Manufacturer’s Errors & Omissions (E&O), also known as Manufacturer’s Professional Liability, is a key insurance coverage for today’s manufacturers. E&O coverage is designed to protect insureds against liability stemming from committing a manufacturing error, faulty product design, or damages caused by employees providing value-added services. The issue is, for many companies this coverage is not part of their commercial insurance program. Why is that?
Here’s what I’ve found. Many:
- Believe their commercial General Liability policy will cover this type of loss
- Don’t think a customer’s financial/business losses are their responsibility
- Just don’t understand what E&O coverage is and how they are exposed
The answer for any one company is likely a combination of these reasons, which is why I want to take a minute to shed some light on this crucial type of coverage especially for manufacturing.
What Does a General Liability Policy Cover?
First, I think it’s important to understand what the typical General Liability policy covers for your business.
The standard commercial General Liability/Product Liability policy most manufacturers purchase as part of their package covers them for bodily injury or property damage they cause to a third-party.
For example: If one of your employee’s actions or your products injure someone or cause damage to someone else’s facility, equipment, etc., the General Liability policy will typically respond for the direct costs of those damages. It will pay for the damaged machine, a portion of the building, or the medical costs associated with the accident.
How Does Manufacturer’s E&O Differ?
Manufacturer’s E&O focuses on the “indirect” costs. There are a stockpile of costs that a company can face, due to property damages, especially.
Consider your own business — things like:
- machine downtime
- payroll expenses if employees cannot work
- missed deadlines
- overtime paid
- extra expenses for other vendors
- loss of income
All of these extra costs or losses are realistic consequences for a customer, yet they aren’t covered by the regular General Liability policy. If the original issue that causes these things were the fault of your company, it is not unlikely that your customer will seek reimbursement for them from you. You may be on the hook.
Focus on the Contracts
Now, you might be thinking to yourself, “those are the risks of being in business. If they want me to pay those costs, they can file a lawsuit.” You’re not wrong, and if the costs are high enough, they probably will. But, remember to consider that you may have already accepted liability for this type of claim without even knowing it. There is a huge contractual component to these claims.
Many contracts, especially with large companies, are actually requiring proof of professional coverage in the insurance requirements section. If that’s the case and you’re not able to push back on this requirement, you could be in breach of your contract if your business doesn’t already have a professional policy.
There are several other places within a contract or purchase order where you may be assuming liability for your customer’s commercial loss or economic damages, even if the insurance section doesn’t specifically request or require the coverage by name.
Outside of the “insurance” section, “indemnity”, and “failure to perform” are other common areas where important language concerning liability can be found. Take a look at a few of the examples of language below that I pulled directly from contracts I’ve seen:
Insurance
(f) Professional liability with limits not less than $3,000,000 per occurrence, $3,000,000 in the aggregate.
Indemnity
Seller shall defend, indemnify and hold harmless __ and its affiliates, officers, directors, consultants, employees, agents, and assigns from and against any losses, damages, claims, liabilities, and expenses, including attorney fees, arising from or related to: (a) the nonconformance of Work to the warranties described in this Agreement, (b) Seller’s failure to perform its obligations under this Agreement.
Failure to Perform
The event of Vendor’s failure to perform any of its obligations hereunder, Purchaser may, at its option, recover from Vendor any losses including reasonable attorneys’ fees, and any other actual, incidental, indirect, special or consequential damages, and may exercise all rights and remedies as may be available to Purchaser. Notwithstanding anything herein to the contrary, nothing in the Order shall be deemed to limit any rights Purchaser may have against Vendor in law or equity.
Signing Means You’re Accepting Risk
I want to be very clear about something — when you sign that contract or purchase order, you have accepted responsibility for these potential costs. Whether you have a policy in place to defend and indemnify the claim or not, your customer has passed the torch to you. Even if you were unaware or disagree with their stance, it is likely you will at least have defense costs (defense costs are also part of the coverage in a professional policy). Consider this my plug to have your risk management team, insurance broker, and attorney review your contractual agreements.
While exposure varies throughout the manufacturing industry, there is certainly a case for any company making products to have Manufacturer’s E&O. Those providing industrial equipment, component parts, value-added services, and onsite consultation are certainly strong candidates.
The current supply chain challenges and use of technology-reliant equipment have been creating stronger interest and attention to professional liability coverage in recent years. If you are interested in learning more about your own business’s risks and options for coverage, please reach out! We’re happy to discuss this all with you.
