Like other perceived high risk business ventures, material handling equipment dealerships are often times faced with immediate and then long-term ongoing problems associated with the addressing of “unexpected,” “shocking” and “surprising” verdicts for which insufficient and/or no insurance coverage exists, and without there otherwise being a shifting of such risks to another entity and/or business.
Although such catastrophic verdicts are perceived to arise out of the presently tough constricted conventional insurance market, the vast majority of these problems can be traced to a failure by insured businesses themselves to engage in their own due diligence when agreeing to serve as a product distributor and thereafter dealing with that manufacturer in the sale of its products. It also arises out of a failure to develop, maintain and consistently implement appropriate risk management procedures and risk shifting techniques in its dealer agreements, as well as customer agreements.
Implementation of due diligence in dealing with manufacturers, use of risk shifting contract provisions, the generation and effectuation of risk management techniques, and the utilization of alternative risk financing techniques may not only serve to allow high risk businesses, such as material handling equipment dealers, to weather today’s tough conventional insurance markets in less than spectacular economic times, but allow them to actually prosper during these times.
This article will outline some risk management and operational due diligence considerations that can spell the difference between the demise of an otherwise financially sound material handling dealership through an unexpected, extraordinary and/or otherwise inexplicable verdict and its ability to continue its operations despite such a verdict, as well as to allow for its ongoing operation with far more limited adverse affects than might otherwise be experienced if the dealership is subject to such a verdict. It also addresses potential options for protection against business operational risks for which there is either no longer any traditional or conventional insurance coverage available or only limited coverage at prohibitively high premiums.
Proactive Due Diligence
Avoidance of financially fatal or catastrophic injuries to any business, as well as the financially debilitating aftermath of an unexpected irrational jury verdict, commences long before a lawsuit is initiated, a dispute arises or a claim is even made. A common sense, knowledgeable and reasonable use of due diligence in the conduct of business with the employment of an effective risk management program and a shifting of the risks associated with the sale, rental and maintenance of forklift trucks, scissor lifts, man lifts and other material handling equipment is one of the keys to the maintenance of a long-time healthy, vibrant and profitable dealership.
Avoidance of a financially crippling verdict to any business requires that a business owner be attuned to the risks posed by the conduct of such a business. As a dealer’s profitability and ongoing existence normally depends upon the integrity of the major products sold by it, one of the more obvious aspects in maintaining a viable material handling equipment dealership is the quality and reliability of its major products’ manufacturers. To the extent that a manufacturer is a well-established, financially sound and consumer safety-oriented entity, the exposure to a dealer for injuries or damages sustained as a result of a purported inherent design and/or manufacturing defect or a breach of warranty is significantly reduced.
Close attention to obligations and duties imposed upon products, dealers or distributors under a dealer or distribution agreement, as well as all other transactional documentation, is critical. Obligations requiring a dealer to indemnify and/or otherwise hold harmless a manufacturer for judgments that may be entered against it and/or for the payment of attorney fees and costs for any defense of claims asserted against a manufacturer by a retail purchaser or user of the material handling equipment sold by the dealer should either be avoided or limited to the greatest extent possible. Under no circumstances should a dealer ever agree to indemnify a manufacturer, customer (e.g., under a customer’s purchase orders) or any other entity for such manufacturer’s, customer’s or other entity’s own negligence. By doing so, a dealer in effect becomes an unlimited insurer of the actions of a manufacturer, customer or third party, leading to a catastrophic injury or other damage claims arising out of the manufacturer’s design and manufacturing of the product or the negligent acts of a customer or user who injures another through a potential misuse of the equipment.
It is the manufacturer and not the dealer who is charged with and profits from its own employees’ expertise and knowledge in the design, development and manufacture of a product, and it is the customer and/or another permitted user who can choose to misuse or abuse it. As such, it is the manufacturer and customer who should indemnify and hold harmless the dealer as the seller of its product since the dealer has no input into or control over such product’s design, manufacture and/or subsequent use.
