchaser alleges there has been negligence in design and/or misrepresentations in connection with the sale of their products.
As regards to how professional indemnity and public liability work together, we refer you to our article Public & Product Liability Insurance vs Professional Liability Insurance: A guide to coverage and claims.
A practical example: cladding
Following Grenfell and La Crosse it is now a very confronting and real exposure for Suppliers that Australian Standards and other product regulations may change as a result of a catastrophe or occurrence impacting the public.
This may have repercussions across a whole industry even when such event or occurrence does not have any direct correlation with the Supplier’s own products. It follows that public policy concern will drive legislation to be enacted which may retrospectively deems products are no longer fit for purpose or no longer conform to regulation – even if at the time of the products being designed, manufactured or sold they were. Insurers readily apply endorsements and exclusions around Australian Standards.
It is in those circumstances that suppliers must ensure they have considered the risk of legal costs and expenses and potentially damages which may flow as a result of representations they make in respect of their products, but more importantly understand that under their Products Liability policy they may not have any entitlement to indemnity because there has been no personal injury or property damage caused by their products.
For further information and advice regarding Errors and Omissions or Professional Indemnity insurance please contact us via the form below.