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Service Liability Exposure: Navigating the Legal Risks and Protections

Service Liability Exposure: Navigating the Legal Risks and Protections. Presented to the NAED Western Region Meeting January 22 nd 2009 Bernd G. Heinze, Esq. The Heinze Group, LLC King of Prussia, PA This Session may well save your business. Background.

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Service Liability Exposure: Navigating the Legal Risks and Protections

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  1. Service Liability Exposure: Navigating the Legal Risks and Protections Presented to the NAED Western Region Meeting January 22nd 2009 Bernd G. Heinze, Esq. The Heinze Group, LLC King of Prussia, PA This Session may well save your business.

  2. Background • This presentation, the supporting research and White Paper are brought to you by the NAED Foundation’s Channel Advantage Partnership initiative. • 44 visionary electrical distributors and manufacturers examine industry issues and commission research to improve profitability and efficiency in the supply chain. • White paper and articles are in final editing stage and will be distributed to NAED members, and made available on the NAED’s website, www.naed.org. Training sessions will be provided at each NAED regional conference. • Webinars on selected topics from the findings and recommendations made will all be provided. • For additional information, please contact Alexis Mead, NAED development manager, at 314.812.5306; or at amead@naed.org

  3. Objectives of the Project • Survey and interview NAED and channel members on nature and extent of providing additional services to customers • Build on 2005 White Paper: “Value Added – Assessing Service Offerings of Electrical Distributors” by Benfield Consulting • Evaluate related insurance provisions and review exposures with insurance underwriters and brokers • Research the manner in which parties can be held liable in a lawsuit based on provision of services • Negligence • Professional negligence • Breach of Contract

  4. Objectives of the Project • Draft White Paper reviewing issues and opportunities • Examine nature of claims and damages that can be sought and awarded • Review current trends in case law and applicable statutes • Develop recommendations to eliminate or mitigate exposures • Serve as an adjunct to the Products Liability Exposure:How to Mitigate the Risks in Today’s Global Market white paper published by NAED Education & Research Foundation in 2007 • Appendix with more technical details

  5. Project Methodology Survey sent to NAED members Follow-up telephone interviews Research conducted in all 50 states on prospective liability and damages Case law Statutes Examined use of written agreements Drafting and editing of White Paper Development of articles (3) and webinars (5) Liaising with Task Force

  6. Bottom Line • In today's increasingly competitive electrical distribution channel and the parallel compensation culture arising out of the litigious business climate, justifiable reliance by a customer on expressed or perceived expertise/experience and the distributor’s performance of an added service will subject the distributor to legal exposures. • The ability to limit and manage exposures is a key element between financial success and failure.

  7. Survey Results

  8. Market dynamics and competitive forces drive increasing number of distributors to pursue providing added services Most distributors are not fully aware of inherent liability or incumbent legal risks Most distributors are unaware that legal liabilities imposed for negligent service performance or contractual breach may not be covered by commercial general liability insurance Findings

  9. Interviews Hybrid services – e.g. training included in the sale to a customer of new products and offered as an additional or stand alone service (both as it relates to products already sold to a customer, or to new products in the market that the distributor wants to sell to customers). Services performed by: employees third-party contractors Use – or Non-Use of written agreements, contracts, PO’s, hold harmless agreements

  10. Interviews 70% of the respondents “believed” that the additional services were covered by their liability insurance but were not certain 5% replied that they were not covered, and 25% indicated that they didn’t know 100% said they would be checking on the issue “immediately after getting off the phone.”

  11. Electrical distributor sells components or products to a contractor Offer to take over site inventory for a major upcoming project as a “professional courtesy” Distributor’s employee visits site several times per week to ensure adequate materials on hand and to order/stock product sold by others Who pays for the unused inventory/restocking fees since distributor’s employee was tracking the product and ordering materials? Who prevails in the lawsuit between the contractor and distributor? Scenario 1

  12. Distributor provides training on product for free training becomes very popular so begin charging for it, even if product is purchased elsewhere customer who attended training is injured while using product and brings a lawsuit who will prevail? Scenario 2

  13. Distributor sells goods for use in panel construction to customer to get competitive advantage, distributor offers services of a trained engineer employee to assist in panel design services gain in popularity, distributor hires outside engineering contractor third-party injured while using panel designed by contractor and files lawsuit who can be held liable? Scenario 3

  14. Insurance • Before undertaking ANY added service activities, be sure they are covered by your existing insurance policy • if they are not, be sure to obtain coverage • Consult with your risk manager, CFO and broker • proceeding with an added service outside the scope of existing insurance policy runs the risk of having any a loss, lawsuit or injury excluded from coverage

  15. Case law precedent Duty to third persons based on training provided Duty to third persons based on providing design and engineering services Duty to third persons based on the failure to properly inspect/service Duty to customer for justifiable reliance on: Website information Marketing/Promotional materials Sales “hype” Sources of Liabilities

  16. Restatement of Torts (Second) §324A the rendering of services for a third person or his things is liable for physical harm resulting if: there is a failure to exercise reasonable care which increases risk of harm; the wholesaler undertakes to perform a duty owed by a customer or manufacturer to a third person or; harm or damages are suffered or sustained because of reliance of the customer or manufacturer upon the undertaking by the wholesaler Contractual Sources of Liabilities

  17. Liability for negligence in the performance of added services Liability for services attendant to the “sale of products” Liability (strict liability) for assembling various component parts into a finished product rendering the wholesaler into the potential category as the product’s “manufacturer” Liability for breach of contract in the rendering of services, including any express or implied warranties accompanying the contractual agreement Nature of Service Liabilities

