If a manufacturer, distributor or merchant incurs a loss from your product, you need product liability insurance to protect your business. Product liability is generally considered a “strict liability offense” — if your product has a defect, you’re liable.
“Like most things, the devil is in the details. From an insurance perspective, it’s important to look at all of the terms and conditions of your general liability policy,” says Shane Moran, vice president at ECBM.
Smart Business spoke with Moran about the facts of product liability insurance.
What are some product liability claims?
Product claims typically fall into three categories, claims arising from:
- The manufacturing or production process — opening a can of soup and finding a piece of metal in it.
- A design failure or hazard — a chair designed with one of its legs significantly shorter than the others.
- A product that is not adequately labeled as to the potential hazard of the product — the label on a cigarette pack or a warning label on prescription medicine.
Who should have product liability coverage?
Manufacturers are not the only companies with product liability exposure — every company from the manufacturer of the components down to the retailer can be brought into a suit, and potentially has an exposure. A retailer may have an exposure if it assembled or installed the product and didn’t follow the manufacturer’s instructions properly. The retailer also would have a duty to the buyer to test the product for safety.
What possible damages could be awarded?
Your company can be legally obligated for damages to a third party that your product causes. These damages range from bodily injury to property and economic damage, with punitive damages potentially awarded.
You also can sustain loses in terms of recall cost, further product testing, advertising cost to prevent damage to your reputation, and business income and extra expense loss.
Why do some policies cover economic damages, but not punitive or statutory damages?
When policies cover economic damages, they mean compensation for a verifiable monetary loss, which can include loss of future earnings, loss of business opportunities, loss of use of the property, cost of repair or replacement, loss of employment and even medical expenses.
Punitive damages are awarded for the purpose of punishment, or to deter a reckless decision or action. Typically, they are used when compensatory damages are deemed inadequate. Punitive damage is a tricky area for insurance, as most jurisdictions have ruled that it is uninsurable. You need to examine your commercial general liability policy’s terms and conditions to see whether you have coverage. In most cases, you will find a punitive damages exclusion included.
Why is it a bad idea to underreport sales volume to lower your premium costs?
Most general liability policies are auditable. While an owner may want to use a lower exposure base to keep upfront premiums low, at the end of the day that same owner runs the risk of a large additional premium payment with the audited exposure.
Right after the policy expires, the audit occurs, which coincides with when the deposit premiums are paid. Deposit premiums are usually 25 percent of the total premium, so without using the proper exposure base at the beginning, a company could be looking at a very large outlay of cash in a short time period. This cash flow crunch could cause the cancellation of a company’s insurance for nonpayment.
Most carriers also lower their rates as the exposure base increases. So, by understating your exposure, you could be causing your company to have a higher rate and premium.
What other mistakes do companies make in this arena?
Many business owners think their insurance covers everything. But, for example, you may or may not have a product recall exclusion. The cost associated with recalling a product can be enormous, and you don’t want to find out that you have no coverage when faced with a claim.
If you’re unsure of your coverage, contact your insurance broker and/or risk manager to review the language.
Shane Moran is a vice president at ECBM. Reach him at (610) 668-7100, ext. 1237, or email@example.com.
For more information about risk management, see ECBM's blog.
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Settlement of a claim and a handicap reimbursement award are two cost containment strategies available to employers to manage claim costs and impact annual premiums. A settlement fixes the claim cost, which then allows the premium to reflect the settlement amount and possibly reduce the employer’s premium. If a handicap award is granted, a portion of the costs of the claim will be charged to the Surplus Fund and not to the employer’s experience.
“By removing costs from an employer’s experience, an employer may be able to lower its annual premium rate calculated by the Ohio Bureau of Workers’ Compensation (BWC), thus reducing its annual spend,” says Lisa O’Brien, director of rates and underwriting services for CompManagement, Inc. “Employers should always review these two very effective cost containment strategies when managing their workers’ compensation claims to make an impact to their bottom line.”
Smart Business spoke with O’Brien about these cost containment options available to employers in Ohio.
What is a settlement?
