Are You Covered?

A LinkedIn poll was recently brought to my attention that was designed to get a feel for what businessmen think about the various insurance products available to them. The basic question of the poll was: “What is the most critical part of a manufacturer's insurance coverage?” It then offered five categories and asked responders to vote for the most important one, then explain their answers in the comments section. The five categories and their current standings are:

1. Worker's Compensation      32%
2.  Business Interruption          12%
3.  Product Liability Coverage 45%
4.  Broad Property Protection    5%
5.  Equipment Breakdown         5%

The results are revealing, as are the comments.

The poll is ongoing, so the numbers may vary as time goes on, but looking at the current results is informative. One that I find somewhat surprising is that Worker's Compensation is included in this poll. In the eyes of most American manufacturers, it is simply a fact of life. Asking if it is important or should be included in your insurance portfolio is like asking if you should provide lunch breaks. Both are subject to legal mandates.

Interestingly though, even with this red herring, product liability insurance comes out far and away the most important coverage a manufacturer can carry. As a starting point, I rank the four remaining types of insurance in this order:

1. Product Liability
2. Broad Property Protection
3. Business Interruption
4. Equipment Breakdown

Let's look at numbers three and four first. These are entirely subjective rankings, and will change if the business you are in is, say, heavily dependent on extremely expensive or complex machinery, or in an area prone to natural disasters which render business inoperable for long periods.

I rank product liability insurance as number one because the consequence of success in business is exposure to an increasingly chaotic litigation system, in which many people, including lawyers acting as sworn officers of the court, are making a living by bringing suit against everyone involved with the use of a product, leaving the end user, the one supposedly harmed, blameless, and everyone else liable. This cottage industry has grown to awards totaling tens of billions of dollars a year, and that doesn't count out of court settlements that companies offer to avoid huge payouts.

Obviously, one way to avoid these expenses is to limit the kinds of suits that may be brought, and the amounts recoverable, which has worked elsewhere when tried. The other response is to create a whole new industry to insure manufacturers against these suits. Tens and hundreds of millions of dollars are spent on insurance policies and self-insurance to protect American businesses from these suits. Where does that money come from? You and me. Every time we buy a product made in America, we pay more than we should for it because American manufacturers pay for liability insurance, (or should). Those costs are passed through to the consumer.

Whatever the legal climate, the reality is that American courts have ruled that if a manufacturer makes a product, that manufacturer may be liable for any incidental or consequential damage arising from the use or misuse of the product. In addition, every person along the chain of distribution of that product may be held liable as well. That means that if you run a business making things, or using things that a consumer could come into contact with, you could be sued.

Political philosopher John Locke wrote in the seventeenth century something that boils down to 'the power to sanction is the power to destroy'. If a court has the right to take away your means of doing business, then you have the responsibility to protect your business by insisting that what you make, and what you use is covered by product liability insurance.