Seventh Circuit Examines Vendor Endorsement: Distributor's Insurer Denied Reimbursement from Manufacturer's Insurer for Personal Injury Settlement Paid to Diet Pill Stroke Plaintiff Where Distributor Designed Contents of Product Label at Issue
April, 2002
Seventh Circuit Chief Judge Richard Posner has written an opinion (joined in unanimously by other panel members) which relieves a manufacturer’s insurer of liability to its distributor’s insurer under its vendor’s endorsement. Hartford Fire Ins. Co. v. St. Paul Surplus Lines Ins. Co., 280 F.3d 744 (7th Cir.).
Facts
A woman suffered a stroke after taking a diet pill. Nion Laboratories manufactured the pill. Nion was primarily insured by St. Paul and that policy had a vendor’s endorsement which contained an express exception for cases in which a claim of products liability is based on labeling of the product by the vendor. The pills were distributed by Team Up International, a company that was insured by Hartford as an excess carrier. Unlike most “distributors,” however, Team Up designed the contents of the labels, including the warnings, and provided the labels to Nion, which affixed them to the packages.
The woman’s suit was settled for a sum exceeding $1 million, paid by Hartford. Hartford then sued St. Paul, claiming the vendor’s endorsement in St. Paul’s policy also covered Team Up. If Hartford’s theory was held to be correct, then, as Chief Judge Posner stated, it would be “entitled to lay off a chunk of the settlement that it paid on St. Paul.”
The Seventh Circuit affirmed the district court’s holding that under these circumstances the vendor’s endorsement did not cover the distributor and entry of summary judgment for St. Paul.
Analysis
Chief Judge Posner is a widely known and often heralded professor, author and jurist. Interesting aspects of the opinion include the Court’s explanation of the purposes of vendor’s endorsements to create upstream payment shifting in traditional products liability litigations, allowing the eventual liability payment to be made on behalf of the manufacturer, which is usually held liable for downstream liabilities of distributors or retailers.
Also interesting is that even though the vendor’s endorsement in this case contained the express exception for mislabeling by a vendor, the Court went on, gratuitously but helpfully, to explain that the vendor’s endorsement would be inapplicable here whether it contained the express exception or not, upon the principal that the vendor participated in the creation of the product (label) and would be responsible for the alleged defect out of which the underlying injury suit arose. The Court discussed that as the majority view, citing cases from Massachusetts, Florida and California (California law governed this decision).
Such view is said not to be “based on the language of the vendor’s endorsement” but “on the improbability of supposing that the manufacturer’s insurer intends to protect others against risks they create themselves.” But “a further consideration is that the vendor’s endorsement policies are cheap addons to products liability policies... and their cheapness makes the most sense when limited to where the vendor is completely passive in relation to the risk of harm giving rise to liability.”
The Court holds that “interpreting contracts to make economic sense is a method of contract interpretation that we have commended in other cases,” [citing authorities] (and)... is “commonsensical” in that “people usually don’t pay a price for a good or service that is wildly in excess of its market value, or sell a good or service (here insurance) for a price hugely less than its market value...” Chief Judge Posner calls such contractual interpretation “just a presumption, but it has not been rebutted.” See Hartford Fire Ins. v. St. Paul Surplus Lines Ins. Co., 280 F.3d 744 (7th Cir. 2002).
Learning Point:
The existence of a manufacturer’s vendor’s endorsement must be confirmed and its express terms reviewed in any products liability litigation. It does not always reimburse a vendor, but commonly will if the vendor has done nothing to increase or actively cause the risk of harm for which liability is sought to be imposed. Many manufacturers “private label” for companies which claim to be distributors only. Sometimes the distributors are the moving force in creating the risk by issuing product specifications as well as labeling and packaging. The Seventh Circuit allows such inquiries to be made on a case by case basis, as do a majority of jurisdictions. Always check your endorsements, then check your facts.
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