Business Risk Exclusion

Business Risk Exclusion is a type of coverage that is often omitted from product liability insurance. Business risk occurs when a company manufactures or sells a product that does not meet the level of performance that the company promises. For example, if a company advertises a product as having a life span of 10 months but the product only lasts 6 months, the policy does not cover the company.

It is sometimes referred to as "product failure exclusion."

The only exception to business risk exclusion is bench error. Bench error is an error made during the manufacturing of a product. If a business can prove that the failure of a product is due to bench error, then that business will be covered under a product liability policy.

Business risk exclusion is a controversial area for both insurers and policy holders. There's much room for interpretation as to what defines an excludable claim. "Faulty work can be loosely defined as any type of operation performed, including materials, parts, or equipment that is part of the work, which is done incorrectly. It might be something that is installed, repaired, built, or maintained in a manner that falls below generally recognized standards of quality or fails to meet representations or warrantees. Even failing to provide instructions or warnings can make it faulty work," notes the Insurance Risk Management Institute.

Courts have continually weighed in on this coverage, often with conflicting opinions that are tied to very specific circumstances of each case. For example, in South Carolina, a contractor hired a subcontractor to install insulation in a new building, which included sealing the joints of the insulation with tape. But the contractor in building the wall found that the tape used was coming loose. The wall had to be torn down and the tape replaced and a court battle ensued when the subcontractor tried to get its insurer to pay for the corrective work. 

"The subcontractor sought indemnification for the wall claim under its CGL policy. The policy covered 'property damage' caused by an 'occurrence,' and it expressly excluded from coverage property damage to 'any property that must be restored, repaired, or replaced because ‘your work’ was incorrectly performed on it.' The policy defined 'your work' to mean: Work or operations performed by you or on your behalf; and materials, parts, or equipment furnished in connection with such work or operations," according to Propertycasualtyfocus. 

An appeals court held that the "your work" exclusion did indeed apply and denied the contractor's claim for repair of the wall.