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RISKVUE ARCHIVE | RISK BITES
But You Said You’d Protect Me:
A Vendor’s Perspective on Vendors Endorsements
By John N. Ellison and Frederick A. Pettit
Introduction
Manufacturers are often looking for distributors and/or retailers to distribute and sell their product. Distributors and retailers can be hesitant to engage in such a relationship out of fear that they may be held responsible for bodily injury and/or property damage that may be caused by a product that they merely usher through the stream of commerce. A “vendors endorsement” can be a very useful tool for manufacturers to attract retailers, distributors and others (collectively, “vendors”) to sell their product. Such a relationship is created when the manufacturer provides the vendor with “additional insured” status in a commercial general liability policy or other insurance policy so they are protected with insurance coverage.
Status as an additional insured is intended to provide the vendor with protection from lawsuits arising out of the use of, and injury or damage from, the product that has been manufactured, distributed and sold. More specifically, the primary purpose of the endorsement has been to protect vendors who have had no input toward, or involvement in, the manufacture or design of a product from liability arising from lawsuits alleging defects in its manufacture or design.
Along with providing the vendor with a form of security or protection in the event of a lawsuit, a vendors endorsement is also financially beneficial to a vendor. For one, a vendors endorsement protects a vendor from the expense of being drawn into a lawsuit arising from a defect in a product that it distributes or sells as an additional defendant. In addition, someone other than the vendor is funding the cost of the premium for this “litigation insurance,” which minimizes the costs to its insurance program while obtaining a more extensive insurance package.
It makes perfect sense that a retailer or distributor who has had no involvement in the design or manufacture of a product, but who has merely been a conduit, should be insulated from liability arising from the design or manufacture. For vendors, however, the news can be even better. A number of courts have concluded that a vendors endorsement may shield from liability vendors who have been accused of negligence in their handling of a particular product under certain circumstances. As we will discuss more fully below, such pro-vendor outcomes depend upon certain policy language and the factual circumstances involved in each particular case. A vendor’s recognition of those factors goes a long way toward securing maximum protection under a vendors endorsement.
Who and What Is (or May Be) Covered Under a Vendors Endorsement
In the event of a lawsuit, vendors want (and need) to know if they can rely on the named insured’s insurance policy to provide them with protection; i.e., a defense, indemnification or both. While each case is different, certain factors may help to predict whether a vendor will likely be protected under a vendors endorsement. As developed through case law, the factors discussed below are commonly involved in such determinations and disputes.
Coverage Language in the Vendors Endorsement
Not all vendors endorsements are created equal. Depending on one’s perspective and circumstance, identical vendors endorsements may provide vendors with adequate or inadequate protection. Obviously, a vendor is hoping for language in the vendors endorsement that will provide maximum coverage in the event of a lawsuit involving the product the vendor has agreed to distribute and/or sell. In many cases, the current standard vendors endorsement just may do the trick.
The standard form vendors endorsement issued by the Insurance Services Office, Inc. (“ISO”), the Additional Insured – Vendors Endorsement (CG 20 15), provides:
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...
Not all vendors endorsements contain this same language. A wise vendor will be mindful of the language contained in the endorsement applicable to him or her, particularly key phrases that can significantly impact whether that vendor has coverage for a lawsuit. Two of these critical phrases are “arising out of” and “in the regular course of.” Both phrases are discussed in greater detail below.
Insurance Contract Construction
A few basic rules of insurance contract construction are worthy of note, as they provide the necessary background and starting point for the analysis courts have made of vendors endorsements. Where a contract term is deemed ambiguous, then the interpretation that is most favorable to the policyholder must be adopted. An insurance company that seeks to limit coverage by an exclusionary clause has the duty to clearly express the limitations of the policy and the scope of the exclusion. Any ambiguity created by the exclusion will be strictly construed against the insurance company and liberally construed in favor of the policyholder. With this foundation, we will now review some of the more critical, often-litigated language in the standard form vendors endorsement.
