When it comes to product liability claims, don’t “put the blame on me” if it’s not my fault; put it on the person or company that deserves it. Product liability claims present an important opportunity to consider shifting risk by way of a tender. This is because, oftentimes, there are other entities that may be legally responsible for a claim or loss, but frequently opportunities are missed to make those parties accept their obligations.
So before engaging in an analysis of whether to settle or fight a claim or lawsuit, an important claims resolution strategy should include a consideration of whether the risk can be shifted to another entity. With the help of “The King,” let’s address how and to whom tenders might be made, the potential bases for a tender, and how best to respond to a tender if a policyholder receives one.
“Burning Love” Understanding the Tender
A tender is a demand made to someone who has (or should have) primary responsibility or liability for some casualty, either by law or by contract, to indemnify, and possibly to defend, an innocent or passive defendant from a claim or lawsuit. The bases for making a tender are found in written agreements, statutes, or the common law of relevant jurisdictions. Tenders should be made in writing and transmitted to the appropriate person receiving tenders, typically the indemnifying company’s legal department, an insurer’s claims professional, or a person identified in a written agreement for receiving notices associated with that agreement.
Tenders most often are based upon indemnity or hold-harmless language in a written agreement. These obligations might be found in a supply agreement between a retailer and distributor or a distributor and a manufacturer. They also might be found in a quality agreement or similar contract between a product manufacturer, a product designer, and a component parts manufacturer. Written indemnity promises might even be found on the backsides of invoices or receipts issued between any of the parties along a product’s supply or distribution chain. In most cases, a valid tender for the defense of a claim requires some kind of written promise by the other party to defend or hold the tendering party harmless from damages, judgments, and settlements, and also, perhaps, from claims and liability generally.
Even if there is no language in an agreement to support an indemnity obligation in favor of a passive defendant, at least half of U.S. states have some kind of statutory protection for distributors, and still other states provide for common law indemnity by active tortfeasors in favor of passive tortfeasors. As a result, one may consider the option to tender even without some favorable contract language requiring indemnification. This analysis will vary state by state.
Tender letters should focus on two things: the claim made against the tendering party, and the language in the contract, statute, or case law that sets forth the indemnity obligation. The tender letter should clearly apply the language in the contract or the relevant common law or indemnity statute to the circumstances alleged in the claim or lawsuit against the tendering party so as to plainly set forth the basis of the indemnity obligation.
Tenders should be made as soon as possible. For agreements that indemnify a party against any loss, the tendering party will have an argument that any payment it makes for its own defense to a claim or lawsuit is a loss that is indemnified. As a result, for payment of defense fees in particular, the date of the tender is very important, as it usually delineates a point in time when there is a transition of responsibility for those fees. If a tendering party waits until litigation is underway or even until it has concluded to make the tender, the party with the indemnity obligation will have a strong argument that it has no duty to pay pre-tender defense fees based upon a lack of notice and opportunity to be involved in the defense up to that point. This is similar to a late-notice argument an insurer might make as a defense to coverage.
“Tender Feeling” Parties to Consider
In product liability claims, tender letters usually are transmitted up the distribution chain to the product manufacturer and sometimes even beyond the product manufacturer to a product designer (if different) or a component parts manufacturer, depending upon the claim. The initial focus often is on what precisely is alleged to have caused the claimant’s injury; although, it may not be readily apparent from the lawsuit or claim what party is or may ultimately be responsible. Accordingly, tendering to all potentially liable parties is a best practice, particularly if the tender includes a demand for a defense or reimbursement for defense fees that are paid.
Besides tendering to the potentially responsible party or parties, a claims professional or defense attorney should encourage the policyholder or client to tender its defense and indemnity directly to the insurers of the likely responsible parties. Such a tender can be made directly to the insurer of the responsible party if there is an argument that the insurer of the responsible party has made the tendering party an additional insured under its insurance policy.
“It’s Now or never” Additional Insured Status
If the opportunity to tender directly to the responsible party’s insurer is available to the indemnitee, then a tender directly to the responsible party’s insurer for defense and indemnity of a claim is likely to be the most effective demand one can make and ought to be the focus of the effort to shift liability. This is because, if there is additional insured coverage under the product manufacturer’s policy of insurance, its insurer likely will have a clear duty to defend the tendering party based merely upon the possibility that the named insured’s product or work contributed to the claimed injury. Given the breadth of an insurer’s typical duty to defend, the failure to accept a demand for coverage by the additional insured tendering party under these circumstances could expose the insurer to bad faith or extracontractual liability. Indeed, because a duty to defend is so broad, this option may be available even to tendering defendants that are not completely passive or without fault.
