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Wholesalers Insurance Plans: Creating Clarity Out of Complexity

Vanilla. It's a bean that's native to Mexico though now mostly produced in Madagascar. It is also a term used by the insurance industry to describe the distribution industry. Given the complexities involved in the distribution business today, that's a bit unnerving. Since distributors don't manufacture products, some insurance underwriters may not take the risks and hazards posed by what distributors do seriously enough… but they should.

From a Property & Casualty perspective, a distributor is in the “chain of commerce.” In some states, that means that if the manufacturer of a product you sold in the past goes out of business or becomes insolvent, you effectively become the manufacturer. All the product liability issues become yours, even though you may never have even touched the box that contained the product. Most states don't go to that extreme, but in the absence of having a manufacturer to blame, the courts do look elsewhere for a scapegoat.

So the question becomes: “How does my insurance plan respond in the event of a significant (or even a minor) product liability claim that is presented?” As any risk-adverse insurance executive would say: “That depends.”

Product Liability Issues

Product liability is part of your general liability policy. Frequently your policy has a line labeled “Products & Completed Operations” with a typical $1 million limit of insurance. This covers something manufactured that causes bodily injury or property damage that you as a distributor may put in the marketplace. Another line on your policy, “Premises & Operations,” also usually carries a $1 million limit of insurance and covers losses specifically in the office/plant itself.

There is usually a general aggregate limit that using our example would typically be for $2 million that applies to both the product liability and the premises and operations. So with a limit per occurrence of $1 million, and an aggregate of $2 million, you can actually have two $1 million product liability losses and still have coverage within your general liability policy. Easy to follow, right?

To compound things further, you can also have an umbrella or excess policy coverage over your general liability policy. So if a claim exceeds the $1 million occurrence limit, your umbrella policy should respond assuming the agent wrote it on “follow form” language. That means the coverage built into your primary (general liability) policy is the same as your excess (umbrella) policy. “Is my coverage follow form?” is ideally not something you want to be asking after a claim.

Ensuring that someone wrote your insurance policies properly is obviously important. Perhaps the only thing better is knowing that you won't have to use them because you have adequately transferred risk back to the manufacturer. There are a few ways to accomplish this.

The most effective, but the most difficult to accomplish, is a contract between the distributor and the manufacturer that contains defense, indemnification and hold harmless language. Just having indemnity language could put the distributor on the front lines for paying out defense costs until such time as they are relieved of their responsibilities by the court.

The “next best” way to transfer risk is by having your company added to the manufacturer's insurance policy as a “vendor.” If you don't alter the manufacturer's product in any way, you essentially become an extension of their company from an insurance standpoint, and their policy extends to you as a vendor. The best way to do this is to request your manufacturer to add an endorsement called additional insured — vendors. This should not be difficult for your manufacturer to accomplish. If there's any cost to add the endorsement, it is usually quite minimal.

Lastly, for those manufacturers that you sell little product for and don't have as much influence or buying power with, from a bare-minimum risk-management standpoint, you should obtain certificates of insurance (COIs). The certificates need to show the name(s) of the manufacturer's insurance carrier and their limits of liability. The insurer ought to have a solid financial rating through A.M. Best or Moody's, something that your broker can easily verify for you.

A certificate of insurance is a snapshot in time. If the manufacturer changes carriers, does not pay the premium or otherwise runs into issues, the certificate at a very minimum tells you that the manufacturer had insurance at some point in time. That can come in very handy in the event one of the products presents a liability issue in the future. Theoretically, distributors should get certificates from everyone they do business with, even the smallest of manufacturers.

Work Comp and Auto

Other lines of insurance within your overall risk-management program present additional challenges. Workers' Compensation and Automobile are the two lines of insurance that typically give distributors the most claim activity.

Some hazards found in distribution centers can be “engineered out.” For example, high-volume lines should be stored on the lowest shelves in the warehouse. Common sense would seemingly dictate that, but surprisingly that is not always the case. Clearly, the less frequently you need to handle product, the less likelihood of a workers' compensation claim.

Strains, sprains and other “soft tissue” injuries make up the large majority of distributor Work Comp claims. These are significantly more difficult claims to adjust than fractures and readily apparent injuries. It is more likely that the employer and insurance carriers will dispute these claims.

A good reporting system internally will help alleviate some of the burden from the distributor. Your supervisory staff should thoroughly investigate “Monday morning” injuries. An employee should report an injury as soon as possible through a first report of injury form. Perhaps more importantly, the distributor should report the claim to the Work Comp carrier immediately upon learning of the claim. Numerous studies show a positive correlation between timely reporting and claim outcomes.

From the automobile insurance risk-management perspective, monitoring the training and driving habits of your actual drivers is the first important practice to implement. The Fair Credit Reporting Act passed in 1996 requires employers to have employees or potential employees sign a form authorizing the employer to run their Motor Vehicle Report (MVR). The employer can also require employees and potential employees to bring in a copy of their MVR. This is a critical first step in the driver screening process and ideally you should conduct MVR checks on an annual basis or have a random rotation system at a minimum.

Insurance carriers have various guidelines for “acceptable” MVRs. Typically, any major infraction (reckless driving, DUI, leaving the scene of an accident) will preclude a driver from insurability under the distributor's program. It may sound harsh, but think about how a jury will look at you in the event that a driver of yours with a poor record is involved in a fatal accident while driving your vehicle. Is that a situation you want to face?

Conduct fleet maintenance on a routine basis. Utilizing an outside fleet management provider (e.g., Runzheimer International) can alleviate some of the headaches of having a fleet. Should you choose to manage your own fleet, confirm that your fleet manager is properly and accurately documenting service visits, work performed, etc. Safety management and documentation are necessary requirements for any sound risk-management program.

Insurance issues can be complex. Managing every policy issue detail is not the best use of a business owner's or executive's time. A service plan that is properly executed allows the company to focus on running the business and allows the broker to be a true trusted advisor who will implement a risk-management program that properly protects the company against a host of potential exposures.

Brad Dumbauld is a vice president of Gregory & Appel Insurance, the exclusive broker to HARDI members. Brad has an extensive background and expertise in traditional and alternative risk insurance programs for the distribution industry. He explains the “rules” of a serious game and helps clarify the complex issues in insurance coverage. Contact him at 317/686-6483 or e-mail [email protected].

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