Envision a scenario where your company is awarded a large contract for a customer. The contract requires your company to create a part for the customer on a very tight timeline. During the fabrication and production process, an unknown error occurred and the part is created with the incorrect specifications. Due to this oversight, your customer misses their shipping deadline and ultimately files a lawsuit against your company for the financial loss.
Manufacturing companies in this situation can have unexpected out-of-pocket costs and financial loss without the appropriate Errors and Omissions (E&O) coverage. Most general liability or product liability policies specifically exclude coverage for professional services, negligence, material defects and financial losses. As a result, financial losses due to design errors or manufacturing defects are not covered under those policies".
“Most general liability policies contain ‘damage to impaired property’ and ‘property not physically injured’ exclusions,” says Steve Barbal, managing director for professional liability at The Hartford. “This means that unless the error results in bodily injury or damage to property other than the insured’s own work, the policy will not cover the loss.”
As the industry continues to evolve, there are a variety of reasons manufacturers are at an increased risk for financial loss, including:
- Complexity of Products: As the production of products becomes more intricate, the chances of errors in design, manufacturing or instructions increase.
- Custom/Bespoke Products: Manufacturers are many times tasked with designing/fabricating custom (one-of-a kind) products or equipment for their clients – which may pose design challenges and increases the potential for the product to not perform per the client’s expectations.
- Global Supply Chains: With parts and components coming from different places in the world, the potential for errors increases and it becomes harder to control the quality of the final product.
- Regulatory Changes: New regulations can introduce new requirements that manufacturers might overlook or misunderstand.
- Increased Litigation: Society has become more litigious, meaning businesses are more likely to sue when something goes wrong with their products.
Manufacturing E&O
E&O insurance is a type of professional liability insurance that helps protect businesses from being sued for mistakes or oversights that cause financial harm to another person or company.
E&O coverage provides protection from:
- The failure of manufactured products to perform the intended function or serve the intended purpose
- Defects in manufactured products
- Manufactured products that fail to meet applicable legal or industry standards regarding quality, safety or fitness for purpose
- Failure to provide warnings or instructions in connection with any manufactured products
Barbal’s team has noticed an increase in manufacturers not carrying the right insurance. “We are seeing a trend where manufacturers don’t think they need errors and omissions coverage,” he says. “This could be due to the misunderstanding that general liability or product liability coverage is enough. Additionally, we are seeing that there isn’t a vast understanding of how E&O differs from general and product liability, thus companies are not pursuing it. They think it’s duplicative.”
Barbal says that once E&O insurance is properly explained, most manufacturers see the benefit and pursue the additional coverage.
E&O in Action
E&O coverage could protect you in a variety of ways. For example, the manufacturer below would have been held liable for the error in product if they didn’t have an E&O policy.
The Scenario
A manufacturing company creates a synthetic polymer used for protective coating on mining equipment. The mining company that contracted with the manufacturer alleged that the polymer was produced improperly and did not protect the component parts in the equipment. The mining company needed to take the equipment offline for extensive repairs, resulting in project delays and the loss of two customer contracts. As a result, the mining company demanded that the manufacturer pay the contractual penalties owed to its customers for the delay and the costs incurred to repair the equipment. The company also sought compensation for the lost income due to the contract termination.
El resultado
The insurer appointed a defense counsel and various experts to assist the manufacturer with the defense and investigation of the claim. A defect was identified in the production run of the polymer used on the mining equipment. As a result, the insurer negotiated a settlement with the mining company with the consent of the manufacturer.
The Impact of Not Having Errors and Omissions Coverage for Manufacturers
Without sufficient coverage, manufacturers face a range of risks that can lead to loss and disruption, such as:
- Financial Strain: Without E&O coverage, businesses may face significant financial losses from regulatory fines and penalties. They might also have to deal with the threat of lawsuits that may carry substantial legal fees, settlement costs or judgments.
- Reputational Damage: A lack of coverage can hurt a company's reputation and cause a loss of customer satisfaction as it shows they are not prepared to handle potential errors professionally. Reputational damage can also affect a company’s stock performance by causing a loss of shareholder value. This loss also impacts financial performance.
- Operational Disruptions: Financial losses from claims can disrupt business operations, potentially leading to layoffs, reduced production or even bankruptcy. Impacts to employee satisfaction may also lead to high turnover or loss of key talent.
It’s important to understand and identify the risks that can create potential losses for your company. Work with an agent or broker to identify these unique gaps for your business and create a coverage plan that protects against all risks.
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Ciertas coberturas varían según el estado y es posible que no estén disponibles para todas las empresas. All Hartford coverages and services described on this page may be offered by one or more of the property and casualty insurance company subsidiaries of The Hartford Financial Services Group, Inc. listed in the Legal Notice.
The Hartford Financial Services Group, Inc., (NYSE: HIG) operates through its subsidiaries under the brand name, The Hartford, and is headquartered in Hartford, CT. For additional details, please read The Hartford’s Legal Notice.
