Insurance for manufacturers: Assembling a policy to protect you when things go wrong
When manufacturers buy insurance, they often fail to consider the expenses they could face if one of their products were recalled.
Mistakes often happen, and manufacturers can face financial ruin if they don't have the money to cover things associated with the fallout, such as customer notification, shipping and repairs.
"Most of your smaller manufacturers do not carry any type of product-recall insurance," says Daniel Abraham, vice president of HUB International New England, an insurance brokerage. "If they have manufactured a product that will cause bodily injury or property damage, they need to be able to go out and retract it. Look what has happened to Toyota."
Toyota Motor Corp., one of the world's largest automakers, recently agreed to pay more than $1 billion to settle a lawsuit stemming from complaints about vehicle acceleration problems. The settlement is one of the largest in the history of the auto industry.
Mark Allen, vice president of LaPorte & Associates, an insurance firm in Oregon, says many manufacturers think they just can't afford coverage for product recalls. Large companies often try to manage their recall risks through quality control - and do so without the insurance, he "They don't want to spend the money," Allen says.
If a manufacturer must respond to a product recall, it may end up paying for losses sustained by other businesses, Allen says.
"Let's say I am selling to a retailer," Allen says. "They may have a loss of revenue. They may incur expenses. General liability excludes recall expenses. A manufacturer needs) a product recall policy that includes third-party liability."
Other types of coverage
In addition to recall insurance, manufacturers need other types of coverage, including:
- General liability insurance covers most injuries or losses you cause to others. It also pays for your legal representation.
- Property insurance is necessary to pay repair and replacement costs for common mishaps, such as fires, floods or theft. The policy will cover buildings and their contents.
- Interruption-of-business insurance covers your expenses and loss of income while your business is closed. Make sure this insurance lasts long enough for you to get your rate of production back to normal, says Jack Hungelmann, author of "Insurance for Dummies." Compensation typically continues for up to two years.
- Employment practices liability insurance protects you if an employee files a lawsuit alleging a violation of their civil rights or a wrongful termination.
- Goods-in-transit insurance covers products you ship to customers until they reach their destinations.
- Errors-and-omissions E&O) insurance is liability coverage for lapses in professional judgment that cause harm to others.
- Employee dishonesty insurance addresses losses caused by theft within the company. It covers embezzlement as well as losses of cash, materials and products.
- Commercial auto insurance covers workers who drive for their jobs. It may pay third parties for losses arising from injuries or property damage caused by the company's commercial vehicles.
- Workers' compensation insurance provides health care coverage for workers who are hurt on the job, regardless of who's at fault. Requirements vary by state, so contact your state insurance department for more information.
How much should you pay for insurance?
Abraham says there's formula for figuring how much a manufacturer should spend on insurance. Premiums will be determined by an underwriter who measures your claim risk. The underwriter will consider how likely your business is to cause injuries or financial losses.
"The premiums will depend on the products they make," Abraham says. "For instance, if they are manufacturing a writer's pen or a computer screen, there is less exposure than if they were manufacturing a brake part for a vehicle."
To get adequate coverage, Abraham says you should work with an insurance professional who takes the time to understand your business and your customers.
If you've filed numerous claims, it could raise your premiums. You can reduce those costs by training your employees to avoid mistakes and keep production quality high, Allen says.
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