Does Your Trade Association Have Sufficient Insurance Coverage for Standard-Setting Liability

Date: Aug 22, 2005

Trade associations provide an important service to their members and the public by working to improve the quality and safety of the various products and services within their industries. Trade associations go about providing this service business in different ways. Some simply disseminate information. Others set standards for products or services. Still others offer certification or accreditation programs within their respective industries, sometimes based on their own standards, sometimes based on the standards developed by other voluntary standards organizations, and sometimes based on their own interpretations of outside standards. These trade associations that set standards, and particularly those that offer certification or accreditation programs based on their own standards, are more vulnerable to product liability litigation since the standards provide a basis for plaintiffs' lawyers to launch negligence/failure to warn lawsuits against the "deep-pocket" trade association to the extent such standards are deemed inadequate to ensure the health and safety of the public.

To minimize this potential liability, all trade associations should conduct audits of their liability insurance to ascertain the true extent of insurance coverage. Most, if not all trade associations, have some form of general liability insurance and directors and officers insurance, but this is typically not enough to protect a trade association that engages in standard-setting, certification, or accreditation activities. General liability insurance and directors and officers insurance typically exclude coverage for standard-setting, certification and accreditation activities through the professional services exclusion. Consequently, if a bodily injury or property damage claim were brought as a result of a trade association's alleged inadequate standards or alleged negligent certification, such claim would likely not be covered.

Standard-Setting and Potential Liability

Plaintiffs' lawyers cast a wide net so liability considerations are an issue not just for true standard-setting, certification and accreditation organizations, but also for trade associations that issue reports and recommendations. Lawsuits, for example, have been filed against a trade association that undertakes the testing of certain products common to its members (which by itself does not usually create a problem) and then uses the data derived from the testing to draw up conclusions and issue advisory reports to its members and the public. The potential liability associated with these seemingly innocuous association activities stems from the "voluntary rescue doctrine" otherwise known as the Good Samaritan Rule. The voluntary rescue doctrine states that under certain circumstances, "a person may be liable and negligent if he or she gratuitously assumes the duty to act on behalf of another and fails to act with due care in performing that duty."1 This is why product liability risk management considerations suggest the inclusion of careful descriptors of the scope of the work, disclaimers and, in appropriate circumstances, notes about membership conflicts of interest, in such reports.

Courts have found that trade associations have a duty to exercise due care when they promulgate standards, whether through pure standard-setting or when an association holds applicants to a standard in order to be certified or accredited. When the duty to exercise due care in promulgating or applying the standard is breached, plaintiffs' lawyers can claim that the trade association's negligence was a foreseeable cause of the plaintiffs' injuries or property damage.

The New Jersey Superior Court held that the American Association of Blood Banks ("AABB") owed a duty of care to the recipients of blood products.2 The court stated AABB's "raison d'etre" was to ensure that all recipients received as safe a blood product as reasonably practical and, to that end, AABB promulgated standards with the intent and expectation that its members would follow them. Thus, AABB was "reasonably chargeable with a duty of care owed to those recipients whose life and health depended on the reasonableness and prudence of its action."3

The AABB was also found to be liable for breaching its duty of care when a patient was given HIV-infected blood during a transfusion.4 The blood bank complied with AABB's standard, yet still delivered tainted blood to the patient; as such, the trade association was held liable for issuing the standard. The court stated that the relationship between the standard-setting association and the patient, while not direct was one in which the conduct of the association had a direct impact on the patient.5 Furthermore, the court felt a substantial risk would be posed if the association failed to exercise due care in promulgating standards; in this case, the contamination of blood with the HIV virus which ultimately led to the patient's death from AIDS.6

A Washington state court similarly held that the National Spa and Pool Institute ("NSPI") was liable for breaching its duty of care to a teenage boy who suffered major injuries after he dove off a diving board into a pool.7 NSPI had published safety standards for the swimming pool industry that covered, among other things, how diving boards should be installed on a pool deck. The standards specifically permitted the use of a "606 jump board" with a "Type II pool;" the same combination the boy was using at the time he suffered his injuries.8 The court found evidence that NSPI knew 10 years prior to the accident that a diver of similar height and weight of the victim who dove from the board could enter the pool at velocities high enough to cause neck injuries. Nonetheless, NSPI had failed to change its standards and instead published a brochure describing the "steering-up technique" suggesting that a diver use their hands and arms to steer up as soon as they entered the water.9 The court stated that, by promulgating safety standards, NSPI voluntarily assumed the duty to warn consumers of the risks posed by the pool and board combination. NSPI was held liable for breaching its duty of care.

