Topic: GL Policy – Defective Products Extension (Rip and Tear Endorsement)

Author: John Negrotto, George Cunningham and Steve Ortley

Overview:

The Xavier Yard Zoning (XYZ) Corporation is a large privately-owned concrete and rebar company based in Fort Worth, Texas. XYZ Corp has secured a contract to supply concrete and rebar building materials for a new 40-story hotel being constructed in downtown Dallas valued at $100 million in supplies, labor and potential revenue.

Given XYZ’s business endeavors they have a risk management department which is managed by Teddy Johnson (TJ), who has been in the risk management business for the last 15 years. Until recently they were using a super regional broker and have garnered all of the required coverages and bonds for a low deductible General Liability policy a first-dollar Workers Compensation policy and low deductible third-party Employers Liability policy.

To save money, they have retained your services as an insurance consultant to assist in the renewal of XYZ’s policy. You were able to market the program to a variety of markets and secured a higher $100,000 deductible General Liability policy, a $100,000 Workers Compensation Policy and a third-party Employers Liability policy also with a $100,000 deductible. You made your loss projections based on their 5 years of loss history and projected that even with a slight increase in claims XYZ would significantly benefit from executing your risk program. TJ and the XYZ management team were ecstatic about the savings and with the capital were able to competitively bid and win the Dallas Hotel project with the working capital saved in the insurance fixed costs.

Situation:

About 4 months after entering the new risk program, TJ gets a startling call from the on-site safety supervisor for XYZ. An XYZ employee at the insistence of the General Contractor was hoisted approximately 20 stories to the top of the work-site via crane to inspect the recent installation of XYZ product. While walking along the overhang to inspect the edge, the XYZ concrete and rebar balcony gave way and the XYZ employee fell to the ground. No safety harness was used and no safety protocol was followed to get the employee to that concrete balcony, a simple crane and hoist delivered him to his destination, no elevator and no scaffolding.

An incident inspector soon arrived on scene and the XYZ rebar was determined to be the cause of the accident because it malfunctioned and was not hardened the right way before the installation. Given the condition, the 20 story foundation was not going to be able to support the remaining 20 stories and needed to be replaced.

Scenario 1:

After the call, TJ re-read the Workers Compensation and General Liability policies and immediately calls you to ask how the insurance products will respond. If XYZ had a Defective Products Exclusion, which of the three insurance policies (WC, GL and EPLI) would respond to the claims and how much would XYZ probably need to pay?

Scenario 2:

After the call, TJ re-read the Workers Compensation and General Liability policies and immediately calls you to ask how the insurance products will respond. If XYZ did have a Defective Products Extension what would have to be included in the contract with the General Contractor to indemnify XYZ from this claim?

Even with the Defective Products Extension, what else could have been done to transfer risk to a third-party in this case?