IV
Product Liability Exposures and Coverage
______________________________________________________________________________ Product Liability is one of the fastest growing exposures that manufacturers and retailers are facing in today's market and causing the cost of making consumer products more expensive to make due to excessive litigation and state and federal law requirements.
Impact Upon the Insurance Industry
Product Liability exposures exerts a big impact upon the insurance industry because: Litigating product liability claims are also on the rise and are causing manufacturers/ retailers to pay higher insurance premiums to make and market their products. Higher premiums directly affect a company’s profits and investments where the savings in a reduction in premiums could be used to promote the company’s products and services. Self- insured companies save on premiums but are still prey for litigants who may believe their products are unsafe for consumer use.
Liable Parties
Products liability refers to the liability of any or all parties along the chain of manufacture of any product for damage caused by that product. This includes • • • • the manufacturer of component parts an assembling manufacturer the wholesaler the retail store owner
Products containing inherent defects that cause harm to a consumer of the product, or someone to whom the product was loaned, given, etc., are the subjects of products liability suits. While products are generally thought of as tangible personal property, products liability has stretched ______________________________________________________________________________
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that definition to include intangibles (gas), naturals (pets), real estate (house), and writings (navigational charts). Manufacturers are not the only ones subject to product liability exposure. The consumer often brings retailers into a lawsuit for alleged negligence. The age and intelligence of the buyer will have some influence upon whether there is a duty to warn. If a retailer is aware or has reason to know that, because of intelligence, the buyer is not aware of the danger of the product and the retailer has such knowledge, the retailer is required to warn the consumer of the danger. When the retailer or contractor assembles, or both assemble and installs the manufacturer's product, the retailer (or contractor) is under a duty to the purchaser to exercise care in doing so. This would mean that the retailer would have to follow the manufacturer's assembly instructions or installation instructions. More important, the retailer would be required to test and inspect the product to assure the product is safe in its assembly. Further consideration is established when a manufacturer or assembler markets without adequate warnings. The reseller is subject to liability, without negligence, in selling the product that lacks the manufacturer's adequate warning. Thus, those in the market sales chain that are subsequent to a sale by the manufacturer, could be liable, without negligence for the manufacturer's failure to provide adequate warnings.
Liability Claims
Products liability claims can be based on o o o negligence strict liability or breach of warranty of fitness
depending on the jurisdiction within which the claim is based. Many states have enacted comprehensive products liability statutes. These statutory provisions can be very diverse; so the United States Department of Commerce has promulgated a Model Uniform Products Liability Act (MUPLA) for voluntary use by the states. There is no federal products liability law.
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Types of Product Defects
In any jurisdiction one must prove that the product is defective. There are three types of product defects that incur liability in manufacturers and suppliers: Design defects are inherent. They exist before the product is manufactured. While the item might serve its purpose well, it can be unreasonably dangerous to use due to a design flaw. Manufacturing or production defects occur during the construction or production of the item. Only a few out of many products of the same type are flawed in this case. Defects in marketing deal with improper instructions and failures to warn consumers of latent dangers in the product. Products Liability is generally considered a strict liability offense. Strict liability wrongs do not depend on the degree of carefulness by the defendant. Translated to products liability terms, a defendant is liable when it is shown that the product is defective. It is irrelevant whether the manufacturer or supplier exercised great care; if there is a defect in the product that causes harm, he or she will be liable for it. The law of products liability is found mainly in common law or state judge-made law and in the Uniform Commercial Code. Article 2 of the UCC deals with the sales of goods and it has been adopted by most states. In it, the most important products liability sections are the implied and express warranties of merchantability in the sales of goods.
Risk Utility
This can be understood as essentially the same as risk benefit. The issue is phrased in terms of whether the cost of making a safer product is greater or less than the risk or danger from the product in its present condition. If the cost of making the change is greater than the risk created by not making the change, then the utility or benefit of not making the change is outweighed by the risk and the product in its unchanged condition is defective. Another way of identifying risk utility is the risk versus cost or burden. That is the risk of danger greater than the cost or burden of eliminating the danger. If it is, the product is defective. If the burden of eliminating the danger is greater than the risk of the danger, then the product's benefit or utility outweighs its danger and therefore the product is not defective.
