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As manufacturers shift gears and repurpose their operations to meet changing customer demand, or to produce sorely needed gowns, masks and ventilators amid the COVID-19 pandemic, they need to be sure that their insurance coverage is appropriate, experts say.
The caution to businesses to check in with their agents, brokers and insurers before they jump into a new product line, comes as some face rising liability exposures due to their change in focus, these experts say.
Meanwhile, industrial plants and other premises that have been closed temporarily due to the pandemic require proper monitoring to prevent loss and damage occurring while these facilities remain idle, insurers and brokers say.
Any time an operation retools or repurposes its employees to create a new or different product, it changes its risk profile and exposure base, said Renee Dube, Valhalla, New York-based vice president, national property & casualty practice, at USI Insurance Services LLC.
“There is a concern and there should absolutely be a review of exposure base and coverage if a manufacturer is repurposing or focusing on a new product,” Ms. Dube said.
Based on the type of work being performed by an employer, insurers assign a class code that generates the appropriate rate and coverages for that risk, she said.
“That class code is critical to the underwriting of a particular manufacturer,” Ms. Dube said.
On March 18, President Trump invoked the Defense Production Act of 1950 under which manufacturers can be called upon to produce materials and services needed for national defense purposes, in this case to meet shortages in key medical supplies, such as masks and ventilators.
For example, automaker General Motors Co. on Wednesday signed a contract under the DPA to make 30,000 ventilators by August.
“At the highest level we are seeing a lot of organizations being asked to step up,” said David Carlson, Cleveland, Ohio-based U.S. manufacturing and automotive practice leader at Marsh LLC.
“These companies have the resources, technology, engineering and overall wherewithal to be able to pivot and partner with other organizations to build and supply the needed products under the current COVID-19 pandemic,” Mr. Carlson said.
However, it’s the non-life science companies, “those that are not making the products currently, or those that make them currently but not the exact type, or maybe a different model,” where the liability starts to present itself from a risk management perspective, Mr. Carlson said.
Jeff Diefenbach, a senior vice-president and managing director at Burns & Wilcox Ltd. in Detroit, cited the example of a plastics manufacturer in Michigan that had been producing “non-critical plastic components for the auto industry for decades.”
“This week they started manufacturing plastic surgical gowns that doctors and nurses in hospitals are wearing, which is a tremendously different products exposure,” he said.
Some general liability policies could have exclusions for medical products manufacturing, so suddenly a company’s “general liability policy and the products liability component to that policy that had been covering them for all these years no longer affords them coverage for that new product,” Mr. Diefenbach said.
Insurance policies may also restrict coverage to the classification specifically identified in that policy, so if a business starts doing something completely different their limits may not be adequate, he said.
“Something like a surgical gown could provide a much bigger exposure to loss than a doorknob,” he said.
As a result, agents and brokers need to reach out to their clients to make sure their exposures haven’t changed, and “if any of these manufacturers are entering into a contract or an effort to produce a product outside their wheelhouse, they’d better check with their insurance agent to see if their program covers it,” Mr. Diefenbach said.
From an underwriting perspective, “you really have to look at each and every client differently,” said Darlene Villoresi, Morristown, New Jersey-based life sciences product liability leader at Marsh LLC.
“In general, if it’s a client that doesn’t have any other medical products, if you convince the (insurance) markets that they’re with to pick up this new exposure, there’s not a specific endorsement. They may want to charge for it, but there’s not a specific wording that would need to be added,” Ms. Villoresi said.
Whether a manufacturer’s insurance policies and premiums are reflective of the risk in the new contract is a discussion point, Ms. Dube said.
A business that is repurposing may face increased exposure, but liabilities may also decrease where certain product lines are shut down because of government mandates or as workers are furloughed in a slowing economy, she said.
“Everybody is in this together and open to discussions whether it’s around the timing of premiums, mid-term audits or changes in exposure base,” she said.
Some insurers have reduced or returned premiums to policyholders during the COVID-19 pandemic, including in the workers comp sector. Observers say declining payrolls could lead to reduced workers compensation premiums.
While companies stepping up to manufacture or distribute products under the Defense Production Act may have government immunity, it’s important that they seek outside counsel to better understand the liabilities involved, experts say.
Some of it is a gray area as to what is immunity under the DPA, and there may also be areas where immunity is limited, said Marsh’s Mr. Carlson and Ms. Villoresi.
“Immunity is not going to preclude you from getting sued, and the insurance will cover your defense in the event you’re sued,” Ms. Villoresi said.
Everybody involved in the COVID-19 efforts from the manufacturers to the insurers and federal and state governments are “compelled to do the right thing,” Mr. Carlson said.
“Everybody is learning. This is an unprecedented event, so even the insurance industry is saying we want to do the right thing, we want to help with risk transfer, but we need to understand it,” he said.
Meanwhile, the temporary closure and idling of factories and other commercial premises to prevent the spread of COVID-19 could leave companies vulnerable to loss, according to two separate reports from insurers FM Global and Allianz Global Corporate & Specialty SE, the corporate insurance unit of Allianz SE.
The potential damage caused by fire or as a result of inadequate maintenance remains, or even increases, when operations are shut down, said Thomas Varney, Chicago-based regional manager of the Americas at Allianz Global Corporate & Specialty SE.
Where possible, companies should continue to conduct regular inspections and tests of fire-protection systems, for example, Mr. Varney said in an interview.
“There’s more to it than closing the door. Do you understand all the things going on and have steps been taken to ensure your assets are protected?” he said.
Companies need to help protect their facilities by taking key steps to prevent loss as the crisis unfolds, according to a report released Tuesday by Johnston, Rhode Island-based insurer FM Global.
For example, companies should contact authorities and explain that security and maintenance personnel at their site are “essential” in the context of stay-at-home orders, FM Global said in its report.
They should also maintain staff to perform regular daily rounds inside and outside idle facilities and to watch for criminal activity, smoke, fire or property damage, FM Global said.
Remote technologies, such as webcams and sensors that can detect out-of-the-ordinary motion, heat or water flow, should be considered, the insurer said.
More insurance and risk management news on the coronavirus crisis here.