The Truth about Products Liability Insurance Coverage
Warshauer, Irene C., Plunkett, Catherine, Risk Management
It seems like a simple idea. When a manufacturer purchases products liability insurance, it does so with the intention of transferring the uncertainty of a possible future loss to its insurance company in exchange for a stated, fixed sum, or annual premium. The insurance is supposed to afford protection against claims that the manufactured product is defective due to design or manufacture, or that the manufacturer failed to issue proper instructions or warnings to prevent foreseeable injury. Yet this simple scenario has given birth to a complex litigation monster that continues to overwhelm courtrooms nationwide. Most products liability claims are covered for defense and indemnity under comprehensive general liability (CGL) policies. The amount of coverage for multiple claims depends upon the trigger of coverage, number of occurrences and interpretation of policy exclusions. Currently, there are well over 120,000 products liability cases pending nationwide against manufacturers alleging personal injury or property damage due to exposure to, or use of, such diverse products as tobacco, breast implants, heart valves, asbestos, silica dust, lead paint, pesticides, prescription drugs, radiation and urea-formaldehyde insulation.
The two most important common-law causes of action for recovery in a products liability suit are strict liability and negligence. Strict liability means that the manufacturer is held responsible for injury directly attributable to its product. Strict liability is premised on the assumption that the manufacturer has a greater understanding of the inherent risks associated with the use of its product and includes design defect, manufacturing defect, and defect due to a failure to issue a proper warning.
Negligence is based upon the manufacturer's failure to act as a "reasonable man" to prevent a foreseeable injury. Suits asserting this cause of action will generally focus upon the manufacturer's failure to warn the user of the risks of using the product (which ironically are often discovered after the product has been marketed) or the manufacturer's failure to otherwise take reasonable action to produce a safe product, including the failure to correct discovered dangers. Both strict liability and negligence are causes of action used to establish liability for plaintiffs' injuries.
Whether or not these claims will be covered under a products liability policy will hinge upon the terms of the insurance policy purchased by the manufacturers of these products and the interpretation the courts place on these specific terms. Most insurance policies are standard form policies that contain the same basic provisions. Virtually all liability insurance policyholders are automatically covered for products liability when they purchase the standard form CGL policy. Coverages "A" and "B" will generally provide insurance for liability due to personal injury or property damage resulting from products manufactured, sold, handled or distributed by the policyholder.
For 20 years, the 1966 standard form CGL policy was the foundation of insurance coverage for products liability. The standard policy language governing the insurance companies obligation to defend or indemnify on a product-related claim provides: "The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of (A) bodily injury or (B) property damage, to which this insurance applies, caused by an occurrence." Furthermore, "the company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury or property damage, even if any of the allegations of the suit are groundless, false or fraudulent ...." Occurrence is defined in the 1966 policy as "an accident ... which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured."
However in 1986, the standard form CGL policy underwent revisions to include new term definitions and exclusions, and to rephrase some previous policy language. …