If a manufacturer, distributor or merchant incurs a loss from your product, you need product liability insurance to protect your business. Product liability is generally considered a “strict liability offense” — if your product has a defect, you’re liable.
“Like most things, the devil is in the details. From an insurance perspective, it’s important to look at all of the terms and conditions of your general liability policy,” says Shane Moran, vice president at ECBM.
Smart Business spoke with Moran about the facts of product liability insurance.
What are some product liability claims?
Product claims typically fall into three categories, claims arising from:
- The manufacturing or production process — opening a can of soup and finding a piece of metal in it.
- A design failure or hazard — a chair designed with one of its legs significantly shorter than the others.
- A product that is not adequately labeled as to the potential hazard of the product — the label on a cigarette pack or a warning label on prescription medicine.
Who should have product liability coverage?
Manufacturers are not the only companies with product liability exposure — every company from the manufacturer of the components down to the retailer can be brought into a suit, and potentially has an exposure. A retailer may have an exposure if it assembled or installed the product and didn’t follow the manufacturer’s instructions properly. The retailer also would have a duty to the buyer to test the product for safety.
What possible damages could be awarded?
Your company can be legally obligated for damages to a third party that your product causes. These damages range from bodily injury to property and economic damage, with punitive damages potentially awarded.
You also can sustain loses in terms of recall cost, further product testing, advertising cost to prevent damage to your reputation, and business income and extra expense loss.
Why do some policies cover economic damages, but not punitive or statutory damages?
When policies cover economic damages, they mean compensation for a verifiable monetary loss, which can include loss of future earnings, loss of business opportunities, loss of use of the property, cost of repair or replacement, loss of employment and even medical expenses.
Punitive damages are awarded for the purpose of punishment, or to deter a reckless decision or action. Typically, they are used when compensatory damages are deemed inadequate. Punitive damage is a tricky area for insurance, as most jurisdictions have ruled that it is uninsurable. You need to examine your commercial general liability policy’s terms and conditions to see whether you have coverage. In most cases, you will find a punitive damages exclusion included.
Why is it a bad idea to underreport sales volume to lower your premium costs?
Most general liability policies are auditable. While an owner may want to use a lower exposure base to keep upfront premiums low, at the end of the day that same owner runs the risk of a large additional premium payment with the audited exposure.
Right after the policy expires, the audit occurs, which coincides with when the deposit premiums are paid. Deposit premiums are usually 25 percent of the total premium, so without using the proper exposure base at the beginning, a company could be looking at a very large outlay of cash in a short time period. This cash flow crunch could cause the cancellation of a company’s insurance for nonpayment.
Most carriers also lower their rates as the exposure base increases. So, by understating your exposure, you could be causing your company to have a higher rate and premium.
What other mistakes do companies make in this arena?
Many business owners think their insurance covers everything. But, for example, you may or may not have a product recall exclusion. The cost associated with recalling a product can be enormous, and you don’t want to find out that you have no coverage when faced with a claim.
If you’re unsure of your coverage, contact your insurance broker and/or risk manager to review the language.
Shane Moran is a vice president at ECBM. Reach him at (610) 668-7100, ext. 1237, or email@example.com.
For more information about risk management, see ECBM's blog.
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When screwdrivers were created, they had an obvious use — to turn screws. But over time people started using them as chisels and pry bars, which led to injuries and the addition of warning labels that laid out the proper use of screwdrivers.
What to include on warning labels is tricky. You not only have to warn about the inherent risks of the product from its intended use, but you have to consider the ways it could potentially be misused, says James C. Hyde, a partner at Ropers Majeski Kohn & Bentley PC.
“Most small to midsize businesses think about the need to have instructions and warnings on product labels, but there are topics they need to address that they’re not thinking about or are even aware of,” says Hyde.
Smart Business spoke with Hyde about what should and shouldn’t belong in product warning labels and ways companies can protect themselves from legal judgments.
How do you determine what to address on warning labels?
There’s an obligation to warn about inherent risks associated with the intended use of products and provide instructions on proper use. But companies often don’t understand they have a duty to warn against reasonably foreseeable misuse of the product. Basically, you have to brainstorm scenarios in which people might be injured misusing the product and warn against them.
There is also a duty to warn of potential allergens in your product. That also applies to products that are not ingested. A small business selling hand soap might have an ingredient that could cause an allergic reaction, so there’s an obligation to warn that the product contains the ingredient.