  18. Nature & Extent of Damages • Compensatory Damages • Lost profits • Loss of business opportunities • Property damages • Bodily injuries • Punitive Damages • Loss of Goodwill • Loss of Contract with Manufacturer

  19. Training Liabilities • Prospective liability for: • Person improperly trained • Person injured based on conduct of person who was trained • Property damage due to conduct of person who was trained • Use of out of date training materials/information • damages to manufacturer of product due to improper training

  20. Training Recommendations • Use only fully certified and trained employees or third-parties • If using third-parties obtain: • copies of current certifications • hold harmless/indemnification • additional insured status • certificate of insurance • “valid and collectible” insurance, if possible • Remember: “due diligence is only valid if you do it diligently”

  21. Training Recommendations • Obtain signed agreements as to the exact nature and extent of the training project • If providing a “certificate of completion,” be sure the attendee has physically, spiritually and mentally “attended” each session • Consider offering a test on the basic principles at the completion of session and before awarding the certificate

  22. Energy Audits • Nature of Activity: • Preliminary/Simple Audit • minimal interviews with site operating personnel, a brief review of facility utility bills and other operating data, and a walk-through of the facility to become familiar with the building operation and identify glaring areas of energy waste or inefficiency. • Potential Liabilities: • Failure to identify major problem area • Failure to have properly certified and trained personnel conduct the audit • Recommendation of: • improper corrective measures • implementation costs • potential operating cost savings, and • failure to advise of more thorough audit as deemed warranted from the preliminary survey

  23. Energy Audits • Nature of Activity: • General Audit/Site energy audit • collects more detailed information about facility operation and performing a more detailed evaluation of energy conservation measures identified • review of utility bills to evaluate the facility's energy/demand rate structures, and energy usage profiles • in-depth interviews with facility operating personnel • able to identify all energy conservation • Potential Liabilities: • Failure to identify major problem area • Failure to have properly certified and trained personnel conduct the audit • Negligent financial analysis or operating parameters • Negligent development of detail required to justify project implementation

  24. Kitting • Nature of Activity: • Grouping of individually separate but related items are for packaging and supply as one unit • Potential Liability: • Failing to determine/identify the proper items to be grouped together • Failure to check packaging and warnings of individual items prior to being grouped and ship to ensure compatibility • Negligent packaging and shipping

  25. Engineering Support • Nature of Activity: • electrical and instrumentation services along a variety of commercial and industrial applications • Prospective Liabilities: • improper certificated employees or third-parties used to perform service • negligent performance of services • failure to properly document nature and extent of services performed

  26. Lamp Recycling Projects • Nature of Activity: • Recycling prevents broken and crushed lamps from being put into in dumpsters and other receptacles where mercury vapors escape into the atmosphere only to fall back to earth when it rains, contaminating the water supply, fish and anyone that consumes them.

  27. Lamp Recycling Projects • Prospective Liability: • failure to properly dispose of materials • using non-trained personnel • causing environmental contamination • failing to properly encapsulate remains • bodily injuries for exposure

  28. Panel Building • Nature of Activity: • performance of design work using state-of-the-art engineering support and workstations • building and testing of equipment • use of customer specifications • Prospective Liability: • failure to use of state of the art materials and processes • failure to follow customer specifications • failure to advise customer of specs that are not state of the art

  29. Recommendations • C.Y.A World Requires Documentation of Everything • Specifications • Contracts • PO’s • Insurance (valid & enforceable) • Hold Harmless Agreement • From distributor to customer • From vendor to distributor • Certificate of Insurance • Exclusions

  30. Recommendations • Benefit of using employees vs. independent contractors • Educate employees and independent contractors • Consistency in sales and performance are key • Obtain/provide contractual documentation • Always, Always, Always use written contracts

  31. Recommendations Consider utilization of a risk analysis and supplier insurance review Based on relationship with customer/circumstances of use of a vendor

  32. Recommendations • Before performing a non-core but added service, understand fully the: • nature and extent of the project • expectations of the customer • potential exposures and • proactively implement those actions and documents to mitigate prospective liabilities

  33. Review insurance policies Educate risk management and broker Ensure the insurance is consistent and comprehensive Obtain Additional Insured Endorsement and Certificates of “Valid and Collectible” insurance of required limits of liability and aggregate coverages Recommendations

  34. Want to Learn More? To register to attend the remaining Webinars in the Series, go to www.naed.org and click the Foundation/Research link

  35. Click the Foundation/Research link at www.naed.org to see the archived webinars and other related information: Overview of Service Liabilities Project held October 1, 2008 Added Services Provided by Wholesalers & Distributors held November 5, 2008 Hybrid Services: Where the Sale of Products and Services Converge Held January 14, 2009 Want to Learn More?

  36. Products Liability White Paper Information • The full report is now available for download from the NAED Learning Center at www.naedlearningcenter.org. To obtain a hardcopy of the full report, contact NAED Customer Service by email at customerservice@naed.org or by phone at 888-791-5185. • Background information on state of the channel • Specific recommendations to mitigate and manage risk exposures • Appendices are also be available at www.naed.org (click on the Foundation/Research link): • In-depth review of specific cases and scenarios

  37. Questions & Answers Thank You Bernd G. Heinze, Esq. President & CEO Heinze Group, LLC 150 South Warner Road Suite 156 King of Prussia, PA 19406 610.225.2363 (office) bernie@heinzegroup.biz

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