While instances of associations being held liable for standards-setting or certification activities are rare, the consequences can be disastrous.

The Gray Area of Standard-Setting

While the law has changed in recent years, trade associations that set standards or rely on its standards to certify personnel or products that make their way to the consumer, have been the subject of lawsuits, and as noted above, have faced liability. Since "standards" can come in many different forms, and what may constitute a "standard" or "duty of due care" is seemingly limited only by a plaintiff's lawyer's imagination, it is important for associations to consider a range of options to limit their liability exposure.

For instance, in today's litigious society, could an association that publishes and opines on the results of research into the efficacy of industry-related products face liability? How about an association that publishes a question and answer section on its website concerning industry-related products? Where will the line be drawn? One can conceive of a plaintiff arguing that an individual member of the public relied on such opinion or information to its detriment. These examples might seem like a stretch, and proving causation is likely to be a major practical hurdle for the plaintiff, but plaintiffs' lawyers are more and more creative, and associations are viewed by some as a "deep-pocket."10

The bottom line is that whatever trade associations know concerning the health and safety about its industry's products or services and how it undertakes informing its members and the public of what it knows is open to scrutiny, with the attendant likelihood of more consumer plaintiffs' actions being filed against associations.

Minimizing the Standard-Setting Risk

The public benefits of standards development are well-known and respected, but the risks for standards-setting organizations must be properly managed. Trade associations should reflect carefully about what they view as "standards" and what they characterize as standards. In some circumstances, associations may be better positioned if they characterize their work product as "general guidance" for the industry that can be voluntarily followed rather than a standard. Trade associations should strive to disseminate facts and, when giving opinions, should use disclaimers where appropriate to delineate the trade association's role in arriving at its opinions and clearly stating the intended scope of use of its opinions. Where appropriate, information about potential conflicts of interest can be included.

Equally importantly, trade associations should ensure that they have sufficient insurance coverage. In order to cover bodily injury and/or property damage claims that may arise from a member company following a trade association standard or as a result of a certified tradesman's repair activities, the trade association must ensure that it is covered for its standard-setting or certification activities. As stated earlier, the commercial general liability policy ("CGL") and the directors and officers liability policy ("D&O") typically do not cover these activities.

A miscellaneous professional liability policy or specialty errors and omissions liability policy is likely necessary. This liability policy fills the gap between the CGL and the D&O by endorsing the standard-setting, certification or accreditation activities as "insured services" and endorsing "bodily injury" and "property damage" as recoverable damages arising from the newly-expanded insured service.

The law is constantly evolving and trade associations need to assess their on-going activities based on today's risk management realities to minimize their liability exposure. We have yet to discover the future boundaries of trade association liability in many areas. As trade associations continue to provide an indispensable service to both their members and society at large, self-protection and preservation must remain a central focus. As part of its overall risk management review, a miscellaneous professional liability policy can allow a trade association to stay on the cutting edge of industry practice, providing the guidance and leadership so necessary to its members and the industry, while meeting association risk management objectives.

For more information on this topic or on obtaining proper insurance coverage for trade association activities, please contact Arthur S. Garrett III at 202-434-4248 or garrett@khlaw.com.

1Meneely v. Smith, 5 P.3d 49, 55 (Wash. Ct. App. 2000).

2Snyder v. American Association of Blood Banks, 659 A.2d 482, 492 (NJ Super. Ct. App. 1995).


4Weigand v. University Hospital of New York, University Medical Center, No. 97251, slip op. (N.Y.S.2d, 1997).

5Id. at 723.


7Meneely v. Smith, 5 P.3d 49 (Wash. Ct. App. 2000).


9Id. at 52.

10One bright spot is the enactment of the Standards Development Organization Advancement Act of 2004. Under that law, standards development organizations (SDOs) have the opportunity to limit their antitrust liability to actual damages, as opposed to treble damages, and the antitrust rule of reason applies to challenges brought against SDOs. Unfortunately, there is no corresponding limit on product liability claims.