A settlement is an agreement among the employer, the injured worker and the BWC for a specific amount to settle one or more workers’ compensation claims. All three parties must agree to the settlement amount before a claim can be settled either in full, which settles all allowed conditions and benefits, or a partial settlement, which settles only certain conditions and/or benefits, either medical or indemnity (compensation).
What happens when a claim is settled?
When a claim is settled, the injured worker will receive a lump sum payment from the BWC. Settlement affords injured workers the freedom to manage their treatment priorities, on their timeline and on their schedule.
If the claim is settled for both the indemnity and medical portions, the injured worker will receive no additional compensation or medical benefits in the settled claim. If the claim is settled for either medical only or indemnity only, the injured worker can no longer receive the benefit type that has been settled (either medical or indemnity).
For employers, settlement can help manage costs and bring closure to a claim for their employee. Settling the claim removes reserves (indemnity, medical or both depending on the type of settlement) associated with the claim from all future rate-making. However, costs already paid out, plus the settlement amount, will continue to be charged to and impact the employer’s premium rate.
When will a settlement impact the employer’s premium?
Settlement of a claim will affect an employer’s premium rate only going forward. In order for a settlement to be included in the employer’s upcoming year’s rate, the fully executed settlement application (signed by both the employer and the injured worker) must be filed by May 15 for public employers or by Oct. 15 for private, state-funded employers.
These deadlines do not apply for settlements that occur through the court of common pleas. Common pleas settlement inclusions in the employer’s experience are based on the date the settlement is paid.
For a court of common pleas settlement to be included in an employer’s upcoming rates, the settlement must be paid to the injured worker before the applicable survey date, June 30 for public employers and Dec. 31 for private employers.
What is a handicap reimbursement?
The BWC encourages employers to hire and retain employees with handicapped conditions. To help offset the challenges those with handicaps often experience in the job market, the BWC offers the Handicap Reimbursement program as a means for employers to reduce their claim costs. Ohio law defines a handicapped employee as one who has a physical or mental impairment, whether congenital or due to injury or disease, whose impairment jeopardizes the person’s ability to obtain employment or re-employment. Also, the impairment must be due to one of the 25 eligible diseases or conditions that Ohio law recognizes.
The most commonly recognized conditions are arthritis, ankylosis, diabetes, cardiac disease and epilepsy.
When should an employer file an application for handicap reimbursement?
If an injured worker suffers a lost-time claim (eight or more days away from work) and a handicap condition is met, the employer can file a CHP-4 application with the BWC requesting reimbursement of claim costs charged. The employer must show the handicap is a pre-existing condition (prior to the date of injury) and that it either caused the claim or contributed to increased costs or a delay in recovery. Applications are reviewed and awards are granted by the BWC’s Legal Operations Department. Once awarded, the BWC will apply the handicap reimbursement award to chargeable claim costs, thereby reducing costs and possibly premium rates.
Private, state-funded employers must file handicap reimbursement applications by June 30 of the calendar year no more than six years from the year of the date of injury. Public employers must file handicap reimbursement applications by Dec. 31 of the year no more than five years from the year of the date of injury.
Claims with a handicap reimbursement can be settled and settled claims can continue to be considered for handicap reimbursement.
What is the typical range of handicap reimbursements awarded?
Per BWC public information, handicap reimbursements typically range between 5 and 100 percent, depending on the degree to which the handicap condition impacts the claim. On average, current public information shows a handicap award to be approximately 26.17 percent.
Lisa O'Brien is the director of rates and underwriting services for CompManagement, Inc. Reach her at (800) 825-6755, ext. 65441, or Lisa.Obrien@sedgwickcms.com.
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Employers and employees alike commonly assume that if an employee is paid an agreed-upon annual salary rather than an hourly wage, that employee is exempt from the strict wage hour laws here in California. For example, employers believe salaried employees are not entitled to overtime pay and meal and break periods. However, that’s not necessarily the case.
“Specific to the white-collar universe, there are exemptions — there’s an executive exemption, an administrative exemption, a computer analyst exemption, a professional exemption — and that means if you meet a salary requirement and you meet duties requirements governed by the statute, then you are classified as exempt and therefore are not entitled to overtime,” says Elise R. Vasquez, partner at Ropers Majeski Kohn & Bentley PC. “What we’ve started to see is an up-rise in white-collar exempt misclassification claims.”