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An understanding of Risk-Utility can greatly benefit a company in understanding the exposure they are faced within manufacturing their product and services. Such considerations to be concerned about are: the usefulness and desirability of the product the likelihood and probable seriousness of injury from the product the availability of a substitute product that would meet the same need and be safe the manufacturer's ability to eliminate the danger without impairing usefulness or making the product too expensive the user's ability to avoid the danger the user's anticipated awareness of the danger the feasibility on the part of the manufacturer of spreading the risk of loss by pricing or insurance
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V
Business Liability Exposures and Coverages
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Business Income Loss
The business income loss exposure has the same three elements as property loss exposures. Unlike property loss exposures, however, only one item is subject to a business income loss. For the purposes of discussing the business income loss exposure, we use the words revenue, income, or profit. The item subject to loss is the income of the business organization. The profit, or net income, the business could have earned will be reduced if the business must close temporarily because of direct property damage. Even if the business is closed temporarily, it must continue to pay most, if not all, of its normal operating expenses. The business also may incur extra expenses. It is difficult to reduce operating expenses, particularly if business is interrupted only for a short time. Payroll of key employees, debt service, taxes, insurance, and many other expenses continue whether or not the business is open. In the event of a longer interruption of business, many expenses can be reduced or eliminated. It is often difficult to predict which expenses will continue and which will not since there are so many different kinds of loss that might occur. However, the impact of continuing expenses on a business income loss may be substantial. In many cases, these expenses may be much greater than the profit earned by a business organization.
Business Interruption Loss
Loss Identification
The most frequent cause of interruption of the activities of an organization is damage to its premises, resulting in a "business interruption" loss. A business interruption loss is equal to the reduction in profits that result from the interruption plus the expenses that necessarily continue during the interruption. ______________________________________________________________________________
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The period of loss runs from the time the organization is partially or fully shut down until the time at which normal volume of business is restored after business resumes. Normal business volume is not often reached again until sometime after the organization reopens, usually because some former customers do not return immediately.
Business Interruption Coverage
Most businesses will need either business interruption coverage or extra expense coverage, but there are situations in which the insured will wish to have both forms of insurance protection. Some insureds have a recognizable need for both types of coverage, because the business is potentially exposed to both a "business interruption loss" and an "extra expense loss." A business that carries on different types of activities is a good example. Assume that the newspaper publisher also uses his plant to provide contract-printing services for other local businesses. If a loss damages the printing press, then the newspaper will suffer an extra expense loss. The publisher will need extra expense insurance to continue operations, regardless of the cost, in order to avoid a permanent loss of business. The contract printing operation will suffer a business interruption loss. There is no urgent need to spend extraordinary sums to stay in business while the repairs are made, but the publisher will nonetheless wish to have business interruption coverage in place in order to compensate for the loss of earnings.
Extra Expense Loss
Types of Loss
It is often difficult to predict which expenses will continue and which will not since there are so many different kinds of loss that might occur. However, the impact of continuing expenses on a business income loss may be substantial. In many cases, these expenses may be much greater than the profit earned by a business organization. Two basic types of extra expenses may be incurred as the result of a business income loss: Some extra expenses ultimately reduce the loss. Others enable the business to remain in operation.
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Extra Expense Insurance
Extra expense insurance is designed for those businesses that simply cannot allow a physical damage loss to cause a shutdown of operations. One group of businesses that needs such coverage consists of enterprises that will suffer a permanent loss of customer goodwill as a result of even the temporary curtailment of operations. Continuity of service is the key to success for those businesses, because an interruption will immediately send clients to the firm's competitors, and a number of these clients may never return. Newspaper, laundries and dry cleaning establishments, as well as fuel oil dealers are examples of this type of business. Extra expense insurance is also designed to serve the needs of businesses that bear a special relationship to the public and whose uninterrupted service is vital to the community's welfare. Examples include banks, power plants operated by public utilities, hospitals, and nursing homes. Such concerns simply cannot tell their clients to "go elsewhere" until normal operations can be resumed.
