Chapter 15h Vendors/vendees

• Library: The Handbook on Additional Insureds (ABA) (2018 Ed.)

CHAPTER 15H Vendors/Vendees

Samantha Johnson

I. History of Vendor's Endorsements

Modern products liability law extends strict liability for product defects to distributors and retailers of a manufacturer's product, in addition to the manufacturer itself.¹ Most courts hold a seller (a nonmanufacturing person or entity engaged in the business of selling or distributing products) in the chain of distribution liable for defects found in that product.² Courts also generally allow a retailer or distributor who acts as a mere conduit for a manufacturer's product to sue the manufacturer for indemnification.³ Coverage in the form of vendor's endorsements developed to extend the manufacturer's own products liability coverage to the distributors or retailers ("vendors") of the manufacturer's product as manufacturers sought methods to induce retailers, distributers, wholesalers, and other vendors to sell the manufacturers' products.⁴ Even though a vendor may remain a party to the lawsuit, the expenses of defense and the payment of judgment is borne by the manufacturer's insurer rather than the vendor's insurer (in cases where the endorsement applies and the manufacturer's insurance is primary).⁵ When the manufacturer's insurer covers the vendor, it potentially obviates the need for the vendor to file suit separately against the manufacturer to obtain indemnity.

The endorsements do not extend all of the coverage available to the manufacturer, however. The endorsements contain exclusions, which courts generally interpret as an attempt to define the boundary between those instances in which the retailer or distributor's exposure to liability arises purely from its role as a conduit and those in which, by altering, repairing, or repackaging the product, the retailer or distributor itself might have caused or contributed to the injuries.⁶

The most common vendor's endorsement was ISO Form CG 20 15 11 88,⁷"Additional Insured—Vendors."

WHO IS AN INSURED (Section II) is amended to include as an insured any person or organization (referred to below as vendor) shown in the Schedule, but only with respect to "bodily injury" or "property damage" arising out of "your products" shown in the Schedule which are distributed or sold in the regular course of the vendor's business, subject to the following additional exclusions:
1. The insurance afforded the vendor does not apply to:

a. "Bodily injury" or "property damage" for which the vendor is obligated to pay damages by reason of the assumption of liability in a contract or agreement. This exclusion does not apply to liability for damages that the vendor would have in the absence of the contract or agreement;
b. Any express warranty unauthorized by you;
c. Any physical or chemical change in the product made intentionally by the vendor;
d. Repackaging, unless unpacked solely for the purpose of inspection, demonstration, testing, or the substitution of parts under instructions from the manufacturer, and then repackaged in the original container;
e. Any failure to make such inspections, adjustments, tests or servicing as the vendor has agreed to make or normally undertakes to make in the usual course of business, in connection with the distribution or sale of the products;
f. Demonstration, installation, servicing or repair operations, except such operations performed at the vendor's premises in connection with the sale of the product;
g. Products which, after distribution or sale by you, have been labeled or relabeled or used as a container, part or ingredient of any other thing or substance by or for the vendor.

2. This insurance does not apply to any insured person or organization, from whom you have acquired such products, or any ingredient, part or container, entering into, accompanying or containing such products.

Policies do not typically define the terms "distributed" or "sold." However, courts have construed those words as having the ordinary meaning found in the dictionary.⁸

The CG 20 15 form was updated in 2004.⁹ In this update, ISO sought to limit some of the broad coverage readings by moving the "arising out of" language to the initial description of "Who Is an Insured," creating a threshold determination prior to the exclusions. The update also added exclusion (h), which excludes coverage for:

h. "Bodily injury" or "property damage" arising out of the sole negligence of the vendor for its own acts or omissions or those of its employees or anyone else acting on its behalf. However, this exclusion does not apply to:

(1) The exceptions contained in Subparagraphs d. or f.; or
(2) Such inspections, adjustments, tests or servicing as the vendor has agreed to make or normally undertakes to make in the usual course of business, in connection with the sale of the products.

