Because of the litigious nature of our society, a spilled cup of hot coffee can put you out of business. Add to that, increased global manufacturing practices and environmental concerns and its no wonder that liability and risk factors have garnered tremendous attention in recent years. Most businesses view their risks in at least a cursory fashion each year when they renew their insurance policies. But in light of the recent Wisconsin Supreme Court ruling on the Plenco case, businesses of all sizes and across industries need to make sure all aspects of their risk and liabilities are covered.

Evaluating risk and long-term liability

According to Todd G. Smith, a shareholder and member of Godfrey & Kahn’s Insurance Practice Group, claims and litigation present significant risks for all Wisconsin businesses, including product manufacturers. “Particularly in today’s challenging business environment, litigation can cripple a company’s balance sheet, attract unwanted negative attention and distract a company from its business goals,” Smith says.

Earlier this year, a case involving Sheboygan-based Plastics Engineering Company (Plenco) went before the Wisconsin Supreme Court. Plenco manufactured asbestos-containing molding compounds for a 23-year period. As a result of Plenco's asbestos use, it was named as a defendant in hundreds of lawsuits for claims arising from exposure to Plenco's asbestos-containing products. Plenco sought coverage for these lawsuits through a series of general liability and umbrella policies. Plenco's insurer was on the risk for some, but not all, of the years of exposure in the claims.  At issue was the extent of the insurer’s share of the risk.

In regard to the Wisconsin Supreme Court’s Plenco decision, the Court’s decision was the primary effect of increasing the amount of coverage for personal injury damages caused by a manufacturer’s defective product.

According to Richard Bolton, partner at Boardman Law Firm in Madison, general liability insurance policies obtained by manufacturers include a limit as to what the insurer will pay “per occurrence.” “From the insurer’s perspective, payouts are limited if more injuries can be accumulated under the umbrella of a single occurrence,” Bolton says. “In other words, if five people are injured, but all of their injuries constitute a single occurrence, then an insurer’s potential liability is less than if each injured individual is treated as a separate occurrence.”

As Bolton explains, the “single occurrence” issue is important for manufacturers who sell products that end up having a defect that causes many personal injuries. “Manufacturers typically sell many of the same product, and all of these products may potentially cause injuries, if defective,” Bolton says. “From the manufacturer’s perspective, separate policy limits for each product and each injury provides the greatest protection. From the insurer’s perspective, however, if the act of selling an entire defective product line is treated as a single occurrence, then cover limits are substantially limited.” Instead of having coverage limits for 50 injured people, for example, the insurer might only have a single limit for all 50 injured persons.

“In Plenco, the Wisconsin Supreme Court rejected the insurer’s single occurrence argument,” Bolton says. “The Supreme Court concluded that each individual injured by a manufacturer’s product constitutes a separate occurrence.”

The Court also addressed the issue of allocation of insurance between different insurers liable for a single injury. In Plenco, personal injury damages caused by asbestos exposure can arise over a long period of time. “The insurer responsible for providing coverage at the time of the initial asbestos exposure, however, may be subsequently replaced by a different insurer at a later time,” Bolton says. “In this situation, the insurer in Plenco argued that it should only be liable for an individual’s damages on a pro rata basis, i.e., the percentage of time as to which the insurer was the general liability insurer.”

The Wisconsin Supreme Court rejected the insurer’s argument for allocating liability between different insurers.

“The Plenco decision has the effect of providing more insurance coverage for manufacturers of products that cause multiple injuries,” Bolton says. “The Plenco decision does not have any significant effect on a manufacturer’s potential risks. For injuries that may occur over a protracted period to time, however, Plenco emphasizes the need to look backward in time for coverage from more than one potential insurer. The Plenco decision emphasizes the possibility that coverage may exist under multiple policies.”

As Roy Fine, partner at DiRenzo & Bomier explains, the Plenco case is interesting because casual reading of the case would suggest to most people that it doesn’t have any significance to Wisconsin businesses since it relates to insurance companies and also asbestos, which the industry is getting rid of.

“Because the insurance coverage related to asbestos doesn’t exist anymore for the most part, it’s excluded from most commercial policies,” Fine says. “Therefore, it’s easy to look at the Plenco case at first glance and think it doesn’t have any relevance. However, it’s important for businesses because it really illuminates the need for them to examine their insurance coverage.”

