In 1993 the Technology Group was formed to address the unique insurance needs of the emerging technology industry.

Mike Cremeans, Member, The Institute for Orthopaedics

If you are a supplier to orthopaedic companies, and you produce a product based on specifications developed by someone else, you are probably experiencing a "push back" from your clients due to the fact that more of the contracts you have with your clients require you to indemnify or hold them harmless "from any and all losses and costs."

This creates a challenge because maybe you've never had to deal with the issue - it was "understood" that the manufacturer indemnified YOU, and your risk was very low. I would like to go through the issues and then discuss some guidelines you might consider in your negotiations with your customers (OEMs).

Let's look at an example of language you might find in a typical contract. "YOU" is the supplier and "ME" is the customer or OEM:

YOU shall indemnify, defend and hold harmless ME and my shareholders, directors, officers, employees, agents, attorneys, accountants and consultants from and against any and all claims, damages, liabilities, costs and expenses (including reasonable attorneys' fees and costs) arising out of or relating to: (i) any breach of this Agreement; (ii) any liability claim relating to the Products (or Services) and any Technology Related to the Licensed Products; and/or (iii) any claim that the Products (or Services) and any Technology Related to the Licensed Products, or any portion thereof, infringe upon the intellectual property rights of any other Party.

You may also find a section on Insurance. Your customer wants you to "fund" your obligations in the form of an insurance policy. The language may look like this:

YOU shall maintain a policy of insurance to cover any negligent acts or omissions of your company and your employees or agents during the performance of this Agreement. Such insurance shall include, but not be limited to, comprehensive general liability. The comprehensive general liability insurance shall be written with limits of not less than $5,000,000.00, and shall: (i) include broad form product liability, personal injury liability, property damage liability, and contractual liability coverage; (ii) name ME as an additional insured; and (iii) be primary and non contributory for all purposes. YOU shall provide ME with a copy of the policy of insurance required under this Section upon request in writing.

Let's take apart the requirements. You probably know that insurance will never pay for "any and all" claims and certain risks will have to be assumed by you. This is especially true when it comes to allegations against you for infringement of IP rights - these are specifically excluded under most policies. You'll find that "general liability" policies cover premises liability, products liability, property damage and have some coverage for "contractual liability" exposures. Most general liability polices consider the term "insured contract" to include that "part of any other contract or agreement pertaining to your business... under which you assume the tort liability of another party to pay for 'bodily injury' or 'property damage' to a third party or organization. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement."

Under the insurance section, it's probably a good idea to get a clear understanding of exactly what the other party means by "contractual liability." Your insurance professional needs to review the language of most, if not all, contractual obligations and they should be consulting with the insurance carrier to confirm the contract is an insured contract. Non-contributory or primary means that your policy would cover your customers first before their policy would respond. Additional insured means your customer asks to get certain rights under your insurance policy. (If possible, we suggest you offer the most restrictive coverage grant thus reducing the chances that your policy would respond). Note: under general liability policies, the insurer agrees to pay sums that YOU become legally obligated to pay as damages, and probably provides the right and duty to defend YOU against any suit seeking those damages. This duty-to-defend provision does not automatically apply to contractually assumed defense costs, so you have to be careful about how the policy will in fact respond to the claim.

Here are a few things you need to consider when negotiating these "new" contractual requirements:

• From the OEM's point of view, they are being advised by their own attorneys, internal risk management departments and insurance carriers to transfer as much liability "down" to you as possible. If you are negotiating with a very large company, they probably self insure a very large portion of their liability insurance program, usually in the form of a large deductible or self insured retention. This means that they have to spend their own dollars (perhaps up to $5,000,000 or more) to defend a suit. They want you to share in that cost by transferring the liability to you.
• From the supplier's point of view, you may find it difficult to comply with the terms and conditions of the contract. Your insurance carrier may not agree to cover the OEM's liability (refuse to add them as an additional insured) or may not consider the agreement as a "covered contract."
• You will probably find that the cost to increase your current limit of liability is more expensive than you anticipate. The cost depends on the type of product, size of the contract, limit of liability and your own quality control procedures (or lack thereof).

Make sure your insurance professional has enough lead time to review the contracts and never assume that you have all the required insurance currently in place. Many of you are probably used to saying "Just send them a certificate so I can start this job" or may ask the question, "This isn't going to cost me additional premiums, right"? To avoid misunderstandings, put your insurance professional on the checklist of persons to contact when you negotiate deals with OEM's.

One final note: please be sure you check with your legal professional about this issue as well; it is critical that your legal and insurance advisors work together to help you negotiate appropriate solutions to these contractual requirements.

Michael Cremeans is a Senior Vice president with Britton-Gallagher & Associates, Inc., a privately owned, independent insurance brokerage located in Cleveland, Ohio. The firm specializes in developing insurance and risk management solutions for medical device companies nationwide. Britton-Gallagher & Associates, Inc. is the endorsed insurance broker for several technology associations throughout the US.

Britton-Gallagher & Associates, Inc.

800.607.4711

www.britton-gallagher.com

michael_cremeans@britton-gallagher.com

Copyright 2005 Michael Cremeans, Britton-Gallagher & Associates, Inc. All rights reserved.