Why Manufacturers Refuse to Name Vendors as Additional Insured

A troubling dilemma

More and more manufacturers refuse to name their clients as Additional Insured on their Product Liability insurance policies. Or, they go to the other extreme and require being named Additional Insured on their clients’ policies.

This is extraordinary. In the past manufacturers used additional insured vendors endorsements to entice retailers and wholesalers to sell their products.  This reassured retailers and wholesalers of protection if they were shotgunned into a lawsuit for a product’s manufacturing defect.

What’s behind this trend?

I’m of the opinion that this reversal by the manufacturers is due to two factors.

1. It’s possible manufacturers use high self-insured retentions and loss-sensitive rating plans to save money on insurance premiums. These methods of reducing premium costs means manufacturers are likely to be required to pay out of pocket for a large portion of the defense costs. By eliminating clients as Additional Insureds, the defense costs would have to be covered by their client’s Product Liability policy. That’s a huge savings for the manufacturer.
2. Manufacturers are not always the designer of the products they manufacture. The three legal theories of recovery in a Product Liability lawsuit are manufacturer defect, design defect and instruction and warning defect.  When a manufacturer names a client as Additional Insured, the manufacturer’s policy is primary to the clients’ policies. The manufacturer’s policy would have to respond to all Product Liability lawsuits, even for design or instruction and warning defect.  Manufacturers contracting to build products designed by others aren’t responsible for the design or instructions and warnings of the products.  And they don’t think it’s their responsibility to cover such claims on a primary basis.

This type of manufacturer is often called a third-party manufacturer. This is because they simply build products based on the specifications provided to them by other parties.

The manufacturer’s argument regarding additional insured

Since third-party manufacturers aren’t responsible for the design and warning labels or instructions, many ask their clients and vendors to name them as Additional Insured. They justify this request saying they make products to the specifications of their clients. Therefore, they should be covered on the client’s Product Liability policy. This is a very convincing argument and not without merit.

A possible resolution to the problem

This is an odd dilemma.There is no overt Indemnification agreement or contract that declares the third-party manufacturer responsible only for manufacturing defects. Or that states the  designer of the product, who is often also the seller, is responsible for design and instructions and warning defect claims. If you’re aware of such an indemnification agreement, please email or fax me a copy.  We would love to be able to recommend this to our clients as a simple way of resolving this troubling issue.