Making this more challenging is the prevalence of companies that sell products they do not manufacture under their own labels. The company might not be aware of all the chemicals used in the manufacturing process. For example, a company was selling exercise mats containing a chemical that required a California Proposition 65 consumer warning label. The company was not the manufacturer and were not aware the chemical was in the finished product, but it was sued for not warning of its presence. The state Office of Environmental Health Hazard Assessment has a website that lists chemicals that require a warning label because they’re considered carcinogens, or could cause birth defects or reproductive harm.
Do you have to warn against obvious dangers, such as coffee being hot?
There is no duty to warn consumers of an obvious danger — those making custom knives do not have to warn that the knives are sharp and may cut the user. The law requires warnings to be effective. But if the warnings become voluminous, consumers won’t read them and they lose their effectiveness.
The famous McDonald’s coffee case seemed pretty obvious on the surface — coffee is hot. But the plaintiff’s argument was that it was served at a temperature that was much hotter than one could drink it at or that one would expect it to be served. This illustrates how broad and very product-specific the issue is and why businesses need to have a well thought out procedure in place for developing use instructions and warnings.
How does a company protect itself?
Before the product goes to market, the company has to evaluate it specifically to determine what use instructions and warnings need to accompany it. The process should include the people involved in developing the idea for the product, as well as the designers and marketers, and engage resources such as industry associations. It’s a good idea to not only document the design and development process of the product but also to document the development of warnings and instructions, too. If sued, it helps to show the jury the process undertaken when developing the warnings. It demonstrates that there was a procedure in place and a comprehensive effort to provide clear and complete warnings including dangers of potential misuses of the product.
Ultimately a jury will decide whether it was reasonably foreseeable that someone was going to use that screwdriver as a chisel.
James C. Hyde is a partner at Ropers Majeski Kohn & Bentley PC. Reach him at (408) 918-4538 or firstname.lastname@example.org.
Insights Legal Affairs is brought to you by Ropers Majeski Kohn & Bentley PC
A global economy means product manufacturers should take a broader perspective when addressing issues related to product liability.
“They have always had to worry about warnings and product defect issues, but now with a global economy and the Internet, they need to be worried about not only federal and state laws and regulations but also international concerns in countries where their products may be advertised and purchased,” says Lawrence Borys, a partner at Ropers Majeski Kohn & Bentley PC.
“The changing world has expanded the concerns of businesses. Whereas previously manufacturers worried about design and quality control, warranty issues, or their warnings or labels, they often did so from a more provincial perspective. They now need to look at things from a much more global point of view,” Borys says.
Smart Business spoke with Borys about product liability and how businesses can protect themselves from legal judgments.
How has the Internet changed the product liability landscape?
Typically, product liability cases involved whether the product had a design or manufacturing defect, or the nature of the warning label or instructions on how to use the product. Because so much information is available on the Internet, manufacturers and sellers need to be careful about what representations are made online. Online sales raise a concern for manufacturers that simply didn’t exist 30 years ago. There needs to be a balance between marketing and selling a product versus the representations being made. The Internet is so prevalent that in many product liability cases there is an allegation or contention that raises an issue about what was represented online.
How can companies limit product liability?
Whether in product design, manufacturing, marketing or sales, work closely with your staff, experienced counsel and risk management professionals, including insurance representatives. No matter how careful you are, almost by definition success will lead to a greater probability of a product liability lawsuit with more products on the market. Working with strategic advisers reduces the likelihood that an isolated case will impact a successful business.
What types of insurance are available?
Traditionally, businesses get general liability insurance and some type of product liability coverage, but there are newer, advanced products such as patent infringement coverage and cyber liability to protect against hacking. Product recalls, once rare, have become more common, so there also is product recall insurance.
Does documenting the development process help when defending a lawsuit?
Record keeping and documenting how you addressed concerns is important when defending a product. California has separate product liability areas — there is a negligence aspect, which is focused on whether you acted as a reasonable manufacturer. Records of what was done to make the product safe are critical in the analysis of whether you acted reasonably in the process or recklessly in putting a product out into the marketplace. The other area of product liability, whether the product contains a defect, usually focuses on if the product functions the way most consumers think it would. Again, good record keeping is essential to show you considered foreseeable and anticipated uses.
It’s been said that you can manufacture the most effective mousetrap in the world, but that’s just a start. You have to determine whether your product may have violated patent or other forms of intellectual property protection, here and abroad; how to ensure every subsequent mousetrap gets built the same way as that first one; how you’re going to market and sell it; what your website will say; and how you want to label it with warnings provided on how to use the mousetrap. And you need to do all of that remembering that you may have to defend your product in a much broader geographic area than anticipated. Good documentation will help in every jurisdiction.