Manufacturer’s Approval for Use of Non-OEM Attachments
and Equipment Alterations
It is not unusual for material handling product manufacturers to mandate that the sale of non-original equipment manufacturer (OEM) attachments and other aftermarket attachments for use in conjunction with its equipment and any modifications to its products by a dealer or others needed to permit a customer specific use occur only after obtaining the manufacturer’s written approval. Typically, this requires a photo and written description of the attachment and/ or modifications to the equipment, allowing a customer’s intended use of the attachment to be submitted by a dealer for review by a manufacturer’s in-house engineering staff. The manufacturer then determines if the proposed attachment and/or modification can be safely used or incorporated by the dealer without any adverse affect to the integrity and otherwise safe use of its equipment.
Absent the obtaining of a written approval from the manufacturer, dealers have been repeatedly confronted by manufacturers’ claims that the dealer is solely responsible for a product purchaser’s and/or user’s injuries or damages due to an unauthorized incorporation or use of such an attachment or modification to the equipment, even though other objective knowledgeable engineers specializing in the design and/or manufacture of the same type of equipment appreciate that it was the inherent design of the equipment as originally manufactured that was the real cause for such injury or damage. Compliance with such a requirement or the voluntary solicitation of a manufacturer’s approval of the use of such an attachment or alteration of material handling equipment by a dealer is extremely important in order to avoid such a dispute and the potential for a financially fatal and/or financially catastrophic verdict being entered against the dealer.
Inclusion as an Added Insured
The requirement that a dealer be identified as an additional insured under a manufacturer’s policy should also be addressed during negotiations for entering into a dealer agreement. As the dealer is an important part of a manufacturer’s product marketing, promotion and distribution network, justification exists for it to be included within the manufacturer’s product liability, general comprehensive and casualty insurance coverage. Justification also exists for a contractual requirement in an equipment sales, rental and maintenance form agreement for a dealer to be included as an added insured under a customer’s policy. As the customer ultimately controls who will use the equipment, if individuals who will be using it are trained in its safe operation, a dealer should be able to demand, as part of its bargain in the sale of its equipment, that a customer not only have insurance coverage for itself, but also for the dealer if it is sued as a result of such use.
Although not a substitute for a dealer obtaining its own coverage, the inclusion of an insurance coverage mandate provision in a manufacturer’s dealer agreement and a customer equipment sale, rental and/or maintenance agreement can serve to provide additional coverage to a dealer against an unexpected product liability or negligent maintenance verdict. To ensure the effectiveness of an insurance coverage mandate provision imposed by a manufacturer’s dealer agreement or a material handling equipment dealer’s customer sale, rental or periodic maintenance agreement, it is critical that that agreement also provide for a policy endorsement that overrides any accident liability, general liability, casualty and/or other policy exclusions for liability arising out of the design, manufacture, modification and/or repair of a product. Absent such an endorsement, numerous different types of policies (e.g., general liability, casualty) normally exclude such coverage for injuries arising out of these activities and render such a contractual insurance coverage provision ineffective.
It is also important that the largest amount of coverage that can be agreed upon be included. It is suggested that the coverage be at least $3,000,000 to $5,000,000. Besides requiring a large minimum amount of coverage, it is also important that any insurance coverage provision requirement mandate that the carrier providing such coverage have and maintain at a minimum a specified A.M. Best or Fitch classification/rating (e.g., A- rating or above) so as to ensure that the carrier providing the coverage is financially sound. Notices of non-renewal and/or cancellations of such policies also should be required to be directed not only to the named insured manufacturer, customer or indemnitor, but also to the additional insured dealer indemnity.
14 Components for a Dealership Risk Management Program
Absolutely critical to the avoidance and/or elimination of the potential for the entry of a multimillion dollar catastrophic verdict and/or the aftermath of a financially catastrophic and/or fatal effect of such a verdict is the establishment and maintenance of a risk management program within the dealership that is implemented by a knowledgeable and educated individual appointed to serve as the dealership’s Risk Manager. A dealer’s risk management program should, at a minimum:
- Require a dealer officer or other management official serve as the dealer’s Risk Management Manager in the development and consistent implementation of such a program.
