Manufacturers face risks that other industries don’t. Converting raw materials and transforming them into a product used by hundreds or even millions of people can be daunting from a risk management perspective.
Many manufacturers rely upon and expect the products liability coverage included in the commercial general liability (CGL) insurance policy to cover all claims after the product has left their facility. Unfortunately, they don’t always consider the limitations of the CGL policy.
Additionally, many manufacturers purchase product recall insurance to pay for costs associated with withdrawing their product from the market to avoid further liability.
Need insurance for your manufacturing business, but not sure what type to obtain? Check out our article, “Manufacturing Insurance: What You Need To Know.”
Here's the problem with that:
The standard commercial general liability insurance policy responds to damages you’re legally obligated to pay a third party due to your product causing bodily injury or property damage.
Product recall coverage pays for the costs of withdrawing a product from the market due to actual, alleged, or potential bodily injury or property damage.
But there is no coverage under the general liability policy (or its included products liability coverage) for when you cause financial loss due to a manufacturing error or faulty design of a product. This is where Manufacturing Errors & Omissions insurance comes in.
Why Manufacturing E&O Insurance Matters
Being legally liable for financially harming a client because of a manufacturing error is a very real risk. Depending on the product you manufacture, this risk could be the largest one your business faces.
Here are three hypothetical claim examples provided by our manufacturers errors and omissions (E&O) provider, AmWins Group, to help illustrate why manufacturers E&O is so critical:
Lumbering Jack, a wood beam manufacturer, is called upon by a ski resort developer to supply 500 beams made of white oak and walnut lumber. However, due to an error, Lumbering Jack instead manufactured 500 beams made of white ash and red oak. As a result, Lumbering Jack is required to initiate a new order with a new lumber manufacturer, resulting in a higher cost due in part to the higher quality of oak and walnut. Subsequently, the developer's project is delayed due to a later delivery date for white oak and walnut beams, as originally ordered. The economic loss is derived from the higher cost to fill the order as well as the delay in project start-up, incurring loss of rent.
Walson's Widgets designs specialized components for timepieces. A client, Corky's Clocks, discovers their watches are not working properly due to a flaw in Walson's watch widget. Corky's Clocks is required to recall their watches and replace the faulty component for any remaining loyal customers and, in turn, sues Walson's Widgets for loss in profit and the additional replacement costs arising from a design or manufacturing defect.
Sugar Mama provides automated sugar dispensers for a candy manufacturer. During installation, the dispensers are incorrectly calibrated to tablespoons instead of teaspoons, and the candy manufacturer eventually discovers their candy contains too much sugar. As a result, the customer suffers a reduced profit margin (due to added sugar in the recipe), additional expenses to recalibrate the dispensers to teaspoons, and lost revenue due to business interruption. The candy manufacturer sues Sugar Mama for financial damages arising out of improper installation and calibration.
What does manufacturers E&O insurance cover?
As mentioned above, CGL and product recall insurance only cover claims arising out of bodily injury and property damage that the manufactured product causes to others.
But this is only part of the risk some manufacturers face.
What if you are responsible for causing financial harm to your client? You will most likely have to pay for the damages, but the commercial general liability policy will not help in either the defense costs or the settlement/judgement against you.
Here are a couple coverages provided in the manufacturers E&O policy:
If an error in your manufacturing operations leads to a faulty product, and that product causes financial harm to your customer, this is a covered claim under the manufacturers E&O insurance policy.
If defective material is used to manufacture your product, and as a result financially harms your customer, it would be covered under the manufacturers E&O insurance policy.
Errors In Professional Services Provided
This coverage is provided in both the generic E&O policy and the manufacturers E&O policy. It covers errors in the professional services that manufacturers sometimes provide to their customers, such as design, development, selling, value-added services, advice, consultancy, specification, formulas, labeling, packing, instructions, or warnings.
Each manufacturing business is different in the extra services that they provide to their customers. If you do provide any of these services, any errors associated with them would be covered under most manufacturing E&O policies.
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What does manufacturers E&O insurance not cover?
Although a great policy for manufacturing companies to have, the manufacturers E&O policy is only designed to work alongside the CGL policy and the product recall insurance policy. For this reason, we suggest all manufacturers have at least a CGL policy before considering manufacturers E&O.
It specifically fills in the gaps provided in those standardized coverages to give manufacturing companies additional insurance coverages.
Here is what the policy doesn't cover:
Bodily Injury & Property Damage
The manufacturers E&O policy does not cover any damages resulting from bodily injury and property damage that are caused to third parties. This is because your products liability coverage on your CGL policy should cover these incidents.
Financial harm resulting from delays in getting your product to customers in a specified timeframe is generally not covered under the manufacturers E&O policy. Nor is promising deadlines that you cannot meet, even if there is a contractual penalty.
Designing and manufacturing products that infringe on the patents of others are not covered under the manufacturers E&O insurance policy. There are certain patent infringement policies that can help you address this risk if patent infringement in particular is a significant concern for your business.
What manufacturers need E&O coverage?
The key to determining if your business needs to purchase a manufacturers errors and omissions policy is whether an error in your product or services could put your customer in a position to lose income or have significant expenses that you are liable for.
Here are three examples of manufacturers who typically need manufacturers E&O:
Component Part Manufacturers
If you make a component part for another product, an error in the manufacturing of your specific part could result in the loss of income for the final manufacturer through various delays, recalls, and lost contracts.
Manufacturers With Value-Added Services
The more professional services that you provide to your customer, retailer, and distributors, the more risks you have for a manufacturers E&O claim. If your business model relies heavily on these services, you should consider purchasing a manufacturers E&O insurance policy.
Manufacturers that make commercial or industrial products should at least discuss getting this coverage with their insurance broker. Manufacturing complex products that could result in a loss of income for the customer is a risk this policy can address.
Additional coverages to consider when purchasing manufacturers E&O
Although manufacturers E&O is meant to work alongside the commercial general liability policy, it is also designed to work together with other policies to cover the risks that manufacturers face. The additional coverages are warranty and product recall insurance.
Here is how they work together:
Source: AmWins Group, Inc
This coverage pays for costs associated with pulling products out of the marketplace due to the product causing bodily injury and property damage to others.
This coverage pays for your losses during a product recall event that didn't cause any property damage or bodily injury. An example of this is a component part manufacturer advertising that their product has a five-year lifespan when their parts, unfortunately, fail within two years. There is no lawsuit; the client just wants you replace the product with one that meets the advertised lifespan.
Although not every manufacturing company needs a manufacturers E&O insurance policy, many do. In fact, for some manufacturers, this is one of the primary risks in their business operations.
If you are concerned but unsure if you need this insurance policy, let us know. We will listen to you and learn about your business and what you manufacture, and help you come up with a plan to address only the risks that impact you.