It’s easy to go to your agent and sign up for a business policy and once you get it, just throw it in a file and you’re done with it.
“This case makes it very clear you need to do more than that,” he stresses. “When a business asks an insurance agent what coverage they are receiving, no doubt the agent is giving them an accurate representation about the general coverage. But like many things, the devil is in the details, including the definitions and exclusions.”

The ruling in Plenco will have an impact on how insurers write their policies and exclusions. “There are specific exclusions that don’t leave any room for interpretation and the courts will hold the parties to their agreement,” Fine says.

What’s at stake

The types of risks and liability do vary somewhat by a company's business. For example, a professional services business may focus on the risks and liabilities related to malpractice issues. A manufacturing company might focus on the risks associated with products liability and occupational exposure. And companies that own or control real estate may focus upon historical exposures, such as the risks to asbestos and other similar products.

“For asbestos claims and environmental claims the damage appears over a long period of time,” says Gordon Davenport, an attorney with Foley & Lardner in Madison.

An employee in a manufacturing plant could be exposed to asbestos over a long period. Ground-water contamination from an underground gas tank may take decades.

“Then you have the issue of when did the damage occur and what policies apply to it,” says Davenport.

Understanding risk begins with a complete understanding of your company’s product or service, its customers and distribution channels. “If your business produces a durable product with a long useful life, the risks presented to the company will naturally extend longer,” Smith says. “If your product includes potentially hazardous materials, or is inherently dangerous (such as fertilizer or a blender), the risks are obviously more significant. Finally, if your product contains materials obtained or manufactured overseas, including China, they may include materials that are not as thoroughly tested or regulated as they would have been had they originated from the United States. These risks are often unpredictable despite a company’s best efforts when working with overseas suppliers.”

A mixed blessing

Liability and risk management begins with appropriate insurance coverage. As Smith explains, insurance companies have developed specialty coverages to address risks posed by certain products or services. “Your insurance professional should identify insurers who will work with you to suggest best practices or other measures your business can adopt to reduce or eliminate claims,” Smith says. “Working with your carrier in this manner not only reduces risk of litigation but may also reduce your insurance premiums.”

Smith advises that Wisconsin businesses also seek to protect themselves in their contracts with suppliers and distributors, by obtaining agreements to indemnify you should your company face a claim based on conduct by your supplier or distributor. “By entering into agreements that allocate responsibility for claims before they arise, businesses can bring an element of cost predictability to their risk profile,” Smith says. “Such agreements are encouraged and favored under Wisconsin law.”

The nature of your business’ customers is also an important consideration when analyzing the risk of potential claims.

“Consumers generally present the largest source of litigation,” Smith says. “A business should also consider the demographics and other information of its customer base to fully gauge the risk of future claims. Are your customers affluent? Are they highly educated? Often businesses collect this information to help it market its goods and services more effectively. This information is also useful, however, to analyze the risk of potential claims that might be asserted against the company.”

Most manufacturers purchase coverage for damages potentially caused by their products. “For injuries that may occur over a protracted period of time, however, Plenco emphasizes the need to look backward in time for coverage from more than one potential insurer,” Bolton says. “Manufacturers have a tendency to look just to the policy in effect at the time a claim is made, or the policy in effect when first exposure occurred, etc. But the Plenco decision emphasizes the possibility that coverage may exist under multiple policies. When claims are made against a manufacturer, they should consider the possibility of insurance coverage over a range of time and policies, as well as from multiple insurers.”

Companies wishing to avoid liability should avoid the mistakes described above and keep their eyes and ears open for new sources of risk. “Businesses should keep and retain accurate records, including records describing their manufacturing processes, supplier and distributor agreements, customer research, etc.,” Smith says. “In addition, the company should document the steps it takes to reduce risk, including any steps taken at the recommendation of its insurance carrier or counsel.”

So how will this affect the future of liability insurance for companies? “The Plenco case is a very significant decision for Wisconsin companies in terms of the amount of insurance coverage that they will have available to them for long-term claims,” Davenport says. “While insurance companies have fought this across the country, they have not attempted to change the policies to try and achieve a different result. It might make insurance companies be a little more anxious to exclude certain coverages because the risk is just too great.”

By Maura Keller

Maura Keller is a freelance writer originally from Wisconsin.

More Featured Articles