Recommendations made by a manufacturer’s rep are an issue that arises all too often in the world of reps. It is important to set out a framework before describing how to best manage the issues associated with recommendations by reps.
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Typical Situation
Successful manufacturers’ reps are frequently degreed professionals with many years of hands-on experience in their respective industries. They can be a wealth of knowledge when it comes to practical applications and performance criteria for products. Their knowledge and information can be invaluable to principals and customers, and is often key to closing a sale.
Rep Theory and Practice
Most reps should project themselves as drummers, solicitors and facilitators. They are in the business of providing product information and other support. In theory, reps are never in the chain of title and do not make product recommendations. The principal, not the rep, has the final say in accepting orders made by the customer.
In practice, reps recommend processes and make suggestions. Communication by e-mail provides easily gathered proof of these activities. One good practice is to assess and present alternatives but have the customer or principal make the final choice. The decision should be presented as theirs to make, based on the information provided, and whatever additional knowledge, information and experience the customer or principal may have.
The rep has a duty of loyalty to the principal as an agent for the principal. Reps generally have little or no duties to customers other than responsibility for negligent or intentional bad acts.
Insurance Policy
It is good practice to ask to be an “Additional Insured” on the principal’s general liability insurance, generally at no additional cost. The principal’s insurance carrier may prefer this because now the carrier has a friendly rep included within the insurance coverage, rather than an unfriendly rep not so included.
Product Recommendations
Reps should be careful not to make product recommendation representations without understanding the related risks and implications. Reps should always refer back to the manufacturer and their engineers for confirmation of product performance characteristics. It is the principal’s responsibility to properly qualify both the customer and the application of the product. It is also helpful from a risk management perspective to have the customer’s technical staff and engineers weigh in on the evaluation process.
There have been a growing number of situations where reps have been sued for making suggestions with respect to a product application that did not pan out. A recent example involves a product that failed in the field after the rep allegedly recommended that the new product would meet the underlying customer’s needs. Assigning liability in such instances is a factually intensive process. Millions of dollars of liabilities can be determined by a few unfortunate e-mails or voice mail messages.
Types of coverage available to address such liabilities include Errors and Omissions (E&O) and Umbrella coverage.
E & O Coverage
E & O Insurance, also commonly known as Professional Liability insurance, can help protect the manufacturers’ rep for the failure of a product to perform as expected. In today’s business world, companies providing products or services to third parties need protection beyond their general liability policies. Typically, standard general liability coverage responds only to claims or lawsuits made by third parties for bodily or physical injury to, or loss of use of, tangible property. However, due to the very common “impaired property exclusion,” most general liability policies do not apply to claims when the product fails to perform without physical damage accompanying that failure.
In addition, most general liability policies do not respond to claims for injury to intangible property, such as damage to data. Companies need E&O insurance to ensure their assets are adequately protected. Due to an increase in professional standards, many manufacturers are now seen as holding themselves as “experts” and therefore must defend claims that allege negligence. Bottom line, Errors & Omissions insurance is designed to help protect your company against claims for financial injury that allege your product, or the one you sold, failed or there was a failure to perform services.
Umbrella Coverage
Oftentimes, commercial liability policies are issued with standard limits of $1 million per occurrence and $2 million annual aggregate. In today’s litigious environment, it is widely accepted that these standard limits are simply too low to adequately protect a business. By adding an Umbrella (or Excess) liability policy, additional layers of protection can be added and as a result, expanding the depth and level of coverage. However, it should be noted that umbrella liability insurance does not extend the coverage limits on an E&O or professional liability policy (as discussed above). In the event that you wish to increase the limits of your E&O policy, you must talk to your broker and/or underwriter to increase the limits specific to that policy.
Conclusion
Reps can, and should, take care to respect their position in the marketplace. They can, and do, have valuable contacts and product information. Manufacturers are in the best position and typically are interested in handling and maintaining responsibility for product applicability and recommendations. Common sense and careful choice of wording, especially in e-mails, cannot be overlooked. Finally, the appropriate insurance should be explored in all instances.
