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Generally, the day-to-day life of a manufacturers’ rep is not filled with product liability risks or other situations where indemnification (reimbursement) of claims are a concern. However, based on the authors’ experiences with both claims management and defending manufacturers’ reps, we thought it important to identify the likely risk management environment within which most reps function. Then a set of strategies for minimizing risk will be described.

Framework

Manufacturers’ reps are generally solicitors, drummers and expediters. They do not take title or responsibility for the products they sell. Instead, a manufacturer has designed and engineered the product and, as such, the manufacturer is typically the first line of defense if product liability claims arise.

However, manufacturers’ reps can occasionally be involved in the engineering and specification of product and component solutions. If something goes wrong in the process, lawyers tend to sue all parties involved, even if only tangentially, to maximize the chances for recovery on product liability claims.

Below is a set of risk management strategies to help manage and minimize exposure for reps.

Formal Agreement With Principal

The formal written agreement with manufacturers regarding the rep’s services can often be the best way to protect reps against indemnification claims. Generally in the agreement, the manufacturer attempts to have the rep indemnify the manufacturer for the rep’s bad acts or negligence. If so, out of a spirit of mutuality, a rep can ask the manufacturer to indemnify the rep for the manufacturer’s bad acts or negligence. Frequently, each side negotiates required insurance coverage to be provided by each of them for the benefit of each other, and potentially the customer.

Named Insured

We also recommend that reps request to be listed as a named insured on the manufacturer’s insurance policies. Insurance providers are frequently willing to add reps as an additional named insured for little to no cost to the policyholder because it provides them more control over any claims that may be made. Whether the rep is working with domestic or foreign suppliers, be mindful to confirm the manufacturer has insurance coverage in the United States, or can be persuaded to do so, as it is a benefit to their customers.

Protection Through Manufacturers’ Reps and Warranties

Reps should confirm that manufacturers keep their representations and warranties current with adequate coverage protecting the rep. Oftentimes, the representations and warranties will pass through and cover other entities in the supply chain. Reps do not need to wait for contract renewals or force a termination to suggest an amendment to the parties’ agreement. If the manufacturer does not have representations and warranties, now may be a good time to request the principal to add these additional protections.

Signature Lines

It is important to put the world on notice that your agency is a limited liability company or other incorporated entity. Frequently, reps are asked to sign contracts and their corporate designation (LLC or Inc.) should always appear next to their officer title to minimize the chances of personal claims.

For corporations, the officer designation should be used such as “President” or “Vice President” when signing a contract. For limited liability companies (LLC’s), having the “Member” or “Managing Member” be the signer would be a good choice depending on the terms of the LLC’s Operating Agreement.

Limit Assets

Another effective strategy can be to limit the assets in the agency at any one time. Commissions typically are paid monthly and can be paid out to the employees and sales agents monthly as well. Often, when a plaintiff’s attorney finds that the value and assets held by the agency are low, they will drop the agency (or distributor) as a defendant because the likelihood of significant monetary recovery is slim. Therefore, keeping just enough resources for the short-term cash flow management of the agency can also be an attractive strategy.

Structure

With the proliferation of limited liability companies, corporate structure for the agency can help mitigate risks. It is common for manufacturers to isolate riskier activities in a separate LLC subsidiary. Rep agencies can take similar steps. The most common example would be for a rep agency to engage in buy-sell or distribution activities through a separate LLC. The separate LLC could be a stand-alone entity or a subsidiary owned by the agency, depending on the circumstances.

Conclusion

For the near future, there may well be an uptick in claims by customers against manufacturers resulting in indemnification claims implicating reps. Whether reps work under a handshake agreement or a written contract, the above recommendations can help limit reps’ legal exposure and protect against the risks of product liability claims.

MANA welcomes your comments on this article. Write to us at [email protected].