An Iowa agency insured a plumbing and heating business with a CGL policy on a standard CG 00 01 occurrence form for many years before it closed in summer 2014. In spring 2015, a minor fire resulted from a furnace installation that occurred while the policy was in force and the company was still in business.
The agency submitted a claim, but the insurance company denied coverage under the CGL because the fire occurred after policy cancellation—and neither the occurrence nor claims-made CGL policies covers occurrences that result in bodily injury or property damage after expiration of the policy.
The above scenario—a real-life case outlined in a submission to the Big “I” Virtual University Ask an Expert service—highlights one of the most important aspects of insuring commercial clients’ product liability today: coverage for discontinued products and operations.
“What is often not clearly understood is it’s the policy that’s in effect when the bodily injury or property damage takes place that is triggered, and not the policy in place when the product is made or sold or purchased,” explains Craig Stanovich, principal consultant at Austin & Stanovich Risk Managers, LLC in Holden, Massachusetts. “Products you have previously made or sold that are still in the stream of commerce can still cause injury or damage. Unless you keep a CGL policy in place that still includes product liability coverage when the injury or damage actually occurs, you won’t have any coverage.”
Consider a client who wants to retire and close the doors of their business. “Typically if I retire, I say, ‘Cancel my insurance policies,’” Stanovich points out. “But if a product causes injury two years after I cancel my insurance to someone and it’s caused by a product I sold a year before I retired, I could still have liability for that injury. Clients typically don’t understand this part of product liability insurance.”
If they want discontinued product coverage, most clients will not have to pay as much in premium as they did when they were actively creating and selling the product, says Jessalynn Suda, associate managing director at Burns & Wilcox.
“As a very generalized statement, you can look at your last three to five years of production, take an average of that, and a discontinued products policy is going to be around 75% of what you would be paying if you were still in business for those last few years,” depending on the size of the company as well as the quantity and type of product in question, Suda explains.
But how long should you encourage your clients to continue paying for product liability coverage? A common misconception is that the answer lies in the statute of limitations. “The statute of limitations on a product normally begins to run when the injury itself actually occurs,” Stanovich explains. “That means if you’re injured on a product today, you have a certain amount of time to bring a claim in the courts, otherwise your cause of action will be terminated.”
Don’t confuse the statute of limitations with the statute of repose. “That’s probably the first thing that comes to people’s minds, even the buyer—they say, ‘The statute of limitations is only three years, so I don’t need coverage for more than three years,’” Stanovich says.
In reality, the statute of repose “may or may not affect your liability,” Stanovich explains. “Some states don’t have a statute of repose for products, or if they do, it’s quite long—it could be 20 years.”
Ultimately, the end date of the policy shouldn’t be your call. “When it’s done correctly, the client’s attorney is kind of driving the bus,” Stanovich says. “They know how the law works, what the potential liabilities are, what the contract of sales contemplates, what’s being bought, if there’s a statute of repose, how long it is, when does this begin—the attorney should do the legal analysis and then they should bring the results of that analysis to the insurance agent.”
Only then should you as an insurance agent say, “OK, in this case, based upon your attorney’s analysis of your potential liability, here’s the type of insurance you need,” Stanovich notes.
“If you say, ‘This is the coverage you need,’ and it turns out it’s not the coverage they need and your guidance was based on a flawed analysis of the legal exposures, you could easily end up having suggested the wrong insurance,” Stanovich says. “If you want to help someone who’s in this situation, what they need to do is be talk to their attorney and have the attorney talk to the agent about the legal exposures that exist.”
The issue gets even more complicated if the business in question is involved in a merger or acquisition. “Sometimes clients have to get discontinued product coverage if they’ve been purchased and the new company says, ‘We’re not going to be liable for whatever you were doing before,’” says Diane McDonnell, senior underwriter, commercial insurance at Burns & Wilcox.
“Who has liability is different than who has insurance,” Stanovich cautions. “A lot of people simply presume once they sell their business, they have no liability for future claims. That may or may not be true based on the terms of the sale. Agents and brokers really have to be careful with providing insurance advice on this matter because the subtleties of the types of sale, who’s responsible for what, whether it’s an asset sale, a stock sale—you have to be cognizant of that, and agents and brokers frankly aren’t attorneys.”
By the same token, “attorneys don’t understand insurance, either,” Stanovich points out. “I’ve met more than one attorney who says, ‘What good is product liability coverage if it doesn’t cover you forever?’ This is a profound misunderstanding of how the policy works, so if they’re giving that advice to their customer, that’s not good either.”
That’s why it’s so important for agents to work with their clients’ legal counsel on product liability decisions. “To put the agent in the position to try to figure out the legal exposures that exist in an M&A is, in my view, not particularly fair, and is not the best course of action,” Stanovich says.
Jacquelyn Connelly is IA senior editor.