If you're a tire dealer or distributor, how sure can you be that you won't lose your business in a liability lawsuit if a tire you've sold fails on the road and causes an accident?
In the case of major tire brands, that's no problem. As a rule, major manufacturers carry liability insurance policies that indemnify their dealers and distributors amply in the case of an accident.
But what if the manufacturer is an obscure, offshore company from China or Eastern Europe? In this case, more care may be necessary to ensure you won't be left holding the bag in case of a multi-million-dollar product liability lawsuit.
``To my knowledge, nothing like this has ever happened,'' said Robert E. Smith, executive director of the North Carolina Tire Dealers & Retreaders Association (NCTDRA). ``But if it did happen, it would be disastrous.''
Mr. Smith was so concerned about the possibility of such a lawsuit that he included a short article in a recent issue of the NCTDRA's newsletter, warning members to demand proof of adequate liability insurance from their offshore suppliers.
``Don't just ask the question-make sure you have certification in your files,'' stated the article, which also urged members to make sure their own liability insurance is adequate. ``The very minute an accident occurs, particularly if a death occurs, a lawsuit will be filed. And you know who they will file it against. You.''
Concern about the liability issue has spread to the Tire Industry Association (TIA), the national body for tire dealers. Roy E. Littlefield III, TIA executive vice president, said it has asked its insurance carrier, Universal Underwriters Insurance Co., to prepare an article about liability insurance for offshore tires for its magazine, Today's Tire Industry.
``This is a `caveat emptor' scenario,'' added Paul Fiore, TIA director of business development. ``The issue is the ease with which you can determine whether offshore tire suppliers have adequate insurance. We're definitely going to be looking at this over the next year.''
Whether a foreign tire manufacturer has adequate U.S. liability coverage depends largely on whether the company's executives are sophisticated enough to know and shop the international insurance market, said Ed McNenney, an official with Marsh Inc., a major New York-based insurance brokerage.
``If the company is in Western Europe, it's likely to have that sophistication,'' Mr. McNenney told Tire Business. ``But a smaller company-say, in the Far East-would be less likely to do so.''
The upshot, he said, is that ``a lot of retailers have been stuck as the manufacturers of record in product liability cases.''
Acting as a direct importer of tires is where the difficulties can come in, according to Gerry Cecil, program national account executive with Universal Underwriters.
``Product liability claims may end up being your own if you are the only U.S.-based part of your foreign manufacturer partner's operation,'' Mr. Cecil said. ``Even if the manufacturer provides a certificate of insurance, its carrier may not do business in the U.S., or its liability limits may be too low.''
Obtaining a certificate of insurance that's effective in the U.S. and has adequate coverage limits isn't enough when negotiating a deal to import tires, according to Mr. Cecil. At minimum, he advised that an importer should also:
* Consult qualified legal counsel regarding the negotiations;
* Negotiate the joint handling of recall and warranty issues with the manufacturer;
* Obtain additional insured vendor's status on the certificate and get 30-day notice of the policy's cancellation or non-renewal; and
* Place the certificate in a dated file, for a follow-up 30 days before the expiration date.
Several of the larger U.S. tire distributors interviewed by Tire Business said they take great care to ensure their offshore suppliers are bona fide when it comes to liability insurance.
``All our suppliers of offshore products carry liability policies, and we keep those on file,'' said Jim Mayfield, vice president of marketing for Memphis, Tenn.-based private brand marketer Del-Nat Tire Corp. According to TB's most recent directory of private brand marketers, Del-Nat's private brand suppliers include companies from China, South Korea, Japan and Israel.
Del-Nat has never had any problems with its offshore tires, Mr. Mayfield said, and doesn't demand any set amount of liability coverage from its offshore suppliers.
``Our suppliers carry policies ranging from $1 million to $10 million with a variety of insurance providers,'' he said. The company is satisfied that the umbrella coverage in those policies is sufficient, he added.
``The companies we do business with are very interested in providing the coverage we need,'' Mr. Mayfield said.
Findlay, Ohio-based Hercules Tire & Rubber Co. is very cognizant of the dangers of inadequate liability coverage because of its unique corporate structure, according to Steven E. Buck, the company's tire division vice president and general manager.
``We're a dealer-owned buying group, and all our directors are dealers,'' Mr. Buck said. ``We believe very strongly in our suppliers carrying liability insurance, even though it may add an extra point or two to the cost.''
Besides keeping the insurance policies of its offshore suppliers-mostly Chinese-on file, Hercules also has its own umbrella policy, according to Mr. Buck. ``If we have a manufacturer that is not prepared to purchase liability insurance, but we feel the product meets our standards, we will go ahead and sell the product and cover it under our policy.'' He declined to divulge the amount of Hercules' liability coverage.
Huntersville, N.C.-based American Tire Distributors (ATD) Inc. requires certificates of insurance from all its tire and product suppliers without exception, according to Executive Vice President Mike Gaither.
``We continuously evaluate levels of protection, depending on the product,'' he said. Most major tire companies are self-insured, he added, which mandates a certain amount of trust on ATD's part just as offshore insurance coverage does.
``The essential question is creditworthiness,'' Mr. Gaither said. ``When you look to the majors, you're looking at the creditworthiness of the company, whereas with offshore suppliers we have to consider the creditworthiness of their insurance carriers. We wouldn't do business with a manufacturer that may be here today and gone tomorrow.''
In the U.S., however, there's a certain amount of quality assurance built into the system, Mr. Gaither noted.
``First and foremost, to import tires into the U.S., companies must confirm that they meet U.S. safety standards,'' he said. ``This requires a certain amount of due diligence from the federal government on the quality of imports.''
The amount of coverage in a retailer's own liability policy depends on the individual retailer's goals in having a policy, according to Marsh Inc.'s Mr. McNenney.
``U.S. courts have been very, very tough on product manufacturers,'' he said, adding that anyone in the distribution chain can end up a defendant in a product liability case. ``If you judge by the size of loss from a potential jury verdict, the sky's the limit. If you're thinking just of the assets you want to protect, the amount may be smaller.''
The NCTDRA newsletter article recommended umbrella coverage of at least $6 million to guard against inadequate coverage from offshore suppliers.
TBC Corp. officials were contacted for comment because the company has a large wholesale operation that includes providing brands supplied by some offshore manufacturers. They declined comment, citing a company policy never to talk to the press.