Efficacy insurance is insurance against the legal liability for injury to third parties or damage to third party property arising from a product or service failing to perform its intended function. In the insurance world this cover is also referred to as failure to perform when being discussed as either an exclusion or as an extension.
Efficacy is a risk that is covered by a standard Public/Products Liability policy. However, for some trades and industries the efficacy risk is considered too great to insure and an exclusion is applied to the policy.
If a policy is truly silent on efficacy it can be considered as covered, but the position should be checked with the insurance provider if there is any doubt.
What is efficacy in public and product liability insurance?
Public and product liability insurance is generally intended to provide indemnity where there is a legal liability arising from fault with the product or service provided. An efficacy exclusion is generally applied where the product or service can cause loss or damage even if there is no fault with the products itself, and in effect efficacy insurance is providing a partial guarantee that the product will perform as intended. The trades and industries that cause insurers an efficacy problem tend to be health, safety or security related. However, some insurers have a standard efficacy exclusion which is applied to all policies.
Efficacy insurance in the security and fire protection industries
The exclusion of efficacy or failure to perform is a common exclusion in many products relating to the fire protection and security industry.
A good example of an efficacy issue is a sprinkler installer, where a perfectly functioning sprinkler system may not have been installed to the correct specification and so does not suppress a fire as intended resulting in unexpected or aggravated damage. Most insurers would not cover the efficacy risk this example poses because this not the intention of the Public/Products Liability cover they provide, as an inadequate product has been deliberately, albeit innocently, supplied and the product itself has not directly caused the loss or damage.
Partial or total efficacy exclusions on liability insurance policies
Insurers manage their exposure to efficacy by excluding it from the Public/Products Liability policy or restricting the cover. The exclusions insurers apply may be a total exclusion or a partial exclusion, with partial exclusions typically providing cover if it can demonstrated the loss or damage arose from a fault with the product or service provided. It is not always easy to spot an efficacy exclusion in a policy as some insurers exclude efficacy in the main policy wording as standard, as mentioned above, rather than draw specific attention to the issue by applying a specific endorsement. Insurers applying an inner limit may do so by specific endorsement or by use of a separate Efficacy section to the policy.
Where can I buy efficacy insurance?
There is no doubt that efficacy is a significant exclusion, and the availability of cover should be thoroughly investigated as there are specialist insurance providers able to provide cover in most circumstances, but usually at a cost. However, for risks with a significant efficacy exposure, trading without efficacy insurance may be a dangerous game and a false economy in the event of a serious claim.
The specialist insurance providers tend to be trade specific, and, whilst few in number, the competition between providers can be fierce. Risks with a significant efficacy exposure tend not to lend themselves to direct dealing with insurers and the use of an experienced and knowledgeable broker usually proves advantageous.
As a specialist liability insurance broker, Blackfriars is well placed to assist you in obtaining the correct level of protection to meet with your requirements and our team of brokers is on hand to answer any queries you may have or check your existing insurance arrangements for you.