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SI takes a look at product liability insurance -- update '89.


It seems we never have time to stop and smell the roses. There is always something lurking on the horizon, ready to threaten our business and our personal well being. As retailers and wholesalers of firearms, you have had more than your share of problems and concerns; gun control, semiautomatics, Metzenbaum's bill, et cetera. Today, you probably are not focusing on insurance issues and the daily risks that face you in your business. The insurance crisis of the mid-1980s is over. Insurance rates have stabilized and availability of product is not a problem. Right? Wrong! The insurance industry is in a temporary lull and rates will eventually increase as availability decreases.

The issues of risk and insurance should not be ignored nor forgotten. Like it or not, they have to be faced. The survival of your company is at stake.

We live in a society where there exists risk. Risk can be speculative as in the case of the risk of business venture, or it can be a pure risk; that which is unforeseen and or unexpected. We face speculative risks everyday as we make daily decisions. If the risk is too great, we may avoid it and choose alternative decisions. Pure risk, however, can come out of the blue and hit us from all sides. In many cases, being faced with an adverse reaction from the result of a pure risk can destroy us physically, emotionally and financially.

Insurance financially protects us against the adverse effects of pure risk. Liability insurance protects us against a tort or civil wrong that we may cause to other people and their property. Liability insurance pays for the financial responsibilities that one party has to another party as a consequence of action or inaction. Liability may involve negligence or a contractual agreement to assume someone else's liability. Liability insurance pays legal expenses for defense or lawsuits that may arise as well as settlements and judgments. Insurance, in general, is a means to transfer pure risk to someone else; the insurance company.

It is perceived by many jurists in America that the manufacture, sale and/or possession of a firearm constitutes a strict liability exposure for any injuries sustained for whatever reason regardless of the negligence of the user. Retailers and wholesalers of firearms protect themselves by the purchase of liability insurance for exposures resulting from their normal business operations. Premises liability would encompass "trip and fall" exposures of customers. Operations liability would encompass customary and usual operations such as sales, service, repair, material handling, assembly and other operations; all of which are associated with the handling of firearms.

Products liability insurance will protect the manufacturer for lawsuits alleging injuries plus defense costs. In theory, the policy is intended to cover against the risk of negligence in the design or manufacturing process. In reality, the risks have been expanded to include packing, shipping, advertising, warnings, labeling and many other exposures.

The relationship between the wholesaler/retailer of firearms and the manufacturer or importer is symbiotic. In order to place a firearm into the stream of commerce, each party must perform its respective task. Following an accident it is not uncommon to have both retailer and manufacturer accused of negligence. They often times are both alleged to have contributed to the cause of action.

In the mid-1980s, the insurance industry went through an upheaval, the likes of which had never before been witnessed. There had existed a philosophy of cash flow underwriting in order to capitalize on a bull market and high interest rates. Cash flow underwriting meant writing business without proper regard to risk analysis and only with the intent of putting business on the books so as to generate premium income. Underwriting for underwriting profit was thrown out the window. It was not uncommon to see $1.10 paid in losses for every $1.00 received in premiums.

Loss reserves were understated in order to give the impression of profit to shareholders, offsetting the underwriting losses. Loss reserves are an estimate an insurance company will pay out at a future point in time for current losses. Rates were depressed in order to maintain or gain market share. And coupled with all of this, the courts began to make historic awards to plaintiffs in malpractice liability and products liability. Asbestos claims, building collapses, hotel fires, airplane crashes, et cetera (all with losses in excess of $500 million) were the rule rather than the exception. As classes of business were perceived to be dangerous and subject to high jury awards, the insurance industry began wholesale class underwriting restrictions and cancellations. Firearms and related classes were naturally a part of that widespread action.


