Features

An uncomfortable but necessary subject – January 22, 2007

Which would you rather do: talk about product liability insurance with your suppliers and fellow dealers or give your adolescent children “the talk” about the birds and the bees?
Many powersports dealers and OEMs apparently find the former discussion as uncomfortable as that rite-of-passage talk.
The influx of imported products, particularly from Asia, has brought the product liability issue to the front burner. While many dealers have signed agreements with major OEMs for years that include product liability language, the proliferation of these niche products into the market has raised new questions about how much product liability is enough as retailers look to expand revenue streams and profit margins.
Several OEMs declined to be interviewed for this article or insisted on talking in broad terms without being named. But this discussion is one that must take place in the open to help ensure coverages are adequate and that each party is adequately protected.
Because in recreational retailing, accidents can happen, and the consequences can be costly.
“Any reputable company will have what we consider a decent amount of insurance,” says Don Owens, owner and general manager at Dothan Powersports, Dothan, Ala. “There’s no actual formula we use to determine how much is enough.” Even safety accessory products such as helmets have to meet rigid federal standards, which Owens says includes Department of Transportation certification and liability insurance.
Of course, “product liability insurance won’t necessarily keep you from getting sued,” Owens adds. “If you get sued because of a product liability case, they go after the big boys and work on down.”

liability policy
For products such as trike kits from California Sidecar, the company purchases insurance with each kit to protect itself from possible liability claims. Otherwise, Dothan Powersports is protected by liability insurance for the dealership, with extra coverage for its service operation.
Sargent’s Motorsports Inc., based in Portland, Ore., spends $16,000 a year for the $1 million in liability insurance the state requires, says Gary Sargent Sr., owner of the fourth-generation business.
When dealing with manufacturers, Sargent insists the dealership be added to the manufacturer’s product liability policy. “Before I sign on the dotted line, we’re named as an additional insured,” Sargent says. “In the dealer agreement, we’re acting as an agent for the specialty manufacturer for a specified length of time, with a guaranteed inventory. It’s like a franchise agreement, except that we buy inventory.”
Sargent’s carries ATVs, scooters, dirt bikes, street bikes and cruisers from such manufacturers as United Motors, Diamo, QLink, Vento and Tomberlin. When considering a new powersports line, the first question Sargent asks the rep is whether the product is sold through the Internet and drop-shipped to customers. If the answer is “yes,” the conversation stops right there.
“We look past the product to the company,” Sargent says. “Will the company be there for us down the road? We’re in it for the long haul, and we expect our manufacturers to be there beside us.”
Reputable OEMs feel the same way, taking pains to choose the right dealerships in the right locations to present and support their product lines.
“Dealers don’t ask the question (about PLI), and it’s a serious business case,” says Henry Lonski, vice president of North American sales at United Motors USA, based in Miami. “The ones who have been around 20 or 25 years will ask right out. The nonfranchised dealers really don’t ask the question, and we don’t generally work with those companies.”
United Motors has $5 million in product liability, an amount Lonski says separates the company from most units imported from Asia. Product liability insurance should be one of the top five questions a dealer asks when considering new powersports products, along with questions about service, parts, parts availability and warranties.
The insurance question works both ways, however, so don’t be surprised when the OEM asks questions about dealership insurance coverages. The Schwinn Motor Sports division of Pacific Cycle Inc. makes sure its dealers are insured, generally accepting the coverage minimums allowed by the larger OEMs that a dealer carries, says Robert Silvis, general counsel at the Madison, Wis.-based manufacturer.
“We want our dealers to be successful and our products to be successful rather than dictate the requirements, because we’re not one of the big four,” Silvis says. “If we’re not comfortable (with a dealership’s insurance), we’ll take a look at it.”
Schwinn carries what Silvis terms “an appropriate amount” of product liability insurance, declining to be more specific. “Like a lot of companies today, we have a lot of insurance.”
Preston, Wash.-based CMSI Inc. carries a basic policy of $2 million, but often adds an umbrella rider of up to $10 million to cover events where the public may be riding scooters in large numbers, says Tom Lynott, president and CEO. The manufacturer formerly charged $9 per vehicle for product liability indemnification, but some dealers declined to pay, so the amount is now incorporated into the pricing, Lynott says.
CMSI’s dealer agreements include cross indemnification, with the manufacturer holding the dealer blameless for product defects and the dealer holding CMSI blameless for claims arising from service issues.
But that still might not be enough protection, says Owens from Dothan Powersports. “I’ve never seen an indemnification worth the paper it’s written on,” Owens says. “If I have to go to court over something, I assure you the manufacturer won’t pay my legal bills.”
But without having a frank discussion of product liability insurance up front, the courtroom might be the place where a dealer discovers he isn’t adequately protected. The time to talk is before ink hits paper on the dealer contract.
The discussion may be as uncomfortable as discussing the birds and the bees, but you’ll certainly feel better and less stung afterward.

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