Critical Language in the Standard Form Vendors Endorsement
On the whole, many courts have found coverage to exist under a vendors endorsement when certain language is contained in the endorsement and certain types of facts are present. Two phrases that impact whether coverage exists are “arising out of” and “in the regular course of.” The standard form vendors endorsement provides coverage for “‘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.” The inclusion of the phrase “arising out of” in a vendors endorsement, combined with facts that tend to show that the underlying facts arguably occurred “in the regular course of” the activity intended to be covered will likely make for a relatively secure, and ultimately satisfied, vendor.
“Arising Out Of”
Courts have consistently held that this phrase is to be broadly construed, providing a broad range of causality, which results in increased coverage for vendors. Several courts have explained that when used in insurance contracts, the words “arising out of” are broad, general, and comprehensive terms effecting broad coverage. Other inclusive descriptions of the phrase include “originating from,” “having its origin in,” “growing out of” and “flowing from.” This is good news for vendors.
One example of the cases in which courts discuss the “arising out of” language is Atlantic Mut. Cos. v. Home Depot U.S.A., Inc., 2003 WL 202607 (D. Kan. 2003) (“Home Depot”). In that case, the court decided that a vendor was covered by the applicable vendors endorsement based, at least in part, on the broadly interpreted “arising out of” language in the endorsement. In Home Depot, a customer was injured in a Home Depot store when a storm door, which was part of a store display, came loose from the store’s steel shelving beams and struck her as she attempted to open the door. The customer instituted lawsuits against the vendor (Home Depot) and the manufacturer of the door. Home Depot was named as an additional insured under a Broad Form Vendors Endorsement to the manufacturer’s commercial general liability policy. Home Depot twice requested that the manufacturer’s insurance carrier provide it with a defense to the lawsuit pursuant to the terms of the vendors endorsement. The insurance company twice denied coverage, and instituted a declaratory judgment action against Home Depot seeking a declaration that it did not owe Home Depot a duty to defend or indemnify the claims made by the injured customer.
The insurance company argued that coverage did not exist because the injury did not arise out of the manufacturer’s product that was distributed in the regular course of Home Depot’s business because the specific door that caused the injury was merely a display model, and therefore, was not for sale in the regular course of Home Depot’s business. The court disagreed with the insurance company. The court began by analyzing the phrase “arising out of” and concluding that it is to be construed broadly under the applicable state law. The court then determined that the injury arose out of the manufacturer’s product, and that the fact that the manufacturer “pulled one product specimen from its inventory for display purposes did not divest the door of its membership in the universe of [the manufacturer’s] doors distributed or sold in the regular course of Home Depot’s business.” Accordingly, the court ruled that the insurance company was obligated to defend and indemnify Home Depot for injuries caused by the display.1
On the contrary, courts in other cases have reviewed the coverage afforded under vendors endorsements that did not include the “arising out of” language, and which contained more limiting language. In these cases, courts have interpreted the endorsement less expansively, sometimes resulting in an absence of coverage. The case of E. Hulsey, Sr. v. Sears, Roebuck & Co., 705 S.2d 1173 (La. Ct. App. 1997) (“Hulsey”), is one example.
In Hulsey, plaintiffs brought a lawsuit against Sears and one of its employees for injuries suffered while one of the plaintiffs was sampling a treadmill in a Sears store with the aid of a Sears employee. Sears sought coverage from the treadmill manufacturer’s insurance company for a defense to the lawsuit because it was named as an additional insured in a vendor’s endorsement to the manufacturer’s liability insurance policy. The applicable policy language was more limited than that included in the standard form endorsement. For one, the applicable vendors endorsement did not contain the “arising out of” language that has been broadly interpreted and applied by courts. Although the injuries sustained by the plaintiff arguably “arose out of” the product, the absence of that phrase in the vendors endorsement helped to preclude coverage. This case illustrates the importance of the policy language used in each vendors endorsement.
