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What Lumber Liquidators' Problems Teach Us about Product Liability

25. February 2016 08:09

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Product Liability means that manufacturers and retailers can be sued when their products are defective — and the recent story of Lumber Liquidators provides a prime example of how a product liability issue can shipwreck a company.

Your finger might not be on the pulse of floor-laminate scandals, so here's a summary of Lumber Liquidator's product liability issue (more details can be found in this Claims Journal account):

At the core of the story: it seems the flooring product in question, made in China, contains formaldehyde, which can cause cancer and exacerbate respiratory illnesses.

What Is Product Liability?

While Lumber Liquidators hasn't issued a product recall yet, this is a prime example of a product liability case. Product liability occurs when a business makes a product that…

Lumber Liquidators' product has a clear defect: the laminate contains an unsafe amount of formaldehyde. Product defects aren't always that clear-cut. In fact, there are three types of defect that can trigger product liability:

  1. Design defects. A product may be inherently flawed if the design is dangerous. Lawn darts are the classic example. Giving kids a long, sharp spike and telling them to throw it around the lawn… that's a design defect.
  2. Manufacturing defects. Problems may come up during manufacturing that lead to unsafe products. For instance, a metal manufacturer could switch suppliers, accidentally use a lower-grade metal that is more likely to snap, and unwittingly make a defective product.
  3. Marketing defects. It's also possible to have product liability if your product simply doesn't work as advertised or doesn't include adequate instructions, safety warnings, or labeling.

If your product has one of the defects above, a customer could sue you over an injury caused by the product. To make matters worse, most states have laws that mandate some version of strict liability, which lowers the burden of proof for plaintiffs, making it easier for them to hold you liable for product injuries. (See "Paul Walker Wrongful Death Lawsuit Highlights the Concept of Strict Liability" for more information about strict liability.)

How Does General Liability Insurance / Product Liability Insurance Work?

Product Liability Insurance can protect a business from the cost of a product injury or defect-related lawsuit. This coverage is usually included in a standard General Liability Insurance policy and is sometimes referred to as "products completed operations insurance" in policy documents.

It's worth pointing out that depending on state laws, retailers, manufacturers, and anyone in the supply chain may be held liable for defective products.

Let's go back to the Lumber Liquidators situation. The carcinogenic laminate was manufactured by a Chinese supplier — but liability may fall on Lumber Liquidators' shoulders. That's how these things work. If you run a manufacturing business, a supplier's miscue could lead to a lawsuit against your business.

With Product Liability Insurance in place, manufacturers of all stripes can protect their businesses. As Lumber Liquidators' case shows us, sometimes an unexpected problem from further up the supply chain can cause your business to face potential lawsuits.

Learn more about protecting your business in "5 Tips for Understanding Potential Product Liability."

Tags:

General Liability Insurance | Insurance Terms Explained | Manufacturers | Product Liability | Retail

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