When Your Supplier’s Insurance Won’t Cover Your Liability: How to Avoid Gaps in Product Liability Coverage

Running a business that relies on suppliers and manufacturers comes with risks, especially when it comes to product liability. Many business owners assume that their supplier’s insurance will automatically cover any claims arising from defective products or components. Unfortunately, that’s not always the case. When your supplier’s insurance leaves gaps, you could find yourself responsible for costly claims.

In this article, we’ll break down how to identify potential coverage gaps, practical steps to protect your business, and legal considerations that could save you thousands, or even millions, in liability.

What Happens When a Supplier’s Insurance Doesn’t Cover Your Liability?

Many companies rely on their suppliers’ insurance to provide a safety net if a product causes harm or damage. But coverage gaps happen more often than you might think:

• Exclusions in the Policy: Some supplier policies exclude certain types of damages or products.
• Insufficient Coverage Limits: Even if a supplier is insured, their limits might be lower than the potential claims.
• No Direct Coverage for Your Business: Most supplier policies cover the supplier, not downstream businesses that sell or use their products.

Why it Matters: If a product you sell or use causes harm and your supplier’s insurance won’t pay, your business may be directly on the hook.

How to Identify Gaps in Product Liability Coverage

To avoid unpleasant surprises, you need to proactively review and verify insurance coverage. Here are actionable steps:

1. Ask for a Certificate of Insurance (COI)

Request a COI from every supplier and make sure it includes:

• The policyholder’s name
• Coverage limits
• Type of coverage
• Any exclusions

2. Compare Coverage Limits to Your Risk Exposure

Coverage should reflect the potential cost of a claim. If your supplier has a $500,000 policy but your product could generate millions in claims, you have a coverage gap.

3. Review the Policy for Exclusions

Insurance policies often exclude certain risks. Look for clauses like:

• Faulty design vs. manufacturing defects
• Third-party claims
• Consequential or indirect damages

4. Confirm Your Business is Named as an Additional Insured

Being an additional insured ensures that you have coverage if a claim arises from the supplier’s product. Without this, you may need to rely solely on your own insurance.

Practical Ways to Avoid Liability Gaps

Once you identify potential gaps, there are several ways to protect your business:

Purchase Your Own Product Liability Insurance: Even if your supplier is insured, a standalone product liability policy can fill gaps and provide peace of mind.

Include Robust Indemnification Clauses in Contracts: Contracts should clearly state who is responsible for claims, damages, and legal costs. Strong indemnity clauses shift risk back to the supplier if they fail to cover a claim.

Regularly Audit Suppliers and Their Coverage: Don’t assume insurance stays current. Require updated certificates and periodically review supplier policies.

Implement Quality Control and Safety Protocols: Reducing the risk of defective products is the best way to prevent liability. Document inspections, testing, and compliance with industry standards.

Red Flags That Could Signal a Coverage Gap

Watch for these warning signs:

• Supplier resists providing insurance information
• Coverage limits seem low relative to your potential exposure
• Supplier’s policy excludes key risks relevant to your business
• Your business is not listed as an additional insured

If you spot these red flags, it’s time to consult a business attorney who specializes in product liability and risk management.

Why Consulting a Business Litigation Attorney Can Protect Your Company

Navigating insurance policies, indemnification clauses, and liability laws can be overwhelming. A skilled attorney can:

• Review contracts to ensure proper risk allocation
• Identify gaps in insurance coverage
• Advise on the most cost-effective coverage strategies
• Represent your business in disputes if a claim arises

Having legal guidance is not just about reacting to problems, it’s about preventing them before they cost your business.

Key Takeaways: Don’t Assume Your Supplier Has You Covered

• Always verify your supplier’s insurance coverage and limits.
• Look for exclusions, gaps, and whether your business is an additional insured.
• Consider your own product liability insurance to protect your business.
• Use contracts and indemnification clauses to clearly allocate risk.
• Consult a business litigation attorney to safeguard your company.

Don’t leave your business exposed. Contact one of our experienced attorneys in Miami at 305-570-2208.

You can also reach our founding attorney, Eduardo A. Maura, directly at eduardo@ayalalawpa.com.

Schedule a case evaluation online here.

[The opinions in this blog are not intended to be legal advice. You should consult with an attorney about the particulars of your case.]