Reprinted from April 2017, Agency Sales magazine

My client, an independent sales representative, was named as a defendant in a product liability lawsuit. Admittedly, that’s not the norm, but this article should serve as a cautionary tale to consider issues of product liability, indemnity and insurance when negotiating contracts with your principals.

My client’s rep firm represents manufacturers of commercial office and restaurant furniture. Not particularly dangerous stuff, right?

Her firm solicited an order from a restaurant for the sale of bistro chairs and tables. Five years after the restaurant received the furniture, a restaurant patron took a seat on a bistro chair which overturned, severely injuring the woman.

The woman sued the restaurant, the chair manufacturer and my client, the manufacturers’ sales representative.

The manufacturer refused the rep’s request to indemnify (hold harmless) her firm for the costs of the lawsuit and any resulting settlement or judgment. The manufacturer told my client that her firm was not covered under their product’s liability insurance and therefore, her company was “on your own.”

Ultimately, and prior to incurring substantial legal fees and discovery costs, my client settled her portion of the lawsuit by paying the plaintiff $1,000. She was able to extricate herself from a situation that was not terribly complex at relatively low cost. It wasn’t a matter of right or wrong. It was an economic decision and the most expedient resolution.

You Might Ask

• How can the rep be responsible if she did not sell the furniture to the restaurant much less have anything to do with its design or manufacture?
• Isn’t the manufacturer legally obligated to protect the rep since it was their product that caused the injury?
• Wasn’t the woman’s claim barred since it was five years after the sale and the product warranty was one year?

The answers to these questions revolve around issues of product liability, indemnity and insurance.

Product Liability

Product liability is the area of law in which manufacturers, distributors, and even independent sales representatives who make products available to the public are held responsible for the injuries, death, or property damage caused due to defects in the products.

There are two theories upon which a product liability claim is brought:

• Strict Liability — The basis for this theory is that each member of the distribution chain benefits from the sale of the product, so each member should share in the liability when there is a product defect, regardless of fault. In other words, even though the independent sales rep had no participation in the design and manufacture of the product, it can be named in a product liability lawsuit simply because it participated in bringing the product into the “stream of commerce.”
• Negligence — The basis for this theory is that the independent sales representative is negligent. Plaintiffs’ attorneys can bring a negligence claim against the independent sales representative for providing incorrect product advice or performing faulty installation.

Warranty Is Different From Product Liability

A warranty is a promise from the seller to the buyer about the product, such as the product’s capabilities, functionality or quality. Warranty claims require “privity” between buyer and seller (in other words, the parties must deal directly with each other). Damages associated with warranty claims involve costs of de-installation, freight, recall, rework, re-installation, and other economic losses.

By contrast: Product liability damages involve injuries or death to persons and property damage. They do not require privity and they cannot be limited or disclaimed as can warranties.

In a warranty claim, the time period by which the injured party can sue is different from that of a product liability claim. A warranty claim must be brought within the time stated in the contract (e.g., one year from delivery of the product). A product liability claim must be brought within a period of time after occurrence of the injury. That time period could be years after the expiration of the product warranty.

Indemnity

Simply put, indemnity means one person pays for damage to another caused by a specified event or loss. If a product liability lawsuit is brought against the rep, it seems “only fair” that the manufacturer should pay for all the rep’s costs associated with that lawsuit. Indeed, the rep can make a legal argument that it should be protected under the theory of “implied indemnity” which does not require a written indemnity clause.

However, shifting final responsibility to the manufacturer isn’t always a straightforward process and, like all legal claims, can be expensive.

Therefore, it is important to include an indemnity provision in the contract with the manufacturer. This clause provides certainty that the rep’s losses incurred as a result of a product liability claim will be shifted to the manufacturer.

Insurance

Indemnify means to hold harmless and pay. Your contract may have a well-written indemnity clause. However, if the manufacturer doesn’t have the appropriate types and levels of insurance, or if their insurance does not list your firm as an additional insured, the indemnity clause may have little practical value.

The key to an effective indemnity clause is to make sure that your contract also contains an insurance clause which requires that:

• The manufacturer maintain a minimum type and dollar coverage of insurance.
• And your firm be named as an additional insured to the manufacturer’s policy.

The additional insured requirement does not add costs to the manufacturer’s premiums.

Finally

To protect yourself against product liability claims, make sure you consider these issues before signing a contract with your principal and consult with a knowledgeable attorney.

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Recommendations

1. Indemnity: Include an indemnity clause in your agreement in which your principal holds you harmless against product liability claims.
   • The clause should “survive” termination of the contract since a lawsuit could be filed after contract termination.
2. Insurance: Understand your manufacturer’s products’ liability insurance coverage. Request that the manufacturer name your agency as an additional insured on its policy.
   • Require certificates of insurance and notice from the insurance company if coverage is changed or cancelled.
3. Technical Advice and Installation:
   • Avoid product claims that exceed/differ from the manufacturers’ published data.
   • If your agency does installation, ensure your people are well trained and familiar with the safe and proper installation of the product.
4. Products’ Liability Insurance: Inquire into obtaining your own products’ liability insurance especially if your firm:
   • Represents foreign manufacturers’ products; or
   • Performs installation.
   • You may ultimately decide to “self insure” if the PL insurance premiums are prohibitive, but that would be a reasoned business decision based on a cost/risk analysis.
5. Incorporate: Incorporate your business or form an LLC to protect your personal assets.

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