Covering a Vendor as an Additional Insured
Manufacturers are often required by the sellers of their products to insure the sellers for product liability. The insurance afforded to the sellers is called vendors coverage. It is typically provided via a vendors endorsement added to the manufacturer's general liability policy. The endorsement extends the manufacturer's product liability coverage to the vendor.
The following scenario demonstrates how the endorsement is typically used. Vince owns Vital Vacs, a small company that makes vacuum cleaners. The vacuums are highly effective at picking up pet hair, so they are marketed to pet owners. Vince has been selling his vacuums through small appliance stores. Demand for the products has been strong. Yet, Vince thinks sales would be even better if the vacuums were available from A-1 Appliance, a large chain of appliance stores.
Abe, a buyer at A-1 Appliance, agrees to stock Vital Vacs’ products on a trial basis. In return, Vince must cover A-1 as an additional insured under a vendors endorsement added to Vital Vacs' liability policy.
Vendors coverage protects sellers against claims arising out of injuries to third parties caused by the manufacturer's product. This coverage is necessary because a seller may be liable if the product injures a buyer or damages a buyer's property. The seller may be held responsible even though it didn’t design, manufacture, or change the product in any way. A manufacturer may offer a vendors endorsement to entice a seller to distribute the manufacturer's products. In some cases, a distributor may be unwilling to sell a manufacturer's products unless it is insured under a vendors endorsement.
Vendors endorsements vary, but most are based on the standard vendors endorsement published by the Insurance Services Office (ISO). This endorsement is designed for vendors that don't alter products, but simply transfer them “as is” from the seller to the buyer. It covers the vendor as an additional insured for claims alleging bodily injury or property damage arising out of the manufacturer’s products. The products must be described in the endorsement. To be covered, the products must be distributed or sold in the regular course of the vendor’s business.
Limits of Insurance
In the past, vendors endorsements covered claims against the vendor subject to the "each occurrence" limit in the policy. However, some endorsements now include a restriction. They limit coverage for the vendor to the lesser of:
- the limit required by the contract; or
- the limit stated in the policy
For example, suppose that Vital Vacs is insured under a liability policy that includes a $1 million Each Occurrence limit and a $1 million Products and Completed Operations Aggregate limit. Vital Vacs' contract with A-1 Appliance requires the manufacturer to provide only $300,000 for each of these limits. A-1 sells a Vital Vacs vacuum cleaner to a customer. The customer is injured by the product and sues A-1 for bodily injury. If A-1 seeks coverage for the claim under the vendors endorsement, the limit available to A-1 will be $300,00 rather than $1 million.
The endorsement excludes damages for bodily injury or property damage that the vendor is obligated to pay because it has assumed liability for such damages in a contract. For example, suppose that A-1 Appliance subcontracts with another seller, Tip Top Tools, to distribute the Vital Vacs' vacuum cleaners. Tip Top agrees to sell the vacuums and in return, A-1 will assume liability for any claims against Tip Top that arise out of Vital Vacs products. Tip Top is sued for bodily injury caused by a defect in a Vital Vacs vacuum cleaner and presents the claim to A-1 Appliance.
A-1 is not covered for the claim under the vendors endorsement because the claim arose out of A-1's assumption of Tip Top's liability.
No coverage is afforded for product warranties made by the seller that are not authorized by the manufacturer. For example, a salesman at A-1 Appliance tells a customer that Vital Vacs vacuum cleaners are safe to use directly on pets. Vital Vacs has made no such guarantee. The customer buys a vacuum cleaner and injures his dog while using the vacuum on it. If A-1 Appliance is sued for breach of warranty, the claim will not be covered by the vendors endorsement.
Changes, Inspections or Repackaging
If the vendor repackages the products or fails to make inspections and is sued as a result, the claims will not be covered by the endorsement. Also excluded are any physical or chemical changes the vendor makes to the product intentionally.
Demonstration, Installation, Servicing or Repair
These activities are excluded unless they are done at the vendor’s premises in connection with the sale of the product. For instance, suppose that A-1 Appliance demonstrates Vital Vacs' vacuum cleaners for customers in the store. If a customer is injured during a demonstration, and files a product liability suit against A-1 Appliance, the claim should be covered.
The endorsement excludes injury or damage caused solely by the vendor’s negligence. For example, A-1 Appliance displays Vital Vacs products on a shelf several feet above floor-level. A customer is lifting a canister vacuum cleaner off the shelf when the power brush falls on him and causes an injury. If the customer sues A-1 Appliance for bodily injury, the claim may not be covered. The injury resulted solely from A-1's negligent storage of the product.
An exception applies to injury or damage that results from repackaging, demonstration, installation, servicing or repair by the vendor. For example, an A-1 salesman fails to securely fasten a power head to a Vital Vac's vacuum cleaner. A-1 is demonstrating the vacuum when the power head flies off the unit and injures a customer. If the customer sues A-1 for the injury, the claim will likely be covered.