Although most life-sciences companies today are likely aware of the increasing threat of products liability lawsuits, this risk is sometimes lost on product distributors, which in actuality may be just as vulnerable as manufacturers to such claims and the financial losses they inflict.
Having underestimated their own products-liability vulnerability, distributors often find themselves hugely burdened when (1) the law imposes liability on the distributor either by virtue of its membership in the supply chain or because of its own negligence; or (2) the supplier’s policy fails to cover the distributor.
Direct Imposition of Liability on Distributors
Even when distributors are wisely using contracts with their suppliers, and even when these contracts contain the appropriate indemnifications that provide for the distributors’ defense in the event of a claim arising because of some error on the part of the manufacturer, these contracts are unlikely to assist when liability is imposed directly on the distributor.
There are many circumstances under which liability will be directly imposed, but most fall under one of two legal theories: (1) strict liability; and (2) negligence. The theory of strict liability is based on the notion that because distributors reap the benefits of participation in the supply chain, they too should bear the burden of liability when harm results from the product they distribute. Strict liability for distributors is retained by the majority of jurisdictions in this country.
The second legal theory that will likely erode any contractual protections distributors have obtained from their suppliers is negligence. Most indemnification provisions explicitly exclude indemnification for a claim or costs that are incurred by virtue of any negligence on the part of the distributor. Distributors’ negligence is most often alleged in relation to installation of the product or advice on product use. The latter is particularly fraught with regulatory and products-liability perils, including claims of off-label promotion and failure to warn.
Inadequacy of Manufacturers’ Insurance Coverage for Distributors
Beyond the direct imposition of liability, distributors still find themselves “on the hook” for products liability costs if their suppliers’ insurance coverage is insufficient to cover the often-substantial costs of a products liability claim. This occurs much more frequently than many distributors realize, and can occur for a myriad of reasons. Suppliers’ policies may have lapsed, been canceled for nonpayment, or significantly reduced, and the distributor may not be informed of any of these changes. Even if suppliers’ coverage is current and in good standing, multiple distributors may have to engage in a legal battle to eke out their fair share of the limited coverage pool, and do so at a significant legal expense.
To avoid these and other pitfalls, it is crucial for distributors to contractually require annual certificates of insurance from their suppliers, know how many other distributors their suppliers may be using, and have their own insurance policy to ensure coverage in the event manufacturers’ policies fall short or direct liability is imposed.
For the complete article, which more fully describes the circumstances under which products liability may be imposed directly on distributors, the circumstances under which distributors may find themselves without coverage or with access to only limited coverage, as well as a related risk-management checklist for distributors, click here.