Bought a Specialty Distributor? Insurance Checklist

After you buy a specialty distributor, first check that your general liability products coverage fits the goods you sell, because a distributor can be sued over a product it did not make. Then confirm your suppliers' insurance actually covers you through a vendors endorsement (an add-on to the maker's policy that protects the businesses selling its products). After that, check the extra exposure from imported products, how inventory is valued and limited, how goods are covered in transit, and the fleet. This checklist is for searchers, Small Business Administration (SBA) loan buyers and holding companies that just closed on an industrial, electrical, medical supply, food service or other specialty distribution business.

The short answer

Product liability law in many states lets injured people sue sellers in the chain of distribution, not just the maker, though some states limit claims against sellers that did not make or change the product. Ask counsel how your states treat distributors. Your general liability products coverage is your first line of defense.
A vendors endorsement on a manufacturer's policy can protect you, but it usually stops working if you relabel, repackage or modify the product.
If a foreign maker has no reachable insurance or assets in the United States, claims tend to land on the importer. Insurers usually underwrite that exposure separately.
Inventory swings with seasons and purchasing. Check limits, valuation and any reporting or peak season terms.
Truckers and shipping lines can often limit their liability for lost cargo, so goods in transit usually need their own coverage.

Can you be sued over products you did not make?

Yes. In many states, anyone in the chain of distribution, including a distributor, can face a product liability claim when a defective product injures someone or damages property. Some states limit claims against sellers who did not make or alter the product, and the rules are a question for counsel. In practice, distributors are often named in suits alongside the manufacturer and then try to shift the loss upstream.

Your own general liability policy is the base layer. The standard Insurance Services Office (ISO) form covers the products-completed operations hazard: injury or damage caused by your products away from premises you own or rent, once they are out of your possession. That hazard has its own aggregate limit, separate from the general aggregate. The form also defines "your product" to include goods you sell, handle or distribute, not just goods you make. The same definition includes goods sold by a business whose assets you acquired, which matters for products the seller shipped before closing. Whether you are legally liable for the seller's products is a separate successor liability question for deal counsel.

Check the products aggregate against your sales volume and customer requirements, and read any exclusions for specific product types. Distributors of items like lithium batteries, medical supplies, firearms parts or food ingredients may see product-specific exclusions. See the product liability review and successor liability in an asset purchase.

Does your supplier's insurance protect you?

It can, through a vendors endorsement, and you should ask for one from each key supplier. A vendors endorsement is a standard ISO add-on to a manufacturer's general liability policy. It makes a distributor or retailer an additional insured for injury or damage caused by the maker's products, as long as the product is sold in the normal course of business. It lets you push a claim to the maker's insurer instead of your own.

But the standard endorsement lists situations where it does not apply, and several are routine for distributors:

Relabeling, or using the product as a part or ingredient in something else
Repackaging, except when unpacked only for inspection, demonstration, testing or parts substitution and then repacked in the original container
Physical or chemical changes made on purpose by the vendor
Demonstration, installation, servicing or repair away from your premises
Warranties you give that the manufacturer did not authorize
Inspections, adjustments, tests or servicing you agreed to make or normally make but did not
Injury or damage caused only by your own negligence, with narrow exceptions
Liability you took on by contract that you would not otherwise have

Newer editions can also limit coverage to what your supply agreement requires. So collect the endorsements, not just certificates, read the exclusions against how you actually handle each product line, and match them to your supply agreements. Track supplier policy renewals: a lapsed manufacturer policy leaves the endorsement worthless. After an asset purchase, also check who each endorsement names. A scheduled endorsement that lists the seller's entity may not protect your new company, and a blanket endorsement usually applies only to vendors the maker agreed in writing to cover, so ask each key supplier to add your new company or sign a new agreement with it. See additional insured.

A hypothetical example. A distributor buys space heaters from an overseas factory and sells them under its own brand. A heater fire damages a customer's building and injures a worker, and the claim reaches $2 million. The factory's insurer denies vendor coverage because the product was relabeled, and the factory has no assets in the United States. The distributor's own general liability policy has a $1 million each occurrence limit and a $2 million products aggregate. Subject to its terms, it pays $1 million, and its umbrella, which follows the primary products coverage in this example, picks up the remaining $1 million. The claim uses half of the $2 million products aggregate for the year, leaving less room for any other product claim until renewal. The next renewal arrives with tougher questions about private label goods and possibly a higher price, a hit to the earnings before interest, taxes, depreciation and amortization (EBITDA) the buyer underwrote at closing. The numbers are illustrative.

What changes when you import products?

The importer often stands in the manufacturer's shoes. If the foreign maker carries no product liability insurance that responds in the United States, or cannot practically be sued here, an injured person may pursue the importer instead. Insurers know this, so they ask what share of your sales is imported, from which countries, and whether foreign suppliers carry United States product liability coverage naming you.

Steps that help:

Ask key foreign suppliers for a certificate and vendors endorsement from an insurer that will respond to suits in the United States, and verify them.
Put indemnity and insurance terms in supply agreements, knowing they are only as good as the supplier's ability to pay.
Keep testing records and product specifications for imported lines.
Know your reporting duties. Under the Consumer Product Safety Act, an importer counts as a manufacturer, and distributors and retailers of consumer products must also report certain product defects and hazards to the Consumer Product Safety Commission (CPSC). Medical devices, food and some other products fall under other agencies, such as the Food and Drug Administration, with their own reporting and recall rules. Ask counsel how this applies to your lines.

