Manufacturers E&O: Here’s Why You Need It

Consider the following scenario. A customer asks your company to manufacture a part to certain specifications as were outlined in the contract. He then needs to add that part to his product so he can send that product to his customers by a set deadline. Your company then creates a product, but due to an error in the production process, the part is not made to the right specifications. Your customer now receives a part, notices that it’s the wrong specifications, and sends it back to be remade. Now, that delay in production causes him to miss his deadline so he files a lawsuit against your company for financial loss. This scenario could expose your business to significant liability if you don’t have the right coverage in place.

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The Limits of General Liability

Now, you might assume that your commercial general liability policy would protect you against a claim like this, but that’s not really the case. Most CGL policies contain damage to impaired property and property not physically injured exclusions. That means that unless a manufacturing error leads to bodily injury or property damage, the CGL will not cover it. The customer’s financial loss does not fall into either of those categories.

So, in order to protect your business from a product failure resulting in a third party’s financial loss, you will need to add Manufacturers Errors and Omissions or E&O coverage. Manufacturers E&O is professional liability insurance that covers a manufacturing mistake or negligent services that results in financial loss without any bodily injury or property damage. E&O insurance covers damages that result from the following three. Number one, poor, incorrect or faulty products that are manufactured, handled, sold, or distributed. Number two, errors and omissions caused by material defect, including property damage to the product, property damage to the work and property damage to impaired property. And number three, negligence or failure to deliver promised services.

If customers allege that your product failed or that you were negligent in performing services outlined by a contract, they will likely seek to recoup their financial losses through litigation. You could be facing significant legal costs as well as potential damages if the case is lost. Even if the customer’s lawsuit is found to be frivolous, you could still incur the cost of having to defend yourself. That’s where manufacturers E&O can provide significant financial risk mitigation. Manufacturers E&O will cover both the customer’s financial loss and your legal costs.

Now, E&O premiums vary based on the product or service you need coverage for, your company’s financial stability and the limits you seek. This is a vital coverage for anyone in the manufacturing industry. So if you feel like you or your production needs something like this in place, give us a call and we’ll make sure that your production moves from danger to a safe place.

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