Drop Shipping and Quality Control

What are the importer’s responsibilities?

The term drop shipping often has two very different meanings to the business owner and the insurance underwriters.

Most business owners will tell you drop shipping means they are not responsible for the products. Many business owners are quick to point out that they only import the products, but never touch them, shifting the responsibility for product safety to others, such as the overseas manufacturer.  We have seen this logic used products ranging from oil pipes that go on ocean floors to inexpensive costume jewelry.

To the insurance underwriter, drop shipping often means a lack of quality control by the importing business. To their mind, quality control is coming from a manufacturer that often does not have any assets in the U.S. or an insurance policy that will respond to claims brought in U.S. courtrooms.  In other words, it is almost impossible to hold the overseas manufacturer responsible for injuries that occur in U.S. territories.

Drop shipping from a legal perspective

In the eyes of the law, the importer is considered the manufacturer.  The importer has a duty of reasonable care and is in a better position than the consumer to prevent the circulation of defective products.  For an importer, reasonable care is considered to be an effective method for safety inspection of products coming into the U.S.

Drop shipping from the insurance carrier’s perspective

The insurance carriers will rate the importer as a manufacturer unless the overseas manufacturer can prove they own an insurance policy that:

• names the importer as Additional Insured, and
• will respond to product liability claims brought in U.S. courtrooms.

More often than not, overseas manufacturers’ insurance policies define coverage as anywhere in the world except the U.S. and its territories.

Conclusion

Virtual businesses are flourishing.  More U.S. businesses are importing goods into the U.S. direct to third-party warehouses and ship directly to the consumer or retail or wholesale business.  Quality control has become such a large issue that the third-party warehouse owners are requiring proof of Product Liability Insurance from the business owners using their facilities.  The third-party warehouse owners are fearful of getting shotgunned into a Product Liability lawsuit because the business owner did not have Product Liability Insurance.