Product recall costs are a separate question. General liability usually excludes the cost of withdrawing or replacing products, so recall coverage is bought separately. The light manufacturer checklist covers recall in more depth.

Are your inventory and warehouse insured for the right amount?

Inventory is usually a distributor's largest physical asset, and its value moves. Check four things:

Limits against peak, not average. If stock peaks before a busy season, a fixed limit set on a slow month can leave you short. Reporting forms (where you report stock values regularly and pay premium on actual values) and peak season endorsements (which raise the limit for set months) are built for this.
Valuation. Read how stock is valued at a loss. Under the standard ISO property form, stock is valued at actual cash value unless an optional coverage changes that, and only goods already sold but not yet delivered are valued at selling price.
Coinsurance. Many property policies reduce a claim if the limit is below a set percentage of the property's value. A purchase price allocation is not the same as insurable value.
Other people's goods. If you store goods owned by customers or suppliers on consignment, your own property policy may not cover them. Ask about coverage for property of others or warehouse legal liability.

Also ask whether business income coverage includes dependent property coverage for a key supplier. It usually pays only if the supplier's plant suffers physical damage from a covered cause, such as a fire, not if the supplier fails financially, has a strike or has its goods held at customs. See the commercial property review and the business income review.

Who covers goods while they are moving?

Often nobody, unless you arrange it. Your property policy may cover goods only at listed locations or within a short transit extension. Once goods are on a truck, a ship or a plane, coverage depends on transit and cargo insurance and on the shipping terms in your purchase orders and sales contracts, which decide when risk passes from seller to buyer.

Goods in transit: exposures and coverage to check
Situation	Who usually bears the loss	Coverage to check
Your own trucks delivering to customers	You	Transit coverage for your own goods on your vehicles (an owner's form, not a trucker's cargo liability form)
Common carrier shipments in the United States	The carrier, up to any limit it can set by agreement or tariff	Transit coverage for the gap between the carrier's limit and the goods' value
Imports by ocean or air	Depends on shipping terms in the purchase order	Marine cargo insurance, and who buys it under the shipping terms
Customer pickups	Usually the customer once loaded, depending on terms	Your terms of sale

Federal law makes interstate motor carriers liable for loss or damage to goods they carry, but it also lets carriers limit that liability in some cases, so a claim against the trucker may recover far less than the invoice value. Ocean carriers can often limit their liability under federal law and international conventions, sometimes far below the value of the goods, which is why importers usually buy marine cargo insurance. See inland marine insurance.

Your own delivery fleet raises separate questions from the cargo on it. Check four things: every truck and trailer is scheduled; drivers are listed and their motor vehicle records reviewed; the umbrella sits over the auto policy; and staff who run errands in their own cars are covered by hired and non-owned auto. See the commercial auto review.

What belongs on my first-month checklist?

Specialty distributor insurance checklist for a new owner
Check	Why it matters for a distributor	Ask for
General liability products coverage	Claims over goods you sell but did not make	Policy, products aggregate, product exclusions
Supplier vendors endorsements	Pushing claims to the maker's insurer	Endorsements naming your new entity, supplier renewal dates, supply agreements
Imported lines	Foreign makers without reachable insurance	Import share by country, supplier certificates
Property and inventory	Largest physical asset, seasonal swings	Stock values by month, valuation clause, coinsurance
Transit and cargo	Goods on trucks and ships	Cargo coverage, shipping terms, carrier contracts
Commercial auto	Delivery fleet and drivers	Vehicle schedule, driver list, safety program
Workers' comp	Warehouse injuries and forklifts; the seller's experience mod usually carries over	Policy, class codes, ownership change filing
Umbrella	Large product and auto claims	Which policies it sits over and the limits

See also insurance for wholesalers and distributors. A Morrow review can compare the distributor's policies with its product lines, supply agreements and fleet and request quotes where it makes sense.

Keep reading

Frequently asked questions

Why would a distributor be sued if the manufacturer made the defective product?

In many states, injured people can bring product claims against sellers in the chain of distribution, not just the maker. Some states limit that. Distributors are often named alongside the manufacturer and then seek to shift the loss through vendors endorsements and supply agreements.

Is a certificate from my supplier enough to prove I am covered?

No. A certificate is a summary, not the policy. Ask for the vendors endorsement itself, confirm it names your company rather than the seller's old entity, read its exclusions against how you handle the product, and track the supplier's renewal dates.

Does private labeling affect my coverage?

It can. Standard vendors endorsements commonly exclude products you relabel or repackage, so your own products coverage carries more of the risk. Tell your insurer about private label lines.

Does my property policy cover goods on a truck?

Often only in a limited way. Many property policies cover goods at listed locations with a small transit extension. Goods moving on your trucks, with common carriers or by ship usually need transit or cargo coverage.

Does general liability pay for a product recall?

Usually not. Standard general liability excludes the cost of withdrawing, inspecting, repairing or replacing products. Product recall insurance is a separate policy.

References

Just bought a business? Get your insurance reviewed.

Send Morrow the declarations pages, loss runs and key contracts you inherited. Morrow can review them against the business you bought, flag gaps and request quotes where it makes sense. Any new terms depend on carrier underwriting.

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This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.

Just Bought a Specialty Distributor? Your Insurance Review Checklist