Consider this scenario: A customer asks your company to manufacture a part according to certain specifications, which were outlined in a contract. It is needed to add the part to an existing product and ship it to their customers by a set deadline.
Your company creates the part, but due to an error that occurs during the production process, the part isn’t made to the customer’s exact specifications. You ship it, they receive it, and realize it can’t be use it in the final product and requests that the part be remade. The delay in production causes your client to miss the deadline to ship their final product to their customers. As a result of them missing their contractual obligations they face penalties and/or loss of business income/reputation and so they files a lawsuit against your company. Now what?
Exclusions in General Liability Insurance
You might assume that your Commercial General Liability (CGL) policy will cover this claim, but in many cases it will not. Most CGL policies contain “damage to impaired property” and “property not physically injured” exclusions. That means that unless the manufacturing error results in bodily injury or property damage, the CGL policy will not cover the loss.
The customer’s financial loss in the scenario described above would not fall into either of these two categories, so it would not be covered under a typical CGL or products liability policy. In order to protect your business from a product failure resulting in a third-party financial loss without bodily injury or property damage, you need Manufacturers Errors & Omissions (E&O) coverage.
Manufacturers E&O Insurance
Manufacturers E&O is professional liability insurance that covers a manufacturing mistake or negligent service that results in a third-party financial loss without bodily injury or property damage. E&O insurance covers damages that result from:
- Poor, incorrect or faulty products that you manufacture, handle, sell or distribute
- Errors and omissions when caused by material defect, including property damage to the product, property damage to the work and property damage to impaired property
- Negligence or failure to deliver promised services
If customers allege that your product failed or that you were negligent in performing services outlined in a contract, they will likely seek to recoup their financial losses by suing you. You could be saddled with significant legal costs, as well as potential damages if the case is lost. Even if the customer’s lawsuit is found to be frivolous, you’d still incur the cost of defending yourself. That’s where Manufacturers E&O insurance comes in.
Manufacturers E&O insurance will cover both the customer’s financial loss and your defense costs. Most E&O policies are “claims-made policies,” which means that in order for the claim to be covered, both the work in question must be performed and the claim must be made during the policy period.
E&O premiums vary based on the type of product or service you need coverage for, your company’s financial stability and the policy’s limits. Contact Reith & Associates at 519.631.3862 to learn more about adding this important coverage to your risk management portfolio.
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