Fume Trial Win Underscores Need For Indemnification Agreements

The year started off on a positive note with another defense verdict for the industry in the first welding fume trial of 2010. On March 26, an Ohio jury returned a verdict in favor of Hobart Brothers, Co., after rejecting the claims of Texas welder Ruben Arroyo. After being diagnosed with manganism, Arroyo sued Hobart Brothers for failing to adequately warn of the dangers of being exposed to welding fumes, in addition to other theories. After a one-week trial, the jury found in favor of Hobart Brothers on all counts. The Arroyo case was the 24th overall win for the industry in the 29 welding fume cases that have been tried thus far in state and federal courts.

The win is certainly good news. However, Arroyo did not begin welding until 2005, which underscores that welding fume lawsuits will continue to be prosecuted and are not going away anytime soon. Which leads to my next topic: the need for distributors to obtain indemnification agreements and additional insured endorsements from manufacturers whose products they carry.

Indemnification and Vendor Endorsements
Every good risk management plan should start with the distributor’s own liability insurance. It is imperative that you confirm that your business has adequate protection against product liability risk. The recent problems at Toyota serve as a reminder that latent defects can lurk in any product, even those manufactured by the best and most quality-conscious manufacturers. Everyone in the distribution chain is potentially liable for defective products that enter the market. Your company will likely be named a defendant if a lawsuit is filed involving a product you sold—even if your company simply resold another manufacturer’s product.
In addition to liability insurance, distributors should seek to reduce risk through contractual arrangements with the manufacturers. This is especially true for risks where insurance coverage is unavailable or limited, such as the case with welding fume liability. Indemnification is a contractual agreement whereby the manufacturer agrees to defend a distributor in the event a distributor is sued for a defect in the manufacturer’s product, and to indemnify the distributor in the event that damages are awarded. Indemnification agreements are common in product distribution chains. The terms, scope and extent of indemnification vary and are usually negotiable, depending on the bargaining leverage of the distributor. However, even a limited agreement, which provides only that the manufacturer will defend the distributor in the event of a claim, can be enormously valuable in light of the costs of defending product liability claims.

In the end, however, indemnification agreements are only as good as the creditworthiness of the manufacturer, which can be problematic if the manufacturer becomes financially unstable or is itself subject to substantial liability as a result of a major product defect or recall event.

Distributors should also ask to be endorsed as an “additional insured” on the manufacturer’s liability policy. In product distribution channels, these are referred to as Vendor Endorsements, the effect of which is to make the distributor an insured party under the policy. A Vendor Endorsement has several advantages. As an “additional insured,” the vendor has direct access to the manufacturer’s policy. Thus the endorsed vendor has a right to a defense paid for by the manufacturer’s insurance company in the event of a claim. The endorsed vendor can also seek indemnification from the policy in the event of a judgment, even if the manufacturer is insolvent or cannot satisfy the claim. By pushing claims off onto another policy, endorsements can keep a distributor’s own cost of insurance down.

The coverage available under a Vendor Endorsement is limited to the terms of the policy. Additionally, the policy is subject to modification or cancelation by the manufacturer. The coverage can also be exhausted if the limits are reached before the vendor is reimbursed. Finally, standard Vendor Endorsement language does not extend coverage to liability due to the vendor’s own negligence, or if the vendor changes or alters the packaging, warnings or instructions.

Even if limited, having access to your manufacturer’s insurance coverage in the event of a product claim is a valuable asset to have.

(Disclaimer: The information provided in this column is a service provided by GAWDA for informational purposes only and should not be considered legal advice.)

Gases and Welding Distributors Association
Meet the Author
Michael Degan is GAWDA’s joint defense fund coordinating counsel for welding fume litigation and a partner with Husch Blackwell Sanders LLP. Members can reach him at 402-964-5000 and mike.degan@huschblackwell.com.