Risky Business: Protecting Yourself Against Product Liability Claims

Business.com / Insurance / Last Modified: February 22, 2017

With so many risks in product design, manufacturing and marketing defects, what are retailers and manufacturers supposed to do?

For product designers, manufacturers and sellers, product liability claims are a serious concern. In many cases, they present the single greatest potential risk to the entire organization. In 2012, the average jury award for product liability claims was over $3.4 million. This article provides a brief overview of what commercial entities throughout the distribution chain need to know about product liability.

“Strict Liability” and Types of Defects

Understanding “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 that 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, consumers are entitled to expect that they aren’t purchasing dangerous goods.

The Three Defects that Lead to Product Liability Claims

The product liability rules apply to “defective” products. For purposes of our discussion, it is worth taking a quick look at the three types of defects that give rise to product liability claims:

  • Design Defects: The first type of defect is one that exists before the product even gets made. These defects render the product inherently dangerous; meaning that each and every article that rolls off of 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. Essentially, even dangerous products (like lawn mowers, cleaning chemicals, and drugs with serious side effects) can be sold to the public provided that they have adequate warnings about the risks of use. Failure to provide these warnings is considered a defect and can lead to a product liability claim.

So, with so many potential risks, what are retailers and manufacturers to do?

Related Article: Protect Yourself, Before You Wreck Yourself: Business Insurance for B2B Manufacturers

Ways to Mitigate Exposure to Product Liability Litigation and Damages

With more than 34 million estimated product-related injuries and deaths every year, for businesses that provide retail goods, the risk of product liability claims is a serious concern. A single design or marketing defect that affects thousands or millions of products could very well be too much to bear. Fortunately, there are a number of ways that manufacturers and sellers can limit their exposure to product liability. These include:

  • Testing:  From prototyping to factory quality assurance, products should be routinely tested at every stage of the production lifecycle to ensure that no defects exist.
  • Source Evaluations: Retailers, distributors, and manufacturers that use component parts should all be doing 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 that 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 sale of otherwise dangerous products. 
  • Limited Consumer Warranties: Laws in some jurisdictions allow members of the distribution chain to disclaim certain warranties with regard to consumer products. These disclaimers may not prevent all product liability claims, but they can help mitigate the damage when something goes wrong.
  • Insurance: Finally, 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.

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