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Product Liability for Wholesalers

Do Product Wholesalers Really Need Product Liability Insurance?

Product liability occurs if the defective design, manufacturing, or representation of a product harms people or damages property. While product liability is frequently an issue that manufacturers manage, wholesalers that deviate from their roles as intermediaries, such as when developing or advising on product design, also take on more risk. If your operation is planning to add new service offerings, here are six key areas to keep in mind:

  1. Private Labeling

Attaching your brand to a product you don’t make can help boost your position in the marketplace, but it comes with additional risk. To avoid this, work with a manufacturer that already produces the desired product and has a strong track record of successfully branding and packaging products according to accepted best practices and consensus standards and make no additional changes of your own design. Do your due diligence and verify that the manufacturer has formal procedures to meet relevant standards and testing product safety.

  1. Direct Importing

To reduce costs, many wholesalers buy products directly from foreign manufacturers. While this strategy can offer big cost savings, it can also bring added risks. For example, products made overseas often do not follow US safety and consensus standards. If a product does cause injury or damage, the wholesaler could be held liable, even if the foreign manufacturer is negligent. If your wholesale operation direct imports, be strategic when pre-selecting your suppliers:

  • Check to see if they have been named in any prior lawsuits and confirm they follow relevant US standards.
  • Have a formal process to judge the safety and reliability of your suppliers and the extent of uncontrolled liability risk they may impose on your company.
  • Establish a formal product recall procedure so you can quickly identify and remove affected inventory from the supply chain.

Having contracts in place to clarify responsibilities and service expectations can also help. Unless a foreign manufacturer has a legal presence in the US or has agreed to be subject to the jurisdiction of US courts, however, there may be little opportunity to recover damages. As a result, your business could be held solely liable.

  1. Representing Products through Demonstrations or Changes to Manufacturing Instructions

How a company portrays, displays, or prepares a product for buyers can increase risk. As a wholesaler, you aren’t necessarily a product expert. For this reason, avoid offering demonstrations or making any changes to manufacturer instructions. Remember that all instructions, literature, warnings, and repair/replacement/maintenance documentation provided to you by the manufacturer must be passed on to the buyer. Also, employees offering verbal instructions should be well-versed in the use of the product and be careful not to omit potential hazards or understate limitations of the product. This is especially important for technical products that require specialized knowledge of the manufacturer and the ultimate user.

  1. Providing Post-Sale Services

Some wholesalers provide post-sale services, such as installation or assembly, to differentiate from competitors. These types of services are customarily only offered by licensed dealers or those specifically authorized and trained by the original equipment manufacturer. Performing these services can increase your business’s liability. Before moving forward, make sure you’re technically proficient in the necessary tasks, employ the proper tools, and adhere precisely to manufacturer guidelines.

Wholesalers without the capability to safely carry out these types of services should hire expert contractors with applicable education and licensure and use contracts that establish roles and appropriately assign liability. If you don’t have the ability to safely carry out product assembly or other services outlined in your original equipment manufacturer (OEM) contract, hire expert contractors with appropriate licenses, certifications, and qualifications.

  1. Reselling Liquidated Inventory

Wholesalers that resell liquidated or overstocked inventory can be liable for damages caused by that inventory. If you’re considering this for your company, it’s important to understand the risk you may be assuming. The continued sale of banned three-wheel all-terrain vehicles (ATVs), for example, resulted in heavy damages for some dealers. In the case of ATVs, some sellers even faced civil and criminal action. Though banned products provide an extreme example of reselling risks, the overall point remains valid: stay informed of potential risks associated with your inventory.

  1. Storing and Handling Products

In some cases, your wholesale business may conduct “pass-through” sales, never seeing or touching the merchandise. Any time you take ownership of a product before it reaches a buyer’s hands, such as via storage or handling, you take on some liability risk that you should manage:

  1. Whether your warehouse stores inventory for three days or three weeks, factors such as temperature, water, or contact with equipment or other inventory can compromise products.
  2. This includes breaking up a larger pallet to create smaller orders, opening boxed goods to mix and match with other products (such as creating a camping kit or medical kit), re-labeling shipments, or removing literature, product components, or accessories (such as screws or repair patches) that accompany the original packed product.