- Ensure that the risks associated with the operation of the dealership are appropriately assessed by a competent individual who typically evaluates this type of a dealership’s claim and loss run history, as well as that of similarly situated dealers throughout the country who are engaged in the sale, rental and maintenance of the same type of products or equipment.
- Provide for the retention of the assistance of a knowledgeable, experienced and qualified commercial insurance broker in the procurement of appropriate primary, umbrella and excess insurance coverage for the risks associated with the operation of such a dealer’s business from a financially sound and reputable insurance carrier or carriers.
- Provide for a written confirmation to the broker as to the dealership’s reliance upon him/her to procure appropriate coverage, identify the nature of the coverage he/she had recommended be secured and which was secured, identify the risks to be covered by such insurance, the amount of the deductible or self-insured retention (SIR), the single amount of incident/aggregate limits of coverage, and the dealership’s understanding as to whether the umbrella and/or any other excess policies are to be pure form follow coverage (i.e., if primary coverage exists for a particular claim, such coverage would also exist under any umbrella or form follow insurance coverage without the policies for such umbrella or excess coverage containing additional exclusions and/or preclusions that would otherwise limit or exclude from coverage claims that are covered by the primary insurance policy).
- Require a letter be obtained from the broker and/or agent identifying who should be given notice of and/or advised of any potential claims, including the manner of providing such notices and who will be responsible to notify the appropriate insurance carriers of such claims.
- Require that the dealer’s broker and/or insurance carrier provide prior to the onset of a coverage period copies of the actual insurance policy manuscripts to be in effect, including all declarations, information pages and endorsements to the policy, with the Risk Manager (if sufficiently knowledgeable) and/or dealer’s outside counsel reviewing each individual policy and considering the coverage of each policy in conjunction with another to insure that the claims and risks that a dealer understands are to be insured against are, in fact, included within the policy coverage without being in some form or fashion excluded or the damages arising out of such claims being limited in terms of the coverage available.
- Implement internal training and/or other educational programs for the dealer’s sales staff, product technicians and mechanics. In the alternative, require attendance by such individuals at appropriate manufacturer sponsored and/or other manufacturer association or dealer association sponsored programs addressing issues entailing, in part:
- The proper assembly and preparation of new or used equipment for sale or rental to a customer or otherwise in compliance with an agreement for such sale with a filled out, executed checklist reflecting the carrying out of such work being completed;
- The generation and filling out by the dealer’s sales representative or technician of a written checklist as part of the procedure for a demonstration of and familiarization of a customer in the safe use of a new or used product that a customer has purchased or rented;
- Completion of a purchaser/renter signed acknowledgment as to the declination by a purchaser or renter of certain optional safety equipment accessories (e.g., back up alarms, FOPS, ROPS);
- Obtaining an acknowledgment by a customer of the receipt of training in the equipment’s safe use and receipt of an operator’s manual, maintenance manual and warranty information, including exclusions and disclaimers;
- The dealer staff being cautioned against making exorbitant, untrue and/or exaggerated claims about the performance and/or safety attributes of such equipment;
- The appropriate interaction of an employee with a customer upon being advised of injury or damage occurring from the use of a product (e.g., need to solicit information relating to any damage and/or injury incident and to avoid dissemination of any information regarding the product, product sales, production, maintenance, product recalls and similar type inquiries).
