Product liability

Part I: The myths and realities of managing product liability risk

The FABRICATOR October 2005
October 11, 2005
By: Dave Ludwin

By recognizing the myths and understanding the realities of protecting your business, you can make simple strategic refinements to help give you true peace of mind when it comes to product liability.

Each night millions of business owners lock their front doors and head for home, confident that their deadbolts, central-station alarm systems, video surveillance cameras, and motion sensors will keep everything safe until morning. But unless that equipment is installed and working correctly, those owners may not be as protected as they think.

The same can be said for businesses that have implemented measures to limit the liability risk from defective products. In spite of quality control programs, safety committees, warning labels, shrewd lawyers, and savvy communicators, many shop owners today may be operating with a false sense of security.

Claim experience suggests that even the most prudent managers can be tripped up by common misconceptions regarding product liability risk. However, by recognizing the myths and understanding the realities of protecting your business, you can make simple strategic refinements to help offer true peace of mind.

Myth 1
Well-run quality control procedures will mitigate most product liability losses.

Quality control clearly plays a role in ensuring that some defective products never hit the street. But loss statistics show that design defects actually are responsible for the largest product liability payouts. So, in reality, if a product's fault lies in its design, quality control will do little more than ensure that the defect is applied consistently to each product.

Manufacturing flaws prompt the most common product defect complaints, probably because they're so apparent. On the other hand, design defects often are not obvious until a pattern of negative events is detected. By that time, usually it's too late to do anything but react and open the wallet—wide.

That's why quality control should be as visible and vital during the design stage as it is during manufacturing. Even better, quality control should be part of a larger, multidisciplinary review of design that includes key departments, including legal, purchasing, manufacturing, and sales. The more people involved in the design phase, the easier it is to adhere to high design standards and foresee potential misuse of the product.

Myth 2
Warning labels will protect you against product liability lawsuits.

Warning labels alone actually offer very little protection because U.S. courts have held manufacturers to such a high standard of conduct.

A company's best source of protection is to design the hazard out of a product (see Myth 1). This is especially important if a competitor has been able to accomplish that goal. For example, if you manufacture a power saw with blades that stop rotating four seconds after releasing the trigger— and another company's saw stops within half a second—you may be held to that state-of-the-art standard.

Your second-best line of defense is to substitute a less hazardous material for the one you are using. If your product is covered in lead-based paint, for instance, switching paint certainly would be in order. Next on the list is incorporating a guard against the hazard, such as a blade guard on a saw, to isolate it physically. Labels and warnings, as important as they are, rank fourth on the "design hierarchy" adopted by the courts. Their inclusion is a must, but their ability alone to protect you from product liability risk is limited.

Myth 3
Product liability complaints will surface first in the customer service department.

In practice, most complaints are made on the front lines, which means that the people who receive them are not trained to respond to them and are not relaying the complaints to headquarters.

Customer service reps certainly hear their share of grumbling. But so do sales and service personnel, return-desk staff, and clerical professionals. The Internet is rife with consumer horror stories, and most large cities have consumer reporters who live on tips from unhappy buyers. So it's important to track all possible sources of consumer dissatisfaction, not just the customer service logs.

Myth 4
Product safety committees ensure safe products.

In reality, product safety committees simply are one cog in a large and complex machine. Even the strongest teams cannot ensure product safety all by themselves.

That said, a larger issue is at play: Many product safety committees have no real power to effect change.

To bring value to the table, product safety committees must have the complete support of company owners and leaders. That support is most evident in the form of financial backing and the selection of high-ranking members who have the authority to effect change. It's also important that such committees have a clear charter, a sensible structure, meaningful metrics, and a willingness to audit themselves and measure company performance against those metrics.

Myth 5
If you have certificates of insurance from all suppliers, you're totally protected.

Certificates of insurance mean little until a loss actually has taken place. And getting a certificate from every vendor could create a tedious paper chase.

Since your ultimate goal is loss prevention, it's better to have a hierarchy of risk transfer based on how critical the raw materials or components you're buying are. In other words, the more critical an item is to the function of the product, the more risk transfer you'd want to seek. This risk transfer could be as simple as hold-harmless language on invoices to as complex as specifically negotiated indemnity agreements between you and your supplier. Ideally, such agreements would indemnify you for all liability and compensate you for any recall costs.

Myth 6
A good lawyer is your best defense against product liability claims.

This isn't a myth as much as a half-truth. Good lawyers clearly are needed to defend lawsuits and, at times, settle them; but, in many cases, good lawyers also can do more to prevent suits.
The key to risk management is planning, and attorneys can be valuable in anticipating factors that could lead to product liability litigation. For example, attorneys can and should:

  • Review all labels, warnings, and instructions included with products.
  • Help you identify documents that could be crucial to a potential defense, and counsel you on the ideal retention time of those documents
  • Educate your staff in terms of legal trends and recent tort reform legislation.
  • Offer advice on the design review process, including how to document the product development process.

Myth 7
Good media relations is the most important element in a recall situation.

This is much like the "good lawyer" myth in that media relations is important when negative events occur, but comprehensive preparation is paramount. All business owners should ask themselves six questions:

  1. Do I have a way to trace and track down products that may be defective?
  2. Would I be able to identify the users of those products?
  3. Do my distributors understand their roles in a recall?
  4. How would I be alerted to a brewing potential recall situation
  5. Do I have a consistent and reliable go/no-go process for deciding on the need for a recall?
  6. Is my communication function staffed and trained to manage the media if there is a recall?

Communication is a key part of the plan, but it's just one part of it.

Part II will examine the most common pitfalls that open up manufacturers to product liability claims.

Dave Ludwin is director of product liability risk control at CNA, 800-262-6241, CNA underwrites Fabricators & Manufacturers Association-endorsed insurance programs and is a long-time partner in FMA safety programs.

The purpose of this article is to provide general information, rather than advice or opinion. It is accurate to the best of the author's knowledge as of the date of the publication. Accordingly, this article should not be viewed as a substitute for the guidance and recommendations of a retained professional. In addition, CNA does not endorse any coverages, systems, processes, or protocols addressed herein unless they are produced or created by CNA.

CNA is a service mark registered with the U.S. Patent and Trademark Office. Copyright ©2005, Continental Casualty Company. All rights reserved.

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The FABRICATOR is North America's leading magazine for the metal forming and fabricating industry. The magazine delivers the news, technical articles, and case histories that enable fabricators to do their jobs more efficiently. The FABRICATOR has served the industry since 1971.

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