Part 3 of a 6 Part Series
This series is specifically aimed at the needs of Bike Shops, however much of it holds true for many other sport-related businesses. The first five articles are written by Scott Chapin has 15 years of experience in insurance and specializes in insurance for Bike Shops. He is with RJF,
a Marsh & McLennan Agency LLC company located in Minneapolis.
Protecting Your Retail Bike Shop from Private-Labeled Part Liability
by Scott Chapin
RJF, A Marsh & McLennan Agency LLC Company
Over the past couple years, a lot of bicycle retailers have started selling privately labeled bicycle parts: Frames, wheels, components, etc. It’s easier than ever to have a product created with your shop’s logo on it, and it can drive additional revenue into your business. But, as in everything in life, there are other things to consider. For example, many shop owners forget to consider the risks they are exposing themselves to by doing this. Will their insurance protect them in the event of a liability claim if their privately-labeled frame breaks and a cycler gets injured, for instance? This is kind of a loaded question, but the short answer is probably not.
Most bike shop retailers have a Business Owners Policy (BOP), which is designed to cover retail operations. The insurance carriers providing these policies assume that most of the products and completed operations risk is transferred to and absorbed by the manufacturers of the products the retailer is selling. So, for example, if a bike frame fails, and bodily injury occurs, the claim ends up being paid for by the frame manufacturer (or its insurance company). The same thing applies for wheel sets, seat posts, etc.
So, who insures the privately-labeled products sold in a retail shop? Likely, and often, there isn’t any coverage. Most of these products are manufactured overseas and chances are that the manufacturer’s insurance coverage isn’t valid in the United States or any other country, other than where the product was made. Technically, unless the lawsuit originates in the country of manufacture, then there isn’t any coverage provided to the reseller.
So who pays the bill? Well, unless your insurance carrier rated your policy for this unique exposure (and that’s not likely), you, the bike shop owner, are likely on the hook.
Products that are manufactured in the United States tend to pose less risk to retailers because the insurance coverage is broader than the insurance provided by overseas manufacturers and more likely to provide some protection to the retailer. However, retailers selling private-label products made by domestic manufacturers still may have to pay legal fees to defend a claim until a suit is settled. So regardless of where the produce is made, by private-labeling something, you open yourself up to more risk.
Retailers who want to have their own product or label should start a separate company—corporation, LLC, etc.—and get an insurance policy for the manufacturing exposure (products and completed operations liability) itself. Ask your current insurance carrier if they will cover this under your existing policy. Chances are that they won’t. They will probably make the same recommendation, which is to get a separate policy to cover the proper, unique and specific exposures. In fact, I’ve heard twice in three months from retailers who had privately-labeled products. Each were told that their current carriers and policies would not cover this exposure under their current policy. To make matters worse, the carriers also told the retailers that unless they got separate coverage, they would discontinue providing any coverage at all.
While not glamorous or fun work, it pays to make sure you’re protected ahead of time, rather than finding out the hard way after a claim, and you end up liable for the damages.