Risky Business: Protecting Yourself Against Product Liability Claims

If you design, manufacture or sell products, you need to be concerned about product liability. In 2021, Law.com covered such a case where the plaintiff was awarded $11.5 million in damages, an eye-popping amount that indicates the significant financial burden placed on businesses found liable for product issues. Even smaller awards of $100,000 can be too much for a small business to handle. 

Fortunately, product liability insurance pays for the defense and insurance claim settlement in cases where a customer is harmed from using a product you created or sold. Still, even business owners with this insurance already should be aware of the types of liability, the variety of defects you could be sued over and how to mitigate exposure to litigation. 

What is strict liability?

As a preliminary matter, it is important to understand that most product defects are subject to the rule of strict liability. This means the manufacturer or seller will be held responsible for harm caused by the defect, regardless of whether it was at fault in allowing the defect to arise. Consumers are generally well protected under U.S. laws, and when it comes to product liability, they are entitled to expect that they aren’t purchasing dangerous goods. [Find out more reasons why product quality matters.]

Which defects lead to liability claims?

The product liability rules apply to defective products. There are three types of defects that give rise to product liability claims: design, manufacturing and marketing defects.

• Design defects: The first type of defect exists before the product even gets made. These defects render the product inherently dangerous – meaning each and every article that rolls off the production line is a potential lawsuit waiting to happen.
• Manufacturing defects: The second type is a defect in the manufacturing process. This may affect a whole batch of products (for example, if a curing temperature was set too low) or a single item (a hammer with a weak handle).
• Marketing defects: The third type is what is known as a marketing defect, as it relates to your company’s branding and a product’s package information. Dangerous products (like lawnmowers, cleaning chemicals and drugs with serious side effects) can be sold to the public provided they have adequate warnings about the risks of use, but failure to provide these warnings is considered a defect and can lead to a product liability claim. [Related article: How Your Product Packaging Can Win Buyers’ Hearts]

With so many potential risks, what are retailers and manufacturers to do? It’s all about mitigation.

How do you mitigate exposure to product liability litigation and damages?

Almost 11 million people were treated in the emergency room for consumer product injuries in 2020, according to the National Safety Council. That figure underscores why the risk of product liability claims is a serious concern for businesses that provide retail goods. A single design or marketing defect that affects thousands or millions of products could very well cause injuries and be too much for a company to bear financially.

However, there are various ways manufacturers and sellers can limit their exposure to product liability.

• Testing: From prototyping to factory quality assurance, products should be routinely tested at every stage of the production lifecycle to ensure no defects exist.
• Source evaluations: Retailers, distributors and manufacturers that use component parts should all be doing their due diligence to understand and trust where their products are coming from.
• Indemnification from upstream sources: Commercial entities down the distribution chain can (and should) contract with their product sources to ensure the parties manufacturing and designing the products hold ultimate financial responsibility for anything that goes wrong.
• Proper packaging disclosures: As discussed above, warning labels can allow for safer sales of otherwise dangerous products and serve as cautionary notices for users. 
• Limited consumer warranties: Laws in some jurisdictions allow members of the distribution chain to disclaim certain warranties concerning consumer products. These disclaimers may not prevent all product liability claims, but they can help lessen the damage when something goes wrong.
• Insurance: All members of the distribution chain should maintain adequate insurance coverage to protect them in the event of a substantial product liability claim. The type of policy and coverage limits will depend on the nature of the product and your role in the distribution process.

Products make the world go around, so businesses certainly should not be dissuaded from going to market with their new innovations. However, understanding the risks and taking the available precautions to avoid defects and mitigate the damage when product liability claims occur will benefit your business, your commercial partners and your customers.

What is product liability insurance, and why do you need it?

Product liability insurance is a specialized liability insurance that pays for the defense and settlement of product liability claims. It is often included as part of a general liability insurance policy, but your particular policy may not have the coverage amount desired if your company has extensive exposure to manufacturing or selling products that are deemed dangerous or have significant injury issues. This means you may want to buy a specialized, high-limit policy specifically for product liability. 

Without product liability insurance, a business owner is left to pay for any damages out of company funds. Many businesses don’t have that kind of savings, so such a claim would likely be a big financial hit to the company. This is why businesses manufacturing and selling products should invest in product liability insurance; it transfers the financial risk to the insurance company. Check out our complete business insurance guide and our recommendations for the best liability insurance providers to ensure your business is covered the way it should be.

Kurt Smith contributed to the writing and research in this article.