Risk Insider: Shep Tapasak

Supplier Risk and Downstream Liability

By: | December 11, 2017 • 2 min read
Shep is Managing Principal for Integro, and Healthcare Practice Leader for the Southeast. Shep has 25+ years of experience in property/casualty. He is passionate about specialization and innovation. He can be reached at: [email protected]

In the insurance business, the term “deep pockets” is tossed around more frequently than an antipasto salad. In my opinion, the term “downstream liability” is a better way to describe how risk costs can flow to a party irrespective of the degree of fault.

Downstream liability risks are the risks of inheriting liability from the more culpable party. Laws, which vary by state, can sometimes increase these risks, and quite often, downstream liability flows from suppliers and vendors.

Vicarious and Downstream Liability Contrasted

Vicarious liability is a legal doctrine that, in some instances, makes a party responsible for the actions or inaction of a culpable party based only on the relationship between those parties. In other words, the “duty of care” is imputed to a third party precisely because of their relationship to the culpable party.  Employee-employer and child-parent are common examples of special relationships that can yield vicarious liability.

Sources of Downstream Liability


  • Product Defects. Defects in a vendor’s product that impact the safety of the subsequent service or product delivered can often result in liability being assigned and/or apportioned. For example, a manufacturer of medical devices produced scopes with a design flaw that made them highly susceptible to bacterial contamination. While the device manufacturer was responsible for much of the settlements, many hospitals that used the “scopes” during surgical procedures were also subject to significant costs and settlements.
  • Catastrophes and Disasters. Highly publicized events that result in multiple injuries or deaths can lead to lawyers placing focus upon how to find enough assets to adequately compensate victims of the tragedy, regardless of the respective degrees of negligence. An example of this would be the Station Nightclub fire in Rhode Island (2003), which injured or killed more than 200 people. In this case, there were 65 defendants involved with the $176 million settlement. The nightclub, headlining band and others responsible for the pyrotechnics that started the fire paid a very small fraction of the settlement. Beverage distributors, TV and radio stations, and the manufacturers and installers of the foam that enhanced acoustics shouldered the majority of the settlement dollars.
  • Environmental/Pollution Legal Liability. There are numerous claims where vendor work has led to substantial liability for property/business owners. Many of these instances involve indoor air quality issues arising from construction activity and defects, as well as HVAC installation and maintenance. In one of the more extreme examples, the deaths of three young cancer patients within a month of each other at a hospital in Tampa, Fla. were alleged to have resulted from toxic mold released from dust generated during a construction project.

There are many other downstream exposures, which might not involve bodily injury, but can result in unforeseen third-party related costs. Timely examples include: vendors that misuse client data; downstream reputational risk; and staffing agency exposures.


The risks associated with suppliers and vendors can result in significant, unanticipated costs. Risk management programs should include identification and analysis of exposures that could lead to downstream liability costs. These risks can be mitigated, but it is essential to go well beyond supplier audits and certificates of insurance.

More from Risk & Insurance

More from Risk & Insurance

2018 Risk All Stars

Stop Mitigating Risk. Start Conquering It Like These 2018 Risk All Stars

The concept of risk mastery and ownership, as displayed by the 2018 Risk All Stars, includes not simply seeking to control outcomes but taking full responsibility for them.
By: | September 14, 2018 • 3 min read

People talk a lot about how risk managers can get a seat at the table. The discussion implies that the risk manager is an outsider, striving to get the ear or the attention of an insider, the CEO or CFO.


But there are risk managers who go about things in a different way. And the 2018 Risk All Stars are prime examples of that.

These risk managers put in gear their passion, creativity and perseverance to become masters of a situation, pushing aside any notion that they are anything other than key players.

Goodyear’s Craig Melnick had only been with the global tire maker a few months when Hurricane Harvey dumped a record amount of rainfall on Houston.

Brilliant communication between Melnick and his new teammates gave him timely and valuable updates on the condition of manufacturing locations. Melnick remained in Akron, mastering the situation by moving inventory out of the storm’s path and making sure remediation crews were lined up ahead of time to give Goodyear its best leg up once the storm passed and the flood waters receded.

Goodyear’s resiliency in the face of the storm gave it credibility when it went to the insurance markets later that year for renewals. And here is where we hear a key phrase, produced by Kevin Garvey, one of Goodyear’s brokers at Aon.

“The markets always appreciate a risk manager who demonstrates ownership,” Garvey said, in what may be something of an understatement.

These risk managers put in gear their passion, creativity and perseverance to become masters of a situation, pushing aside any notion that they are anything other than key players.

Dianne Howard, a 2018 Risk All Star and the director of benefits and risk management for the Palm Beach County School District, achieved ownership of $50 million in property storm exposures for the district.

With FEMA saying it wouldn’t pay again for district storm losses it had already paid for, Howard went to the London markets and was successful in getting coverage. She also hammered out a deal in London that would partially reimburse the district if it suffered a mass shooting and needed to demolish a building, like what happened at Sandy Hook in Connecticut.

2018 Risk All Star Jim Cunningham was well-versed enough to know what traditional risk management theories would say when hospitality workers were suffering too many kitchen cuts. “Put a cut-prevention plan in place,” is the traditional wisdom.

But Cunningham, the vice president of risk management for the gaming company Pinnacle Entertainment, wasn’t satisfied with what looked to him like a Band-Aid approach.


Instead, he used predictive analytics, depending on his own team to assemble company-specific data, to determine which safety measures should be used company wide. The result? Claims frequency at the company dropped 60 percent in the first year of his program.

Alumine Bellone, a 2018 Risk All Star and the vice president of risk management for Ardent Health Services, faced an overwhelming task: Create a uniform risk management program when her hospital group grew from 14 hospitals in three states to 31 hospitals in seven.

Bellone owned the situation by visiting each facility right before the acquisition and again right after, to make sure each caregiving population was ready to integrate into a standardized risk management system.

After consolidating insurance policies, Bellone achieved $893,000 in synergies.

In each of these cases, and in more on the following pages, we see examples of risk managers who weren’t just knocking on the door; they were owning the room. &


Risk All Stars stand out from their peers by overcoming challenges through exceptional problem solving, creativity, clarity of vision and passion.

See the complete list of 2018 Risk All Stars.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]