As a result, one should make a determination at the earliest possible point in time whether the tendering party is an additional insured under the responsible party’s policy of liability insurance. Many agreements that incorporate indemnity and hold-harmless obligations in favor of one party to the agreement also include a requirement that the indemnifying party purchase insurance to backstop the indemnity and hold-harmless promise. These provisions typically require the indemnifying party to purchase insurance, which makes the indemnified party an additional insured under the policy.
Even if there is no such agreement to purchase insurance, insurance policies for product manufacturers and component parts manufacturers often include provisions like vendor endorsements, or they may include the sellers of the named insured’s product within the section of the insurance policy titled, “Who is an insured.” The reason that many policies for product manufacturers typically include this additional coverage is precisely because their policyholders often will receive indemnity tenders for claims made against distributors or retailers down the distribution chain.
“Suspicious Minds” Why use someone else’s insurance?
A policyholder in the supply chain with its own insurance may inquire why a tender is necessary or why it makes sense, particularly when it will view its own policy of insurance as its backstop for potential liability when a claim is made. Indeed, a policyholder distributor or retailer may resist the idea of tendering a claim up the supply chain for fear of souring a relationship, especially if the claim is not likely to be substantial.
There are several reasons one can give for tendering upstream, notwithstanding the risks to relationships. First, parties up the distribution chain expect these tenders, and, in one sense, it is important and cost efficient to consolidate the defense of claims and place that defense into the hands of the responsible party. This is particularly the case when the passive defendant will be relying on the same defenses as the product manufacturer.
Second, a policyholder that simply relies upon its own insurance can find doing so to be costly. If the policyholder tenders a claim only to its own insurer, this creates a loss experience, which can lead to an increase in future insurance premiums.
Third, for potentially large claims, a tender usually will render the insured’s own policy of insurance excess over the responsible parties’ insurance policies. This will effectively increase the amount of insurance available to address this claim for the tendering party.
Finally, when relying on another policy of insurance, the deductible may be smaller, and it may be paid by the named insured, meaning less out-of-pocket costs for the additional insured policyholder.
It is important to recognize that tendering the claim to the indemnitor up the distribution chain is not the same as tendering or giving notice of a claim and making a demand for coverage to the indemnitor’s insurance company. A separate notice to the insurer is necessary to demonstrate a demand for coverage, as opposed to making a potentially insured claim for indemnity against the named insured under the policy. This is particularly significant as a claim for indemnity will only be as good as the indemnity language in the agreement or under the statute or common law. A successful claim for additional insured coverage, on the other hand, means a defense and indemnity for the claim directly from an insurer, which typically involves much more favorable language, and a much stronger argument for a defense, based only upon the possibility of coverage.
“Return to Sender” Strategies for Responding
While a typical defense and indemnity provision in an agreement does not reach the level of an insurance contract, tendering parties often view those obligations in a similar light when making a tender. In most cases, they are wrong to do so. When responding to a tender, a careful analysis of precisely what is required by the indemnification provision should be undertaken in conjunction with the applicable law to determine precisely what the indemnitor’s obligations are under the contract.
For example, a contractual indemnity agreement may be a promise to protect a party from liability only. Some courts find that such a promise only makes the indemnitor responsible to take some action if there is an actual finding of liability by the indemnitee and, therefore, there is no duty to defend or take any action at the outset of a claim or lawsuit. Even a promise to indemnify against loss may be triggered only to reimburse the out-of-pocket costs actually paid by the tendering party. In other words, if the tendering party has insurance and its insurer pays for the defense of the tendering party, then one could argue that the duty to indemnify the tendering party for loss has not been triggered.
These limitations found within indemnity language may give the responding party the opportunity to delay or refuse a tender, particularly due to the way some courts interpret indemnity language. This could be based upon the possibility or likelihood that the tendering party may be solely responsible for the loss, as most states will not enforce language that would make an innocent party the indemnitor of a guilty party, or the possibility that someone else in the distribution chain may be responsible.
One benefit to delaying a response is the possibility that the tendering party ultimately will not want to undertake the burden of actually enforcing the indemnity obligation or the possibility that the underlying plaintiff may drop a passive defendant prior to seeking a judgment. As a result, a responding party should be circumspect about accepting a tender since once the tender is accepted, the expectation of the tendering party, and most courts, will be that all losses or liability will be paid by a party accepting a tender.
Finding the “Promised Land”
A tender for defense and indemnity is a powerful tool to utilize in product liability actions. Before deciding whether to settle or defend a matter, serious consideration should be given to whether the loss can be shifted to another entity. While this may not bring about a quick resolution, it ultimately may prove to be financially and strategically beneficial to the policyholder and its insurer. Evaluate all potential parties and all possible bases before making the request and continue to evaluate as additional information becomes available.