Bottom line? If your business alters the original product in any way before it reaches the buyer, you could be opening your business up to sharing a significant portion of the manufacturer’s risk if something goes wrong.

While there are other ways that product liability can impact your wholesale business, these six activities are among the most common and costly causes. Regardless of what is being sold or how, you should always evaluate the risk potential of your products and take precautions. These actions will help reduce the risk to your wholesale business and employees, protect your relationships with retail partners, and ensure the safety and satisfaction of the buyer.

Important Recommendations

To avoid further expenses, you should always ask suppliers and/or contract manufacturers to name you as additional insured on their product liability policy. They also need to provide you with a certificate of insurance as evidence of this endorsement. If you designed the product, you are probably responsible for the content of the instructions and warnings. Please see additional information below regarding a vendor’s endorsement.

Vendor’s Endorsement

The general liability endorsement entitled “Additional Insured-Vendors” (CG2015) is commonly referred to as a vendor’s endorsement. The purpose of a vendor’s endorsement is to provide products liability to vendors who sell or distribute your product.

Manufacturers and distributors typically purchase their own general liability policy (which includes product liability) under which they are the “named insured.” The vendor’s endorsement is intended to give primary products liability coverage over and above any coverage the vendor may already carry.

Do I need a vendor’s endorsement?

Adding a vendor’s endorsement to your products liability policy provides your vendor additional insured status on your policy and gives your vendor added confidence to sell and distribute your product without fear of having a claim adversely affect their general liability coverage or premiums.

Most major distributors and retailers are now requiring additional insured-vendor status as a condition for doing business. These vendors will typically require specific insurance limits of coverage within their contracts of $1, $2 or $3 million and may even require an “occurrence” policy form.

What does it cost to add this to my policy?

The additional cost to add a vendor’s endorsement to your general liability policy varies by insurance carrier. The additional cost of a blanket vendor’s endorsement to cover all your vendors ranges from 0% to 7.5% of the existing general liability premium, depending on the insurance carrier. However, the additional premium to add coverage for an individual vendor ranges from $100 to $250.

Common Limitations of a Vendor’s Endorsement

Coverage extends only to products scheduled on the endorsement. All vendors listed on the policy share the aggregate limit stated in the policy. In other words, if one of the other vendors or you (the “named insured”) had a claim and exhausted the aggregate limit, there are no additional limits for the remaining vendors to access. Vendors must rely on you (the “named insured”) to satisfy all policy conditions and pay your premiums on a timely basis so coverage does not lapse.

Express warranties are excluded from coverage unless they are specifically authorized by you (the “named insured”). If a vendor’s advertisement or salesman were to promise a certain fitness of a product or an express warranty that is not specifically authorized by you (the “named insured”), any liability arising out of such promise or warranty is not covered.

Any physical or chemical change intentionally made to a product by a vendor will void coverage. Any repackaging of a product will void coverage, except when it is repackaged solely for the purpose of inspection, demonstration, testing, or the substitution of parts under instructions from you, and then repackaged in the original container.

Failure by a vendor to complete inspections, adjustments, tests, or servicing that has been agreed to or that is normally undertaken during business in connection with the distribution or sale of the product will void coverage.

Any demonstration, installation, and service or repair operations will void coverage, except such operations performed at the vendor’s premises in connection with the sale of the product. Coverage is voided if the vendor (or another party on the vendor’s behalf), after receiving the products, has labeled or relabeled it, or used it as a container, part, or ingredient for any other thing or substance.

Coverage does not apply for bodily injury or property damage arising out of the vendor’s assumption of contractual liability in a contract or agreement (unless the vendor would have such liability in the absence of the contract or agreement).

Coverage does not apply to bodily injury or property damage arising out of the sole negligence of the vendor for its own acts or omissions or those of its employees or anyone acting on its behalf. However, such coverage does not apply to the exceptions contained in points 6 and 8 above or such inspections, adjustments, tests, or servicing as the vendor has agreed to make or normally undertakes to make in the usual course of business in connection with the distribution or sale of the products.

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