Customers expect manufacturers, suppliers and other parties in the retail chain to deliver safe and reliable products. However, at any point in the production and distribution process, exposures related to design flaws, manufacturing defects, inadequate warnings and unclear instructions can all create product liability.
Put simply, product liability is a legal term that refers to the liability of those in the manufacturing chain of a product (e.g., manufacturers, distributors, sellers, retailers and similar parties) for damage caused by that product. This can include manufacturers of component parts, wholesalers and retail store owners, among others.
According to recent data, the average jury award for product liability cases was $5.1 million.1 In many cases, a business can be held liable for damages caused by a product if a plaintiff can prove that the defective product caused an injury or a loss. To complicate matters, products don't necessarily have to be tangible property, and claims can arise from intangible goods such as digital products.
Businesses can be subject to product liability claims even if they didn't design the product. For instance, if a business is selling or distributing a foreign-made product, it could be held responsible for any product defects. Similarly, if a manufacturer uses parts sourced from another party, it can be subject to claims if those parts are found to be unsafe. In other words, businesses don't necessarily have to directly design or manufacture a finished product in order to have product liability exposures.
Following a product issue, organizations can experience significant reputational harm. Failing to take corrective action in the face of product defects can lead to lost revenue and destroy consumer trust — trust that may be difficult to win back. Corrective action could include redesigning or retrofitting a part as well as full-scale product recalls. In general, a product recall refers to the act of removing an item from inventory or exchanging or replacing a product in the marketplace after a defect is discovered. These defects can be anything that hinders a product's performance, harms consumers or creates potential legal issues for producers. Recalls can be complex and expensive, making it even more important for businesses to mitigate product issues by designing, distributing and selling safe products.
While businesses want to produce safe products, mishaps can still occur. That's why, to protect consumers and avoid costly claims, businesses need to be proactive and take steps to reduce product liability exposures. This article explores some best practices that organizations should consider.
Best practices for reducing product liability exposures
To produce, sell and distribute goods that are reasonably safe when used as intended, businesses must focus on reducing product liability. One way to do this is to establish a product liability prevention program. Such a program can help organizations take a top-down approach to product safety, reduce accidents and prevent product recalls.
What's more, an effective program can help businesses reduce accidents, streamline their operations and create better and safer products — all of which can help them enhance their position in the market. While product liability prevention programs differ from business to business, key areas of focus can include:
- Management coordination and control
- Risk transfer
- Design and product development
- Manufacturing and quality control
- Sales and marketing
- Vendor management
- Record retention
- Recall planning
The following sections will examine these topics in more detail, arming businesses with real-world strategies they can use to reduce their product liability exposures.
Management Coordination and Control
An organization's commitment to product safety must come from the top and be effectively communicated. Put another way, management must play an active role in reducing product liability.
As part of their job responsibilities, people leaders should weave product safety into company planning as well as operational and control activities. Doing so establishes a holistic program that encompasses all phases of the product life cycle, including the initial design, manufacturing process and final sale.
Risk transfer refers to the process of contractually shifting a specific risk from one party to another. Put simply, risk transfer is when one party assumes the liabilities of another and gives businesses better control of the exposures they are willing to undertake. When used effectively, risk transfer places the burden of a specific risk on the party that has the most control over preventing a loss.
There are two main ways to accomplish risk transfer:
- Insurance — Securing an insurance policy is one of the most common risk transfer strategies. By securing coverage for a specific risk, an insurer agrees to assume strictly defined financial risks on behalf of the policyholder.
- Contracts — Businesses can transfer risk through contracts, specifically ones that include an indemnity clause and additional insured requirements. It's worth noting that indemnification agreements are independent of insurance and work by transferring legal liability from one party to another.
To successfully transfer risk, we recommend consulting your legal counsel about adding general acceptance and hold harmless/indemnification provisions. These provisions specify that businesses will not be held liable for losses that stem from a vendor's or subcontractor's work. Additionally, vendors and partners should be required to provide certificates of insurance. These certificates confirm that vendors have the appropriate coverage and limits in place.
Other risk transfer considerations, such as asking for additional insured status and requiring specific insurance limits, can go a long way toward reducing product liability concerns. Above all, when transferring risk, businesses should work with a qualified attorney — one who is familiar with product liability law.
Design and Product Development
Product liability claims frequently stem from design issues; particularly, issues related to improper materials, noncompliance with safety and industry standards, inadequate warnings and product defects can lead to litigation.
To prevent product liability issues, businesses must design products that are reasonably safe during foreseeable use, unforeseeable use, service and maintenance. This involves making safety a priority throughout the entire product design phase.
Above all, when designing products, businesses should conduct a safety review and consider hazards that may arise from the intended and unintended use of the product. Moreover, products must comply with all relevant industry and government standards.