In 1986 the sporting firearms industry formed an association insurance company called Sporting Arms Insurance Limited (SAIL), which is domiciled in Bermuda. (If any reader wishes to contact them, call Peter Crompton at 809/295-3342.) Its owners are mainly firearms manufacturers and importers. The company writes products liability insurance and is now in its fourth year of operation. It is the largest underwriter of firearms and insures in excess of 35 manufacturers worldwide. It has also been recently expanded to cover archery equipment manufacturers. Quite a bit has been written on this company in industry magazines, and the purpose here is not to extol SAIL's virtues but rather, to discuss risk exposures to firearms retailers and wholesalers.

Typical Products Liability


A typical products liability policy issued to a manufacturer may include coverage for the vendors of a manufactured product. Coverage applies to certain operations of the retailer pertaining to the handling, packing and repacking of the manufacturers products. HOWEVER, DO NOT ASSUME THAT YOU HAVE COMPLETE PROTECTION FOR EVERYTHING THAT YOU DO ON A GIVEN PRODUCT. A typical Vendor's Endorsement may propound to cover a dealer with respect to distribution or sale of a product "in the regular course of the vendor's business." Coverage does not apply as respects unauthorized warranty. Nor does it apply to any changes to the firearm made "intentionally by the vendor," such as gunsmithing, scope mounting and other modifications which alter the product. Repacking for the purpose of inspection, demonstration, testing or substitution or parts authorized by the manufacturer is covered. All demonstration, installation, servicing or repair operations must be performed on the vendor's premises and can only be performed in connection with the sale of the product.

What does all of this mean? It means the vendor has very limited protection and only with respect to the sale of the product. One should not rely solely on this endorsement to take the place of your own liability insurance.

"Certificate of Insurance"

As little help as this may appear to be, you should still ask each manufacturer or importer for a "Certificate of Insurance" evidencing products liability and vendors coverage. Keep a log of the certificates you receive and keep a diary so that you can request renewal certificates each year.

You may also work with your attorney to create a hold harmless clause within a purchase order if one does not currently exist. This may or may not be enforceable when a claim arises, depending on the courts interpretation and depending upon the nature of the allegations, but in some circumstances such a "holdharmless" may prove to be a viable transfer of risk.

Avoidance. This may be the easiest and surest way to minimize risk. While, it is not the intent of this article to touch upon controversial gun issues, one may not want to handle certain product lines so as to avoid possible liability, perceived or otherwise.

It should be the responsibility of the wholesaler to evaluate each product line. Review the warnings and instruction manuals provided by the manufacturer. When you obtain a certificate of insurance from each manufacturer naming you as an additional insured, vendor, check to see if the insurance company is known to you or your agent. You should investigate to determine its financial stability. A manufacturer who does not have products liability insurance may offer the distributor or retailer a hold harmless agreement. When that happens, consider the financial stability of the manufacturer offering the hold harmless the same way as you evaluate the financial stability of an insurance company.

There is really no sounder way to transfer risk other than through the purchase of your own insurance policy. If both you and the manufacturer are sued and you are found to be liable for only five percent of the claim, you may be responsible to pay the entire judgment should the manufacturer not have valid insurance or be financially incapable of paying the judgment himself. This is the doctrine of joint and several liability.

Our experience over the last ten years in insuring the firearms industry, both manufacturing and retail/distribution, has been a constant education process in differentiating to the insurance industry perception versus reality. Claims experience, quality control in manufacturing, defensibility, safety, loss control practices, are all issues with a unique bend to the firearms industry and which are well controlled and manageable once properly understood and researched.

The New Hampshire Insurance Company is one such company that understands the risks and the manageability of those risks as respects firearms retailers, wholesalers and distributors. They are currently the underwriter for the Joseph Chiarello & Company firearms property and liability insurance program. New Hampshire is a member of the American International Group. The company is licensed in all 50 states and carries an A.M. Best rating of "A". A.M. Best & Company is the insurance industry's watchdog rating agency. This facility offers a complete insurance program to firearms retailers, wholesalers, ammunition manufacturers, reloaders, gunsmiths, indoor and outdoor ranges and accessory manufacturers. Coverage is offered for property, burglary or theft as well as general and product liability.