Commercial Crime Loss
Exposures to crime losses have three elements for types of loss exposures. The three elements are: the item(s) subject to loss the covered causes of loss the financial impact of the loss
Item(s) Subject to Loss
Commercial crime insurance policies cover three broad categories of property. These categories of property are money, securities, and property other than money and securities. As used in crime coverage forms, money is currency, coins, and bank notes that are in use and have a face value, or travelers checks, register checks, and money orders held for sale to the public. Securities are negotiable instruments, nonnegotiable instruments, or contracts representing either money or other property. Also included in the definition of securities are tokens, tickets, and stamps in use, or charge slips issued in connection with charge cards, provided the charge cards were not issued by the named insured. Securities do not include money. In the crime coverage forms, “property other than money and securities” is tangible property that has intrinsic value. However, the term does not include money, securities, or property listed in any crime coverage form as property not covered. Crime coverage forms do not cover certain
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types of property, such as motor vehicles, because such property is covered under other forms of insurance.
Causes of Loss
Employee Dishonesty ~ Employee dishonesty is a criminal act committed by an employee acting alone or in collusion with others. There must be intent by the employee to cause the employer a loss and to obtain a financial benefit for the employee or someone else. Forgery and Alteration ~ Forgery is generating a document or signature that is not genuine. Alteration is changing a document in a manner that is neither authorized nor intended. Robbery ~ Robbery is the taking of property from a person by one who has caused or threatened to cause that person harm or who has committed an unlawful act witnessed by that person. Burglary ~ Burglary is the taking of property from inside a building by unlawful entry or departure from the building. Marks of forcible entry or exit must be evident. Normally, burglary is accomplished when the business is closed, whereas robbery most often occurs when the business is open. Safe Burglary ~ This is a specific kind of burglary meaning the taking of property from a safe or vault accompanied by visible signs of forcible entry on the safe. It includes removal of the safe itself from inside a building. Theft ~ Theft means any act of stealing. It includes robbery and burglary in addition to other forms of stealing. Unobserved shoplifting is a form of theft. It is not robbery because there is no threat of personal injury; and it is not burglary because there is no breaking and entering. Disappearance ~ Disappearance can include not only a crime but also unknown causes of loss. Theft, burglary, and robbery tend to be losses from a known location at a known time; disappearance may lack these elements. Destruction ~ Destruction is the loss of certain property. It does not have to be intended. Instead, destruction is a result. For example, if money were destroyed in a fire at the insured's building, the loss would likely be covered by at least one of the crime forms. Computer Fraud ~ Computer fraud is a specialized kind of theft. That is, a thief uses a computer to steal property from its rightful owner. Extortion ~ Extortion is the surrender of property away from the premises as a result of a threat of bodily harm to someone who is, or allegedly is, being held captive. ______________________________________________________________________________
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Commercial Crime Insurance
Commercial crime insurance includes several forms for covering money, securities, and property other than money and securities for various crime-related causes of loss. In contrast, commercial property coverage forms exclude money and securities, and the commercial property causes of loss forms do not cover as many crime-related losses as do the commercial crime coverage forms. Some of the crime coverage forms insure against only one cause of loss; other forms cover more than one. In the context of crime coverage, the definitions of these causes of loss may differ somewhat from the usual definitions of these terms. It is important to remember this point during the study of commercial crime insurance. As the result of a crime loss, the owner no longer has the property - such as a safe damaged during a burglary. The value of the loss is determined differently for each type of property covered by crime insurance. Money is valued at its face value. If foreign money is lost, it is valued at its own face value or at its equivalent in United States money on the day the loss is discovered. Securities are valued as of the close of business on the day the loss is discovered. The amount of loss may include the premium on a bond required to issue duplicates of the securities.
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