- Have generated and consistently implemented an accident/incident written investigation policy requiring that certain procedures be followed upon a dealership employee being advised of an injury or damage incident and that an investigatory checklist be generated and followed requiring that:
- Any employee, upon receiving any inquiry relating to a product purportedly involved in an incident or accident, product recall, and/or other product injury or damage incident, refers that individual to the dealership’s Risk Manager or his supervisor without responding to such questions or gratuitously providing such information;
- An employee immediately, upon being advised of any potential injury or damage producing incident, advise the Risk Manager of the identity of the individual who provided such information, the identity of the individual or individuals sustaining any injury or damages as result of the incident, background information concerning the incident, and any contact person from whom additional information can be obtained;
- The dealership Risk Manager immediately contact its outside counsel upon being advised of a potential product-related injury and/or damage incident, and obtain written confirmation from the attorney of his retention, along with a direction as to what specifically needs to be done internally within the dealership (if anything) to assist the attorney in any investigation into such an incident;
- The Risk Manager engages in appropriate periodic discussions with outside counsel as to investigatory tasks, if any, to be conducted by a dealership Risk Manager (e.g., interviews of relevant employees, information to be obtained from others relating to the identity of any individual or entity injured or damaged as a result of the incident, nature of injury and damage sustained, the date of the incident, location of the incident, circumstances giving rise to the damage or injury, and other similar information);
- Notice of any claim (e.g., letter from injured product user, his/her attorney, and/or representative) and/or summons and complaint be immediately verbally conveyed by the Risk Manager to any individual designated by the dealer’s insurers for receipt of notice of such a claim, along with an immediate written, certified letter confirmation thereafter which should include a demand for the providing of a defense to and coverage for any claim that may arise out of the incident and that this individual or entity appropriately notify all the dealer’s insurance carriers (if notice is being provided to the broker or a designated third party claims administrator) including all primary, umbrella and excess carriers along with a request that copies of such written notices to these entities by the broker and/or agent be provided to the dealership Risk Manager;
- Notice, if appropriate, be given to the manufacturer for whom the dealership serves as a new product dealer;
- Periodic communications be carried out with the dealer’s outside counsel and insurance carrier regarding the progress of any investigation into such damage and/or injury producing claim;
- The dealership employee be precluded from being interviewed or discussing the incident/accident involved; any sale, rental or maintenance of equipment involved in any incident/accident; any equipment repairs and/or maintenance of equipment involved in any incident/accident; and/or other aspects of a dealer’s business with a potential claimant or his/her attorney, investigator, friend or relative; any dealer insurance claim’s representative; and/or equipment manufacturer’s attorney and/or representative without such individual first speaking with the dealer’s Risk Manager and thereafter, if at all, while in the presence of the dealer’s attorney.
- The Risk Manager oversees the handling of any lawsuit.
- The Risk Manager ascertains the relationship of any insurance carrier designated defense counsel with its insurance carrier (i.e., Is defense counsel in effect a direct employee of the insurer?), and the experience of that defense counsel in handling the type of claim involved, with a written confirmation of the information provided being sent by the Risk Manager to the insurance claim’s adjuster or attorney who provided the information.
- The Risk Manager send a written demand to the insurance claim’s adjuster and defense counsel. assigned by the insurer that the Risk Manager be provided with copies of all pleadings, correspondence, expert reports, test results and/or other information obtained by the claims adjuster and defense counsel and/or exchanged between them, as well as any insurance representative/ employee involving the defense of such a claim, including but not limited to any and all communications between defense counsel and the insurance carrier, all insurance carrier billing guidelines that must be followed by defense counsel, any written proposed defense strategy and/or activities, any attorney case budget, settlement demands, deposition transcripts, case evaluations and any documents and materials of whatever kind or nature relating to the lawsuit or claims.
- The Risk Manager sends a written confirmation to the carrier’s claim adjuster and the insurance carrier’s designated defense counsel reflecting the desire and demand for the Risk Manager and/or another appropriate dealership employee to be in attendance at any depositions, hearings and/or other pretrial proceedings, along with a request that notice of any pretrial scheduling deadlines, mediation dates, all pretrial conference dates and trial dates be immediately provided to the dealer’s Risk Manager so as to insure that an appropriate dealership representative can attend the same.
- The Risk Manager and other appropriate dealer employees attend with the dealer’s insurance carriers appointed defense counsel the depositions of any claimant, eyewitnesses, expert witnesses and others who may be deposed during any pretrial stages of any litigation.
- The Risk Manager engages in regular communications with the dealership’s own outside defense counsel as to the status of the litigation, the insurer retained defense counsel’s evaluation of the case, and potential need for the dealer’s outside defense counsel to at some stage of the lawsuit directly communicate with the insurance carrier and set forth an appropriate written demand to insurance defense counsel and its claim adjuster for the effectuation of a settlement of any existing claims.