Bringing Manufacturing E&O into the Limelight
How Manufacturing Errors & Omissions Differs from General Liability Insurance
Manufacturing Errors & Omissions (E&O) is an insurance coverage that doesn’t necessarily receive the limelight it deserves. Typically, a manufacturer focuses on its General Liability insurance policy which includes the products/completed operations coverage necessary to do business with others. General Liability, however, is for coverage when there’s “bodily injury” or “property damage” sustained by a third party.
But what if you’re manufacturing a product that ultimately becomes part of another product and, for some reason, there’s a flaw in your product rendering it obsolete to the end user (i.e. your customer), and it no longer can be part of their end product? If you’re negligent in designing or manufacturing components or products, there’s resulting financial harm to your customer as their production has now been adversely affected. There’s no recourse, however, under your General Liability policy because “bodily injury” or “property damage” was not sustained by your customer.
An argument might be made your flawed product could have caused “property damage” to their product, however, a standard General Liability policy contains exclusions for faulty workmanship, materials or products which would preclude coverage for this claim. For a better understanding of how Manufacturing E&O would respond on your behalf, here are two different claim scenarios:
1. Just Flour, Inc. provides automated flour dispensers for a bread manufacturer named King Bakery, LLC. During installation, the dispensers were incorrectly calibrated to kilograms instead of pounds, and the bread manufacturer discovers their bread contains too much flour. As a result, King Bakery suffers a reduced profit margin (e.g. too much flour being used in the recipe), additional expenses to recalibrate the dispensers, and lost revenue due to business interruption while the machines are being recalibrated. The bread manufacturer sues Just Flour for the financial damages arising out of improper installation and calibration.
2. ABC Machine Shop, Inc. manufactures parts for transmissions. One of their molds wasn’t designed to spec and, therefore, their customer, XYZ Trans, was unable to utilize the parts that were manufactured by ABC. Because XYZ was unable to meet the deadlines imposed upon them for an order of their transmissions, XYZ sued ABC for lost revenue and expenses.
As you can see, if your customer’s bottom line can be impacted by the product you’re manufacturing for them, then Manufacturing E&O should be considered as part of your overall insurance program. Additionally, a review of your customer contracts should be performed to see if you’re contractually required to carry Manufacturing E&O coverage.
Please contact an ‘A’ Team member for questions as it relates to this coverage.
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