Notably, exclusion (h) does not apply to the exceptions to repackaging (exclusion (d)) or demonstration (exclusion (f)). For example, the endorsement does not limit coverage for a vendor's sole negligence in demonstrating a product for use at the vendor's premises, if done in connection with the sale of the manufacturer's product.

In 2013, ISO revised the standard Commercial General Liability policy, including revising the additional insured forms to place more limits on the coverage available to additional insureds. The CG 20 15 04 13 form states that coverage "applies to the extent permitted by law" and is specifically linked to the coverage required in the contract. The form also explicitly states that the most the insurer will pay on behalf of the vendor is the amount required in the contract or agreement or the amount available under the declarations, whichever is less. The form provides:

A. Section II - Who Is An Insured is amended to include as an additional insured any person(s) or organization(s) (referred to throughout this endorsement as vendor) shown in the Schedule, but only with respect to "bodily injury" or "property damage" arising out of "your products" shown in the Schedule which are distributed or sold in the regular course of the vendor's business.

However:
1. The insurance afforded to such vendor only applies to the extent permitted by law; and
2. If coverage provided to the vendor is required by a contract or agreement, the insurance afforded to such vendor will not be broader than that which you are required by the contract or agreement to provide for such vendor.

B. With respect to the insurance afforded to these vendors, the following additional exclusions apply:

1. The insurance afforded the vendor does not apply to:

a. "Bodily injury" or "property damage" for which the vendor is obligated to pay damages by reason of the assumption of liability in a contract or agreement. This exclusion does not apply to liability for damages that the vendor would have in the absence of the contract or agreement;
b. Any express warranty unauthorized by you;
c. Any physical or chemical change in the product made intentionally by the vendor;
d. Repackaging, except when unpacked solely for the purpose of inspection, demonstration, testing, or the substitution of parts under instructions from the manufacturer, and then repackaged in the original container;
e. Any failure to make such inspections, adjustments, tests or servicing as the vendor has agreed to make or normally undertakes to make in the usual course of business, in connection with the distribution or sale of the products;
f. Demonstration, installation, servicing or repair operations, except such operations performed at the vendor's premises in connection with the sale of the product;
g. Products which, after distribution or sale by you, have been labeled or relabeled or used as a container, part or ingredient of any other thing or substance by or for the vendor; or
h. "Bodily injury" or "property damage" arising out of the sole negligence of the vendor for its own acts or omissions or those of its employees or anyone else acting on its behalf. However, this exclusion does not apply to:

(1) The exceptions contained in Subparagraphs d. or f.; or
(2) Such inspections, adjustments, tests or servicing as the vendor has agreed to make or normally undertakes to make in the usual course of business, in connection with the distribution or sale of the products.

2. This insurance does not apply to any insured person or organization, from whom you have acquired such products, or any ingredient, part or container, entering into, accompanying or containing such products.

C. With respect to the insurance afforded to these vendors, the following is added to Section III - Limits Of Insurance:

If coverage provided to the vendor is required by a contract or agreement, the most we will pay on behalf of the vendor is the amount of insurance:
1. Required by the contract or agreement; or
2. Available under the applicable Limits of Insurance shown in the Declarations; whichever is less.
This endorsement shall not increase the applicable Limits of Insurance shown in the Declarations.

II. Coverage under Vendor's Endorsements

Currently, no reported cases address the updated 2013 form. However, because many companies continue to use the CG 20 15 11 88 and CG 20 15 07 04 forms, the cases discussed in this section are instructive.

A. Vendor's Endorsements Generally Provide Coverage for Injuries Arising out of the Manufacturer's Product

Most courts use a nexus test to determine whether coverage exists under a vendor's endorsement. Courts use the test to determine (1) whether any alterations to a product made by or at the direction of a vendor will bar coverage under exclusions contained in the vendor's endorsement and (2) whether a sufficient relationship exists between the manufacturer's product and the lawsuit to warrant coverage.¹⁰Courts generally exclude coverage under a vendor's endorsement only if the vendor's acts or omissions actually cause the alleged injury or if the manufacturer's product is merely incidental to the injury.¹¹

1. "Arising out of" Language Is...