As part of these standards, businesses should pay careful attention to the labels, warnings and instructions they use with their products. These labels must comply with regulatory standards and be prominent, understandable and provided where applicable.
During the design process, businesses should engineer out as many hazards as possible. However, if potential hazards still exist, businesses should communicate them using warnings and instructions. When drafting these warnings and instructions, businesses should seek the help of design and legal professionals. It should also be noted that warnings and instructions are not adequate substitutes for safer designs, and they should be used only to address unavoidable dangers and hazards that cannot otherwise be eliminated.
Design safety is an ongoing and evolving challenge for businesses. As such, businesses should revisit their designs, adjusting them based on technological advancements, recent court decisions and public expectations.
Manufacturing and Quality Control
Quality control is critical when it comes to detecting and preventing product safety hazards. Quality control measures will differ depending on the complexity of a particular product but must extend to all phases of the manufacturing process. Essentially, quality control should be implemented at every stage of product design to ensure that no item leaves the production line unchecked.
For businesses that design or manufacture physical or digital products, testing is critical. In fact, some regulations require manufacturers to test products in an in-house or third-party laboratory to verify that their products are safe before they reach the general public. To aid in quality control, businesses should place serial or batch numbers on all products to ensure that they are traceable in case of a recall or other product issue. Some businesses even leverage quality assurance software and systems to help them identify and track product flaws, manage supplier quality control and maintain regulatory compliance.
Sales and Marketing
The way a product is positioned to the public can have an impact on customer expectations and the way a specific product is used. When it comes to product liability, sales and marketing initiatives should focus on highlighting product features, appropriate product use and product limitations.
When promoting a particular product, sales and marketing personnel should understand common product liability concerns. That will make them better equipped to set customer expectations and communicate critical safety information.
It's common for product manufacturers to work with outside vendors to secure raw materials. To reduce liability concerns in these instances, businesses must ensure that components are properly sourced through strong vendor management practices.
This is particularly important when you consider that, in the face of a defect, it can be extremely difficult or cost-prohibitive to seek damages from a foreign company for product liability concerns. For instance, if an American company imported components from a foreign company and those components were flawed or unsafe, the burden of a product liability claim is likely to fall on the American company. Following these types of claims, there may be no practical way to seek compensation from a supplier. This same principle applies if a business is selling a product that is entirely foreign made, meaning there are product liability considerations even if a business didn't explicitly design a defective product.
Well-coordinated vendor management helps businesses find qualified vendors and acquire quality product components. Vendor management personnel can help ensure consistent compliance with design specifications, as they work closely with design, manufacturing and quality control teams.
Together with your quality assurance team, vendor management teams should regularly evaluate the capabilities and reliability of suppliers. To further enhance product liability prevention programs, it's crucial that suppliers of key components have their own contracts and insurance policies to help address any exposures related to defective supplies.
Effective documentation is important, as it demonstrates the level of care an organization takes when designing, manufacturing and selling safe products. Specifically, businesses need to establish record retention practices to not only meet applicable regulatory requirements but also to prepare for potential claims. This involves:
- Creating policies to aid in the retention of records that could help in the defense against product liability claims
- Maintaining copies of customer design specifications and product orders
- Establishing a change order system to document any design specification changes and the reasons for those changes
- Developing written procedures and instructions related to the manufacturing and quality control process
Record retention procedures should be based on company policies, management analysis, regulatory requirements and recommendations from your legal counsel. When creating a record retention procedure, it's important to keep storage, protection and retrieval in mind. At a minimum, records that relate to product liability loss control should be retained for the expected life of the product (or its design), plus the longest statute of limitation.
If a business's products harm a customer or other stakeholder, lawsuits can occur, leading to costly legal fees and settlements that can easily amount to six figures or more. Following a product issue, organizations must take corrective actions to curb losses and preserve their reputation. This can include carrying out a product recall, which is a complex and heavily regulated process.
If you are a manufacturer, importer, distributor or retailer of consumer products, you're probably subject to regulatory recall requirements. As such, it's important to be prepared with a plan — one that allows you to mobilize quickly following a product recall, avoid substantial civil penalties and ensure the longevity of your business.
While the specifics of recall plans can vary from business to business, they typically involve:
- Developing a product recall policy
- Creating a product recall team
- Establishing record-keeping practices
- Simulating a product recall
When creating a recall plan, be sure to involve insurance and legal professionals so your plan accounts for legal and product liability concerns that can be easy to overlook.
Enhance Your Risk Management Strategies
Product liability is a complex exposure, and managing risk can be a major undertaking, even if a business has access to all the right resources. To supplement risk management strategies and address specific exposures, it's important for organizations to work with insurance experts to review coverage. Further, to adequately reduce product liability exposures, businesses should partner with legal professionals. These individuals can help businesses:
- Audit marketing materials
- Review document retention policies
- Assist in the defense of product claims
- Interpret laws and regulations as they apply to product safety