Most businesses, and particularly retailers, require that their suppliers name the retailer as an “additional insured” on the supplier’s general liability policy. This means that if a customer is injured because of the supplier’s product, and the customer sues the retailer, the supplier’s insurance will have to pay to defend the retailer in the lawsuit. Demanding to be added as an “additional insured” is a standard part of contractual risk-transfer in retail, as in most businesses. But two recent rulings demonstrate that “additional insured” coverage may not be worth much – if the supplier’s insurer is outside of the U.S. Companies can try to avoid this problem by revising their contract language.
The first decision, Dick’s Sporting Goods v. PICC, involved a supplier of an inflatable yoga ball to Dick’s, a large sporting-goods retailer. One of the balls burst, injuring a customer, who sued Dick’s. Dick’s demanded that the supplier’s insurer, PICC, defend it, based on Dick’s status as an additional insured. PICC refused. Dick’s sued PICC in Pennsylvania federal court, but PICC moved to dismiss on the basis that the insurance contract required that any disputes be resolved in a court where PICC was located – China. The court agreed.
The second decision, Lexington Insurance v. Zurich Insurance (Taiwan), involved injuries due to defective components in a Trek bicycle. The injured customer sued Trek, which demanded that the insurers for two of the component makers defend Trek, because Trek was an additional insured on both policies. Both insurers refused, and Trek’s own insurer (Lexington) paid to resolve the claim. Lexington then sued the other two insurers in the state where Trek is based (Wisconsin) to contribute their fair share to the settlement. But both insurers were based in Taiwan, and both moved to dismiss on the basis that the Wisconsin court had no personal jurisdiction over them. The court agreed, holding that merely because the component makers contracted with Trek in Wisconsin did not mean that the insurance companies had consented to be sued in that state.
These decisions, taken together, should cause concern for any U.S. business that contracts—directly or indirectly—with a foreign supplier, vendor, or service provider and that relies on additional insured requirements as part of its risk-management plan. If that supplier has a foreign insurer (as most will) the US business may run into the same problems as did Trek and Dick’s. It is much more expensive, and difficult, to litigate with an insurer in a foreign country, under non-U.S. law. It is also more difficult to predict whether the additional insured coverage will actually work as intended. The U.S. has developed robust amount of case law around additional insured insurance issues. While U.S. law may differ slightly from state to state, counsel can usually predict how a dispute between an insurer and an additional insured will come out, enabling the business to estimate the value of additional insured status. If foreign law applies, it will be significantly harder to value the coverage as part of the risk-management plan.
To avoid these kinds of problems businesses should re-evaluate their contractual additional-insured language, and consider requiring that a supplier’s insurance either be procured in the U.S., or that it not contain the kinds of language that caused problems in the Dick’s case, and that the supplier’s insurer will be subject to jurisdiction in the United States. The personal-jurisdiction issue in particular may need to involve creative contract language and negotiation with the other party and its insurer. Companies should work with counsel experienced with drafting insurance requirements and with insurance dispute-resolution to find the best solution.
Negotiating for additional insured coverage is a critical part of risk-transfer – often more valuable than general indemnity clauses.
Companies should act now to make sure that they are getting what they think they are bargaining for.