“In The Regular Course Of”
The standard form vendors endorsement requires that a product out of which bodily injury or property damage arises must have been distributed or sold “in the regular course of the vendor’s business” in order for coverage to exist. Determining what conduct falls within and outside of “the regular course of” business is often key to unlocking the scope of coverage.
Ohio Cas. Ins. Co. v. Petsmart, Inc., 2003 WL 22995160 (N.D.Ill. 2003) (“Petsmart”), is one example of a court finding that a vendor was protected under a vendors endorsement because bodily injury was caused by a product when it was used in the regular course of the vendor’s business. In Petsmart, a minor customer of Petsmart was injured when a cat scratching pole fell from a shelf and struck him. The customer brought a lawsuit against both the company that manufactured and designed the product and the vendor (Petsmart) alleging claims for both products liability and negligence.
As an additional insured under a vendors endorsement, Petsmart tendered its defense of the action to the manufacturer and distributor’s insurance company. The insurance company refused to provide a defense, and filed a declaratory judgment action seeking a declaration that it was not required to provide Petsmart with a defense to the underlying action under the vendors endorsement. The court concluded that Petsmart was entitled to coverage under the terms of the endorsement, finding that the minor customer’s injury was directly inflicted by the cat scratching pole, and that the pole was on a shelf for sale in the regular course of Petsmart’s business.2
Other courts have addressed this contract language and found that the vendor’s conduct involving the use of a product at issue was not “in the regular course” of the vendor’s business. Texas Medical Liability Trust v. Zurich Ins. Co., 945 S.W.2d 839 (Tex. Ct. App.--Austin 1997) (“Texas Medical”) is one of the better-known cases in this respect. The Texas Medical case was the product of the silicone breast implant class-action lawsuits that were brought against Dow Corning Company. Typical suits sought damages from both the manufacturer of the implants as well as the physicians who performed the surgery. Many of the physicians sought coverage as vendors of the implants because the suits s alleged that the physicians sold the implants to the patients.
The court determined that the physicians were not afforded coverage under the vendors endorsement because the implants were not sold in the regular course of the physicians’ business. To be covered, said the court, the physicians’ practice of selling the implants would have to constitute a regular feature of the physicians’ business. The court determined that the selling of the implants was merely “incidental and collateral” to the physicians’ business of providing medical services and, therefore, was not performed “in the regular course of” the physicians’ business. Accordingly, the physicians were not provided with coverage under the vendors endorsement.
This limitation is remediable through amendments to the endorsement’s language. In situations like that in Texas Medical, where the conduct may arguably not be in the regular course of the vendor’s business, the vendor should either define the activity as included or delete the “regular” requirement from the endorsement. In short, thorough attention to detail, problems like that in Texas Medical can be avoided.
Exclusionary Language in the Vendors Endorsement
Review and understanding of the policy language used to exclude coverage is equally as important as the language used to provide coverage under a vendors endorsement. The standard form vendors endorsement described above provides the following exclusionary language:
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 products;
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.
As noted earlier, it is important to keep in mind that basic principles of insurance contract construction provide that an insurance company that seeks to limit coverage by an exclusionary clause has the duty to clearly express the limitations of the policy and the scope of the exclusion, and that any ambiguity created by the exclusion will be strictly construed against the insurance company and liberally construed in favor of the policyholder. As the examples below show, courts are willing to find that coverage does not exist under vendors endorsements where the conduct complained of is expressly excluded from coverage under the terms of the policy.
American White Cross Laboratories v. The Continental Ins. Co., 495 A.2d 152 (N.J. Super. Ct. App. Div. 1985) (“White Cross”) is an insurance company favorite. There, Absorbent Cotton Company (“Absorbent”) manufactured and sold bulk rolls of cotton in a “semi-raw material state” to American White Cross Laboratories (“American”). American took the bulk cotton, cut it into small units, packaged the individual units of cotton into boxes and then labeled the boxes for resale to the public in American’s partner supermarket. Absorbent had no input into the labeling that accompanied the product into the stream of commerce for sale to the public.
