Vince owns Vital Vacs, a small company that makes vacuum cleaners. The vacuums are marketed to pet owners because they have an attachment that is very effective at picking up pet hair. Vince has been selling his products through small appliance stores and sales have been growing steadily. However, Vince believes that sales would grow much faster if Vital Vacs' products were available from A-1 Appliance, a large chain of appliance stores.
Abe, the owner of A-1 Appliance, agrees to stock Vital Vacs’ products on a trial basis. In return, Vince must insure A-1 under a vendors endorsement. What is this endorsement and what purpose does it serve?
Vendors coverage protects sellers against claims arising out of the manufacturer's product. The coverage is necessary because a seller may be liable if the product injures a buyer or damages a buyer's property. The seller may be held responsible even though it didn’t design or manufacture the product, or change it in any way. A manufacturer may provide a seller a vendors endorsement as a means of enticing the seller to distribute the manufacturer's products. In some cases, a distributor may refuse to sell a manufacturer's products unless the latter agrees to provide a vendors endorsement.
Vendors endorsements vary, but most are based on the standard vendors endorsement published by the Insurance Services Office (ISO). This endorsement is designed for vendors that transfer a product “as is” from the seller to the buyer. It covers the vendor as an additional insured for claims alleging bodily injury or property damage that arises out of the manufacturer’s products, if the products are distributed or sold in the regular course of the vendor’s business. The products the vendor is selling must be described in the endorsement.
Like all additional insured endorsements, the vendors endorsement contains exclusions. These limit the scope of coverage afforded for the insured vendor. No coverage applies to the following:
- Contractual Liability The endorsement excludes damages for bodily injury or property damage that the vendor is obligated to pay because it has assumed liability for such damages in a contract. For example, suppose that A-1 Appliance subcontracts with another seller, Tip Top Tools, to distribute the Vital Vacs' vacuum cleaners. Tip Top agrees to sell the vacuums and in return, A-1 will assume liability for any claims against Tip Top that arise out of Vital Vacs products. Suppose Tip Top is sued because of a product defect in a Vital Vacs vacuum cleaner and presents the claim to A-1 Appliance. A-1 will have no coverage for the claim under the vendors endorsement.
- Unauthorized Warranties No coverage is afforded for product warranties made by the seller that are not authorized by the manufacturer. For example, a salesman at A-1 Appliance tells a customer that Vital Vacs vacuum cleaners are safe to use directly on pets. Vital Vacs has made no such guarantee. The customer buys a vacuum cleaner and injures his dog while using the vacuum on it. If A-1 Appliance is sued for breach of warranty, the claim will not be covered by the vendors endorsement.
- Changes, Inspections or Repackaging If the vendor repackages the products or fails to make inspections, and is sued as a result, the claims will not be covered by the endorsement. Also excluded are any physical or chemical changes the vendor makes to the product intentionally.
- Demonstration, Installation, Servicing or Repair These activities are excluded unless they are done at the vendor’s premises in connection with sale of the product. For instance, suppose that A-1 Appliance demonstrates Vital Vacs' vacuum cleaners for customers in the store. If a customer is injured during a demonstration, and files a product liability suit against A-1 Appliance, the claim should be covered.
- Sole Negligence The endorsement excludes injury or damage caused solely by the vendor’s negligence. For example, suppose that A-1 Appliance displays Vital Vacs products on a shelf several feet above floor-level. A customer is lifting a canister vacuum cleaner off the shelf when the power brush falls on him and causes an injury. If the customers sues A-1 Appliance for bodily injury, the claim may not be covered because the injury resulted solely from A-1's negligent storage of the product. An exception applies to injury or damage that results from repackaging, demonstration, installation, servicing or repair by the vendor. If (in the previous example) the power head fell on the customer while A-1 was demonstrating a Vital Vacs' vacuum cleaner, the claim would likely be covered.
- Any Insured From Whom You Have Acquired the Product Finally, if any insured has supplied the product, or parts thereof, to the vendor, that insured is not covered under the endorsement. Instead, that insured should be covered for claims arising out of those products or parts under its own products-completed operations coverage.