Potential Liabilities with Approved Suppliers

What to watch out for when endorsing products or services

Sports and recreation associations often enter into agreements whereby an endorsement is given to the products or services of an approved supplier or vendor, often in exchange for a royalty or some other consideration. Typically, such contracts are entered into between an association and vendors such as sporting good manufacturers or distributors, soft drink or beverage manufacturers, insurance providers, website providers, fundraisers, trophy providers, picture providers, etc.

When an association endorses a product or service, the association has a potential liability in the event that the product or service results in injury to a third party. Such injuries could take many forms including bodily injury, property damage, slander, libel, copyright infringement, trademark infringement, violation of constitutional or statutory rights, and other economic damages. The basic legal theory of recovery of the injured party against the association could be under either tort or contract law. Courts often say that an association owes a duty of reasonable care whenever it endorses a product or service and should do its homework in making sure that the product or service is not likely to result in injury or other damages.

For example, assume that a national baseball association endorses a particular manufacturer of a baseball bat in exchange for a royalty fee. It is conceivable that a pitcher  injured by a batted ball could sue both the bat manufacturer and the association that endorsed the manufacturer. The potential legal theory of recovery against the association could be that it was aware of some studies that indicated that a “lively bat” exceeding certain specifications was more likely to result in serious injury to a pitcher or infielder. It could be stretched in a lawsuit that the endorsement of the product amounted to an endorsement of its safety. A similar scenario actually occurred with Little League Baseball, Inc.

In order to protect against such claims, all agreements with approved suppliers should contain indemnification and hold harmless provisions in favor of the association. Furthermore, there should be a definitive statement that the association is in no way endorsing the safety of the product. A hold harmless or indemnification provision is generally worthless unless the approved supplier has a General Liability Policy, including coverage for products/completed operations and contractual liability. The association should collect certificates of insurance from approved suppliers that show evidence of the appropriate coverages being in force on an annual basis. These minimum insurance requirements should also be outlined in the contract with the association being named as an “additional insured” whenever possible.

Endorsing insurance agencies and carriers

Another example of a different type of injury would be when an association endorses an insurance agency or carrier to be its approved supplier of sports insurance. There have been some cases where an association endorsed a particular insurance carrier which became insolvent and was unable to pay its claims, and the association was sued for negligent endorsement of a product. The lawsuit would be based on the economic damages  incurred by the association members as a result of not having their claims paid.

It is critical that associations closely monitor the financial strength of any endorsed insurance carrier. The best way to monitor the financial strength of insurance carriers is through Best’s Key Rating Guide. As a general rule, it is preferable to never do business with a carrier with a rating of less than A-. Please note that even A-rated carriers can quickly become insolvent, so it pays to be vigilant.

Another alternative to lessen the risk of liability for negligent endorsement is to consider an advertising agreement in lieu of a product or service endorsement. Advertising fee agreements can be structured in a number of different ways, including sales based models.

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