The plaintiff purchased American’s cotton product from American’s partner supermarket and used it to create articles of clothing. The cotton ignited while part of the plaintiff’s wardrobe, causing her severe burns. The plaintiff brought a lawsuit against American, Absorbent and another company on strict liability and negligence grounds, alleging, in part, that a defect existed as to packaging and labeling because the highly flammable product did not contain proper labeling and explanation in its packaging for sale to the public. The vendor (American) sought a defense and indemnification from the manufacturer (Absorbent) for the lawsuit under the applicable vendors endorsement. The manufacturer’s insurance company declined coverage on the ground that certain exclusions applied.
American eventually brought suit against the manufacturer’s insurance company seeking to recover defense costs and indemnification for the settlement amount paid in the underlying action. The trial court entered a judgment in favor of American, finding that coverage applied under the vendors endorsement. The manufacturer’s insurance company appealed, and the appellate court reversed the trial court. The appellate court ruled that the vendors endorsement did not provide coverage to the vendor because the vendor’s conduct that allegedly caused the injury; i.e., the packaging and labeling of the product, was specifically excluded from coverage under the terms of the policy. The decision in White Cross further emphasizes the importance of the policy language and its application to the facts of a particular case.
Coverage for Claims Involving a Vendor’s Alleged Negligence
Insurance companies consistently argue that vendors endorsements are only intended to protect innocent vendors from liability arising out of design and/or manufacturing defects that the vendor had absolutely no involvement with. Over the objection of many an insurance company, however, several courts have interpreted certain language in vendors endorsements broadly, resulting in increased coverage for many vendors. In fact, many courts have specifically rejected insurance companies’ contentions that vendors endorsements are limited to coverage for claims alleging a product defect, and concluded that vendors endorsements may provide coverage to a vendor accused of negligence related to the product.
Popular examples of courts finding coverage under vendors endorsements for vendors accused of negligence related to a product are Pep Boys v. Cigna Indem. Ins. Co. of North America, 692 A.2d 546 (N.J. Super. Ct. App. Div. 1997) (“Pep Boys”), and Sportmart, Inc. v. Daisy Mfg. Co., 645 N.E.2d 360 (Ill. App. Ct. 1994) (“Sportmart”). These cases both show that, depending on the correct combination of policy language and factual circumstances, vendors may be granted broad coverage that encompasses negligence claims under a vendors endorsement.
In Pep Boys, a negligence action was brought against Pep Boys for selling freon to a minor in violation of a state statute following the death of a minor who ingested it. The plaintiff did not allege products liability and did not sue the manufacturer of the freon. Pep Boys sought coverage for the underlying lawsuit based on its status as an additional insured under a vendors endorsement to the manufacturer’s liability insurance policy. The manufacturer’s insurance company denied coverage for the lawsuit on the ground that the injury was due to Pep Boys’ “independent acts of negligence, implying...that the injury was not one ’arising out of’ the freon.” Pep Boys filed an action for declaratory relief seeking a declaration that it was afforded covered for the underlying action under the vendors endorsement to the manufacturer’s liability insurance policy.
The trial court entered summary judgment for the insurance company, but the appellate court reversed, finding that the policy language—specifically the phrase “arising out of”—was broad enough to provide coverage to the vendor. The court found that while there “may have been a basis for imposing liability on Pep Boys for its negligence, the product was the death-causing substance.” Moreover, the court explained that despite a full page of detailed and specific coverage exclusions in the vendors endorsement, the endorsement did not exclude coverage if the vendor’s negligence was a proximate cause of injury. Finally, the court also noted that the endorsement did not limit its coverage to claims of manufacturing or design defects, or failure to warn.
Importantly, the court in Pep Boys devoted significant attention to the White Cross case because the court suspected, quite correctly, that White Cross “is a talisman invoked by carriers to limit coverage under vendor’s endorsements.” This statement was made in response to the dictum found in the White Cross court’s opinion about the supposedly limited role of vendors endorsements. The Pep Boys court analyzed White Cross, explained that the policy language in the two cases was different, that the discussion of the role of the vendors endorsement was dictum, and that the court’s decision was based plainly on the fact that certain coverage exclusions applied in that case. The Pep Boys court then proceeded to take part in the only exercise required of it—“to apply the language of the vendors endorsement before [it] to the specific facts in [that] case.”
