Manufacturers who respond proactively to risk will be better positioned to grow and prosper. A part of managing risk is understanding the need for errors and omissions insurance in manufacturing.
Relationships with both suppliers and customers are becoming increasingly interdependent. This presents an increased risk for economic loss that is not covered by traditional insurance.
Manufacturers are selling value-added services to stand out in a very competitive market, increase revenue, and solidify customer relationships. Installation, maintenance, consulting, and repair services increase risk commensurately. The risks associated with these new services may not be properly covered under a manufacturer’s traditional program.
Technology is rapidly changing the factory floor. Productivity improvements are a result of process control improvements, use of new materials, robotics and automation, embedded sensors, and additive manufacturing. However, the way things are made also increases and changes the risk of each product and service sold.
Manufacturing firms have historically been reluctant purchasers of errors and omissions liability policies with only 6% of eligible firms buying the coverage. The interpretation of that data is clear; Cyber and E&O policies need to be better addressed by the manufacturing C suite to protect the business.
Traditional coverages:
- General liability (CG0001): The standard ISO GL policy includes product liability which responds to a third-party claim alleging bodily injury or property damage. However, due to the impaired property exclusion policies do not respond to claims for economic loss where the insured’s product fails to perform without physical damage accompanying that failure. In addition, policies typically do not respond to claims for losses to intangible property such as customer data.
- Product recall (CG0066): The standard recall policy responds to the cost of product withdrawal from the market due to potential, alleged, or actual bodily injury or property damage.
Use insurance to reduce risk, create value, and enhance growth
Structuring a comprehensive program should include general liability, recall, and errors and omissions coverage to make sure firms are adequately protected. The bottom line is that without a bodily injury or property damage trigger there is no coverage for economic loss if a customer sues.
G2 Insurance Services have worked with several manufacturers that have used cyber and E&O coverage to help secure large new business contracts. More and more contracts are requiring the coverage. Firms that already have processes, procedures, and policies in place can respond to bids quickly and secure orders while the competition scrambles to react.
Protect your firm and your customer relationships
In addition to enabling business growth, E&O policies accomplish the following key goals:
- Protect the directors and officers from a claim alleging failure to obtain proper insurance.
- As supply chains integrate it can become difficult to determine which product failed. All members of the supply chain will be sued.
- Protection includes claims for financial injury and defense costs
Consider transferring risk to an impartial third-party carrier. Don’t litigate a dispute with a key customer. Any firm engaging in product design, installation, installation, service, repair, labeling, and consulting should consider purchasing the coverage.
Recent claim examples
- TOOL AND DIE SHOP: A custom-built product does not perform to contract specifications. Your customer sues for lost profits, loss of revenue, costs to correct, and breach of contract.
INDEMNITY: $750,000 EXPENSES: $65,000
- INSTRUMENT MANUFACTURER: A microscope manufacturer sold its product to a metals firm which provided faulty data to a client in the performance of a contract. Based on the incorrect data, the manufacturer used an alloy for a client that failed. Both the metals firm and the microscope manufacturer were sued for lost revenue, profits, and breach of contract.
INDEMNITY: $1,350,000 EXPENSES: $75,000
About the Author
Paul Glover, CPCU, ARM, is an Assistant Vice President for G2 Insurance Services, LLC. and a Manex blog contributor. He can be reached at 415-426-6660 or [email protected].
