Do you need completed operations liability insurance?
Consider the following examples:
• Six months after a roofing contractor finishes work at a bank, melting snow enters through the roof and ruins several network servers.
• A railing installed by a metalworker collapses as a man leans against it. The man falls ten feet and suffers severe back injuries.
• An overhead door malfunctions and closes on top of a new pickup truck. The owner seeks recovery from the contractor who installed the door.
Who is responsible?
In each example the contractor would still be responsible. For the contractor, loss prevention and proper commercial insurance coverage are just as important after the job is done as they are while work is still in progress.
Consider completed operations insurance
In cases such as these, completed operations insurance covers the liability incurred by a contractor for property damage or injuries that may happen to a third party once contracted operations have ceased or been abandoned. Even though the operations are deemed to be “completed” by the contractor, the loss or injury is deemed to be as a result of those operations.
Completed operations insurance contracts are applied to construction products or to the manufacturing of consumer goods and medicines.
When are the operations deemed to be complete?
The insurance company considers the contractor’s work to be complete when one of the following occurs:
• All the work required by the contract is complete
• All the work to be done at a particular job site is complete (if the contract requires work at multiple job sites)
• When the contractor’s work is put to its intended use by someone other than another contractor working on the same job site.
However, the possibility of a loss that could drag a contractor into court does not end when the project is complete. The contractor’s work stays behind and can be the source of future serious liability claims.
What will completed operations insurance provide?
Insurance will provide the contractor with legal defense and pay for any settlement or judgment that results from accidents arising out of completed work. In particular, insurance will pay for the restoration, repair or replacement of any property made necessary because the contractor performed his work on it incorrectly.
A completed operations insurance policy can protect a contractor from losing a great deal of money in a lawsuit, or even in a class action suit. The scope of coverage can often include provisions that address matters such as defects in the materials used to build the edifice. The policy provisions may also address the malfunction of the electrical or some other internal system that results in damage to the building or to an occupant of that building. Some policies will even cover the failure of the contractor to provide fair warning to owners of how to maintain and manage the building and its systems properly.
What is the purpose of completed operations insurance?
The underlying purpose of completed operations insurance is to ensure that the contractor is able to settle the claims without undermining the financial stability of his or her business. At the same time, the insurance coverage also makes it possible for any damages or injuries that result from the operations conducted by the contractor to be compensated at an equitable level. By carrying this type of indemnity insurance, any punitive damages assessed by a court may be settled, and the contractor can continue to operate the business. While completed operations insurance is expensive, one claim is typically enough to justify the expense.
By its nature, construction is dangerous work, and that danger can continue to some extent long after the contractor has moved onto the next job. It is vital that contractors check with their independent insurance agent to have appropriate completed operations insurance coverage in place to protect them if something goes wrong.
What about liability that results from the use of products?
Products liability protects manufacturers, wholesalers and distributors against exposure to lawsuits by people who may have been injured or suffered other losses because of their product. It provides coverage for the policyholder against claims stemming from products sold, manufactured or distributed.
Product liability insurance protects the business from claims related to the manufacture or sale of products, food, medicines or other goods to the public. It covers the manufacturer’s or seller’s liability for losses or injuries to a buyer, user or bystander caused by a defect or malfunction of the product, and, in some instances, a defective design or a failure to warn. When it is part of a commercial general liability policy, the coverage is sometimes called products-completed operations insurance.
To understand the need for this coverage it is critical to understand the potential liability.
There are generally three types of products “claims” a company may face:
Manufacturing or Production Flaws– A claim that some part of the production process created an unreasonably unsafe defect in the resulting product. Recent claims against Chinese manufacturers regarding the presence of dangerous chemicals in their products are an example of this type of claim.
Design Defect– A claim that the design of the product is inherently unsafe. The most memorable example is the series of Pinto car cases against Ford in the 1970’s.
Defective Warnings or Instructions– The claim that the product was not properly labeled or had insufficient warnings for the consumer to understand the risk. The McDonald’s “coffee case” is an example.
The damages awarded in these claims include medical costs, compensatory damages, economic damages, and, in some instances, attorneys’ fees, costs and punitive damages. Product liability claims can and do put businesses out of business – just ask any of the officers from any asbestos manufacturer.
All too often, resellers, gray market commercial sellers, and retailers fail to secure this coverage. The logic is that, since they did not “manufacture” anything, the coverage is not necessary. However, manufacturers are not the only ones subject to product liability exposure, retailers and wholesalers are often brought into a lawsuit for alleged negligence by the consumer. Most states follow the “stream of commerce” model of liability. This means that if your company participated in placing the product into the “stream of commerce,” it can be held liable for damages to the end user.
If your company provides any products to the consuming public, then your company needs product liability or completed-operations coverage. In most cases, some form of this coverage will be present in the standard commercial general liability or business owners’ policy. You will need to confirm this with your independent insurance agent. You will want to have a clear understanding of what is covered (for example, some policies will cover economic damages, but not punitive or statutory damages).
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