Sportmart is a case very similar to Pep Boys, and also beneficial to vendors accused of negligence. In that case, a negligence action was brought against Sportmart based on injuries suffered by a minor while using a gun and pellets that he purchased from Sportmart, but which were manufactured by Daisy Manufacturing Company. The plaintiff did not allege products liability and did not sue the manufacturer. Sportsmart tendered its defense to the manufacturer and distributor of the gun and pellets based on its status as an additional insured under a vendors endorsement to the manufacturer’s commercial general liability policy. Both the manufacturer and its insurance carrier refused to defend Sportmart in the negligence suit. Sportmart then filed an action for declaratory relief seeking a declaration that it was afforded coverage under the vendors endorsement to the manufacturer’s general liability insurance policy.
The court held that Sportmart was covered under the vendors endorsement and that the insurance company had a duty to defend Sportmart in the negligence action. In so holding, the court focused on the phrase “arising out of” in the vendors endorsement, recognizing that the phrase is to be construed broadly and inclusively. The court also explained that the applicable vendors endorsement did not limit coverage to claims alleging a product defect, and that the endorsement contained no exclusion for injuries that were directly caused by Daisy’s product, but also “attributable to the negligence” of Sportmart. The court concluded that “the broad language must be construed against the insurer to require coverage for all bodily injury ’growing out of’ or resulting from Daisy’s product.”
As these cases demonstrate, courts have been willing to find coverage for vendors as long as the policy language is broad and inclusive and the factual circumstances fit that language. Fortunately for vendors, the pro-vendor cases discussed here are not alone in their rationale and outcome. In fact, courts from several different jurisdictions have refused to limit coverage to vendors under vendors endorsements when circumstances permit, and indeed mandate, broad coverage.
Conclusion
Any vendor seeking adequate coverage under a vendors endorsement must review the language of the endorsement to ensure that the language contains the inclusive language discussed and examined above. Naturally, the parties’ respective bargaining positions will likely determine the level of influence that a vendor may have in discussions about the language to be used in a vendors endorsement. In all possible cases, however, a vendor would be well-served to insist upon the broad and inclusive language outlined in these materials. 
Notes:
1 Other examples of cases in which courts discuss the “arising out of” language include: Home Depot U.S.A., Inc. v. Federal Ins. Co., 2004 WL 170037 (5th Cir. 2004) (unpublished); Ohio Cas. Ins. Co. v. Petsmart, Inc., 2003 WL 22995160 (N.D.Ill. 2003); Pep Boys v. Cigna Indemnity Ins. Co. of North America, 692 A.2d 546 (N.J. Sup. Ct. App. Div. 1997); and Sportmart, Inc. v. Daisy Mfg. Co., 645 N.E.2d 360 (Ill. App. Ct. 1994).
2 Notably, the insurance company argued that coverage was excluded because Petsmart was allegedly negligent, and the vendors endorsement did not provide coverage to a vendor whose negligence caused bodily injury. The court rejected this argument. The important question of whether a vendors endorsement provides a vendor with coverage for a lawsuit in which the plaintiff alleges that the vendor’s negligent use of the product caused the injury or damage is discussed more fully below.
ABOUT THE AUTHORS
John N. Ellison (jellison@andersonkill.com) is the Managing Shareholder of Anderson Kill & Olick, P.C.’s Philadelphia, PA office, a national law firm headquartered in New York, NY, with offices also in Washington, D.C., Newark, NJ and Chicago, IL. Frederick A. Pettit (fpettit@andersonkill.com) is an attorney practicing in the same office. Messrs. Ellison and Pettit regularly represent policyholders in disputes with their insurance companies, as well as counsel policyholders in all aspects of their insurance programs.
riskVue | The webzine for risk management professionals
June 2005
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