Under the Obama administration, funds have been funneled to labor board investigators meant to probe wage-hour claims to determine whether or not employers are in violation of the wage hour requirement and employees are misclassified as exempt. In the past, many such claims came primarily from blue-collar jobs, such as the restaurant industry. We are seeing more claims from employees for unpaid overtime that they were entitled to, because they were misclassified as exempt based on the job description and duties performed.
Smart Business spoke with Vasquez to find out more about misclassification lawsuits, and what an employer can do in the event a claim is made.
What establishes an employee as exempt or non-exempt?
The list of qualifiers is comprehensive and very specific for each exemption. Basically, there is a salary requirement and a duties requirement that need to be met for an employee to be exempt. Unfortunately, employers have been relying on the assumption that if they hire a computer analyst, for example, and they pay them the requisite salary, they must be exempt. In reality, that may not be the case. Specific day-to-day duties that they perform may not fall under an exemption. As such, while an employer may meet the salary requirement for a computer analyst, because he or she performs non-exempt duties more than 50 percent of the time, the person is entitled to overtime pay and meal and break periods.
How can employers ensure they are classifying their employees correctly?
The job title and salary requirement are not enough, and each exemption has different requirements. Employers should enlist the counsel of their labor and employment lawyer to perform an audit to make sure each employee falls under the correct exemption.
Their labor and employment lawyer can perform the audit by taking a look at the job description the employer claims is an exempt position, interview the employees in that position, and determine if in fact they perform exempt duties more than 50 percent of the time.
Prior to hiring an employee, employers should be clear about the job duties and what the employee will be doing. When interviewing a candidate, focus specifically on those duties. After hiring, it becomes an upper management issue, where each employee will have a reporting manager who will be responsible for checking with HR and ensuring employees are performing the correct duties for that position more than 50 percent of the time. Educating upper management and HR as to exempt duties will allow for these checks to be in place.
What should an employer do in the event that a claim is filed?
If a company does not have a labor and employment lawyer in place, it should look to hire one with a level of expertise in misclassification lawsuits, both with class actions and individual cases. The lawyer will get the job descriptions of all employees and/or former employees involved in the claim, talk to the reporting managers to see whether or not they did the exempt duties more than 50 percent of the time, look at payroll records and do a risk benefit analysis. This analysis will determine the company’s potential exposure. If in fact there is potential exposure, the exposure can be calculated with reasonable certainty.
If there is liability, most companies will want to avoid trial and resolve any matter early. Hence the importance of hiring a lawyer who understands each and every one of the exemptions as well as which exemptions the employee(s) fall into.
What if the employer loses the case?
In addition to the employer owing an employee or a class of employees any unpaid wages, the employer is exposed to penalties. For every employee who is no longer working for the company, there will be penalties for not paying them what they are owed. There are also other penalties under various statutes an employer could be subject to for various payroll violations. In addition, all employees who prevail on wage-hour claims are entitled to attorneys’ fees and costs.
Because exposure can usually be calculated with reasonable certainty, a lot of these cases do not go to trial, unless the case for the employer is particularly strong. If the employer is correct and can prove the employee(s) filed a meritless claim, the employer can seek fees from the employee(s). The reality, however, is it is highly unlikely an employee will have the means to pay for the employer’s attorneys’ fees.
Elise R. Vasquez is a partner with Ropers Majeski Kohn & Bentley PC. Contact her at (650) 780-1631 or firstname.lastname@example.org.
A lawsuit has just been filed against your company and several of the company’s executives. Your first thought: “We have general liability insurance, and paid a lot of money for it. The insurance company will pay the lawyers to defend us and pay any settlement or judgment that might be entered. No need to worry.”
But then the insurer tells you that your general liability insurance policy only covers claims for bodily injury, property damage and something called “advertising injury.” None of the claims in your lawsuit fall into those categories. You are on your own. Now, your company has to pay for the defense and any settlement or judgment. Suddenly, the lawsuit that you thought was “no problem” because you have general liability insurance is now a financial nightmare for your company.