Also, if you’re going to sell your product online, either directly or through an intermediary, you have the same concerns, as well as ones related to the specifics of many jurisdictions. Working with your in-house team and legal and insurance consultants, you might not be able to stop product liability exposure, but you can help limit it.
Lawrence Borys is a partner at Ropers Majeski Kohn & Bentley PC. Reach him at (213) 312-2026 or email@example.com.
Insights Legal Affairs is brought to you by Ropers Majeski Kohn & Bentley PC
Insuring your business against an emergency is a vital and prudent step to take when owning a business. Most businesses have workers’ compensation and insure their buildings, but there are other types of insurance that business owners may want to consider as well. Choosing the right type of insurance for your business can seem like a daunting task; however, when you choose the right insurance, it can protect you and your business from substantial loss. Many businesses are underinsured because of the expense, but in the event of a crisis, insurance policies can help your company weather the storm and reduce financial loss.
Smart Business spoke to Jim Terrell and Donna Mittendorf of Comerica Bank about some of the most common types of insurance that could help safeguard your business.
What is business interruption insurance?
Terrell: Many businesses that close due to a fire or some catastrophic situation never reopen. It’s not because they didn’t insure their building, but rather it’s because the owners relied on their business to provide them with a steady paycheck. Business interruption coverage pays your lost salary as well as your ongoing expenses, including payroll of key employees and the extra expenses to get back into business more quickly. It could be good coverage to have because if the insurance company is slow taking care of the claim, you’re on their payroll.
What is the benefit of accounts receivables insurance?
Mittendorf: Accounts receivables insurance, or credit insurance, protects your business if your clients don’t pay you. This type of insurance can be particularly useful for new, rapidly growing businesses or if you have foreign clients. Accounts receivables insurance protects your company against loss on receivables, including default, bankruptcy or simply slow payment. This insurance can also protect a company that is unable to collect receivables due to loss of underlying records; for example, ones lost in a fire or flood.
What types of companies could benefit from having product liability insurance?
Terrell: Companies that manufacture, wholesale, distribute or retail a product may be liable for its safety. Product liability insurance protects against financial loss as a result of a defect in a product that causes injury or bodily harm. The type of product you sell should be factored into the coverage amount.
What is employment practices liability insurance?
Mittendorf: This insurance covers allegations of discrimination, sexual harassment and wrongful termination. Many businesses, especially small businesses, may forego this type of insurance because they have few employees or they consider themselves fair employers. That may be the case, but that doesn’t mean a scorned employee won’t allege otherwise. These types of allegations are by nature personal affronts to business owners. The advantage of this insurance is that it has a tendency to depersonalize it as much as it can be.
Is there insurance for home-based businesses?
Terrell: Yes, there is, since most homeowners’ insurance policies do not generally cover home-based business losses. Depending on what you need, you can add riders to your homeowners’ policy. Remember that homeowners’ policies only cover certain facets of home-based businesses, so you may need to purchase additional policies to cover other risks, like general and professional liability insurance.
What if my business has vehicles I need to insure?
Mittendorf: If you have a business that needs vehicles, you should consider commercial auto insurance. This type of insurance insures one or multiple vehicles with liability and property damage liability, as well as additional vehicle coverage like comprehensive and collision coverage. If your company has numerous vehicles and drivers, ask your insurance agent if you qualify for a fleet insurance policy.
How often should I review my insurance coverage?
Terrell: Generally speaking, you should assess your insurance on an annual basis. As your business grows, your liabilities grow and you may need additional or different types of insurance. You don’t want to be caught underinsured if something happens. You should discuss changes in your business with your insurance broker so he or she can determine if your current insurance is still meeting your business’s needs.
JIM TERRELL and DONNA MITTENDORF are senior vice presidents for Comerica’s Texas Business Banking Division. Comerica Bank is the commercial banking subsidiary of Comerica Incorporated (NYSE: CMA), the largest U.S. banking company headquartered in Texas, and strategically aligned by three business segments: The Business Bank, The Retail Bank, and Wealth Management. Comerica focuses on relationships, and helping people and businesses be successful. In addition to Dallas/ Fort Worth, Houston, San Antonio, Kerrville and Austin, Texas, Comerica Bank locations can be found in Arizona, California, Florida and Michigan, with select businesses operating in several other states, as well as in Canada and Mexico. To receive e-mail alerts of breaking Comerica news, go to www.comerica.com/newsalerts.