Over the years both the New Hampshire Insurance Company and the American International Group have shown consistency and stability in terms of rates and coverage for general liability and products liability insurance for this class of business.

The members of SAIL are well focused on loss control. As an offshoot to their company, they have formed a litigation company to handle, investigate, defend and settle claims of the insurance company. When forming SAIL, the manufacturers perceived the insurance industry to be lacking in experience when it came to firearms claims. Historically, a tragic accident involving serious tissue damage or involving a child was often settled before a lawsuit was filed. While this may have seemed expedient at the time and fixed the value of the claim, it also led to many canceled policies when the underwriter compared the claims paid versus the premiums received. Unfortunately, the underwriters were not aware of the posture taken by their own claims department and thus the manufacturer had to suffer the consequences.

Target Risk Management

Firearms claims are manageable. Many claims are the result of unfortunate accidents. They are often not the result of the manufacturing process or the result of work performed by competent men and women in the retail, wholesale or gunsmithing trades. Target Risk Management (TRM), the claims arm of SAIL, will take a vigorous, hard line posture on product liability claims which are deemed to be frivolous and with no validity. SAIL is prepared to spend more money on its claims handling in order to help the industry establish a good record. While it does not intend to roll over and play dead on unwarranted claims, it will investigate, negotiate and settle those claims it deems necessary.

One of the many benefits of such a company is that it brings focused legal representation to the smaller manufacturer or importer who does not have the resources to hire its own inside general counsel. TRM serves that purpose with its extensive internal resources as well as by having the ability to call upon knowledgeable and experienced personnel from the ranks of its clients. The system works. SAIL is in healthy shape today because of this philosophy, and it expects to stay that way for years to come.

As a retailer or wholesaler, the usual first indication that there may be a problem with one of your products is the customer complaint. This usually comes in different fashions: telephone, face to face or a letter.

What You Can And Should Do

If A Problem Arises

When one first becomes aware of a problem, certain established procedures must be followed to assure that the complaint is promptly and courteously handled at the first instance. It is extremely important that appropriate records be maintained. Try to obtain possession of the damaged gun or ammunition. If your customer will not let you keep it, try to take a picture of the damaged product. There have been instances where the damaged gun has been substantially altered between the time of the incident and litigation. Keep any newspaper reports of the incident. Obtain the names and addresses of anyone who might have knowledge of the incident. Next and most importantly, notify your insurance broker and lawyer.

If there is one overriding fact to be derived from this article, it is that you, as a responsible businessman, must do everything in your power to protect your business. Should a claim arise, it will be your responsibility to mount an immediate and professional defense. It is not good business judgment to rely on a manufacturer's vendors endorsement, certificate of insurance, hold harmless agreement or self insurance plan to provide your defense.

Any number of things can happen between the sale of the product to you and an accident involving that product which may affect the manufacturer or his insurance company's ability or desire to defend you, the dealer. 1.) The manufacturer may be out of business. 2.) The manufacturer's insurance company be out of business. 3.) The limits of liability available may not be sufficient to protect all parties involved in the claim. 4.) The claim may have been caused by the dealer failing to include the owner's manual with the gun at the time of the sale. 5.) The foreign insurance company of an overseas manufacturer may not defend or pay a claim in the United States. Many foreign manufacturers refuse to or are unable to provide valid insurance in the United States.

If you are to be the master of your destiny, it is imperative that you protect yourself with your own coverage, underwritten by an insurance company which has demonstrated its consistency, stability, and knowledge of firearms business.

The issues as regarding risk, risk transfers and loss control are not about to subside anytime soon. Hard work and constant communication must continue. Sharing of knowledge about risk, learning how to transfer and manage risk and implementing what is taught are of paramount importance to the survival of one's business and to the industry at large.
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Copyright 1989 Gale, Cengage Learning. All rights reserved.

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Title Annotation:firearms liability insurance
Author:Chiarello, Robert V.; Coonan, James F.
Publication:Shooting Industry
Date:Jun 1, 1989
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