How can a company avoid this scenario?
Smart Business learned more from Edward Galloway, shareholder, and Joel Covelman, senior counsel, at Jackson DeMarco Tidus Peckenpaugh, who specialize in advising companies regarding insurance issues.
Why would a business need anything other than general liability insurance?
The scenario described above is a painful reality for some businesses because they wrongly assume that their general liability insurance covers far more than it does. In our experience, these situations can quickly get even more complicated, causing the potential litigation costs to spiral out of control.
To illustrate this point, consider these possibilities: Imagine if one of the executives in your company who was sued has been advised that he should have a different lawyer, separate from the others, because he believes that others are at fault, not him. He asserts that under the terms of his employment contract the company has to pay for his separate legal counsel. Your company is now faced with paying two law firms to defend the case. Both sets of lawyers send you a litigation budget well into the six-figure range. They also tell you that they need expert witnesses to testify at trial, and the experts’ hourly rates are almost as high as those the lawyers charge. Early in the lawsuit, the plaintiffs make settlement demands also in the six-figure range, but instead of the money coming from your general liability insurer, you would have to pay it out of existing assets or revenues.
If you do not settle quickly, the defense costs are not the only ‘costs’ you will have to worry about. The time that your employees and you spend dealing with the lawsuit, such as preparing for and attending depositions, answering interrogatories, and searching for documents that are requested by the other side, is an additional cost to your company that is hard to quantify, but can have a very real impact on your bottom line.
How does a company know if its liability insurer is justified in denying a claim?
Just because your general liability insurer’s adjuster tells you that its liability policy does not cover your claim does not mean that is, in fact, correct. When a potentially big and expensive claim is on the line, it is worthwhile to seek the advice of a knowledgeable insurance lawyer to be certain you are presenting all the necessary information that will maximize the odds of triggering coverage under the policy, and to be sure the insurer is not wrongfully denying your claim under the law governing insurance coverage.
How can a company avoid having no insurance to pay defense costs or any possible judgment?
While there is not insurance for every conceivable kind of claim, every year, businesses of all sizes should conduct a thorough review of the internal and external risks they face. Competent insurance brokers and lawyers knowledgeable about insurance coverage and litigation can give advice about the types of insurance available, what risks they cover, and the cost of such insurance.
When shopping for insurance you should know that not all policies are the same. Although there is a great deal of standardization in insurance contracts, some insurers modify the industry standard coverage forms or exclusions. You should ask your insurance broker to obtain ‘specimens’ of the actual policies of insurance you are considering buying, so that your insurance coverage lawyer can evaluate whether there are meaningful differences in coverage, and so you can minimize gaps in coverage that are sometimes buried in the details of the policies being offered.
With a coverage analysis of the specimen policies, your company can then perform a cost-benefit analysis by weighing your business risks against the cost of insuring against them. If there is no insurance coverage available for some of the identified risks, or the cost of the coverage offered is too high, then the company at least knows what uninsured risks it is facing, and can contemplate steps to minimize those risks or create reserves to deal with them.
What are some of the other kinds of coverage available besides general liability insurance?
The typical general liability insurance policy issued to a business does not cover claims for breach of contract, negligent misrepresentation, fraud, sexual harassment of a company employee, wrongful termination of an employee, pollution liability, breach of fiduciary duty by a company officer or director, professional malpractice, employee theft, or workplace injuries to employees. Depending upon the insurer and the endorsements you select, your liability insurance policy may or may not cover auto accidents in company vehicles or in the private vehicles of your employees who are on company business, and it may or may not cover defamation of individuals, or disparagement of businesses or products.
Specialized types of liability insurance may be available to provide at least some degree of coverage for these types of claims, such as employment practices liability, pollution liability, directors and officers liability, and errors and omissions liability, among others.
To understand whether your business needs any of these or other coverages, an annual risk and insurance coverage audit is the starting point, along with a discussion with your insurance broker and insurance lawyer.
Edward Galloway is a shareholder and Joel Covelman is senior counsel at Jackson DeMarco Tidus Peckenpaugh. Reach them at EGalloway@jdtplaw.com and JCovelman@jdtplaw.com, respectively.