Defective Products & Liability: A Small Business Primer
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When your business centers on goods for consumers, a defective product can be your worst nightmare. Clearly, your first concern is the damage done to the customer, but you also have to worry about the impact on your business's reputation and finances.

Your General Liability policy most likely includes Product Liability coverage that can help you recover, but the goal is to avoid problems when possible. That means you need to keep an eye out for defective products before they hit the market.

Typically, defective product claims fall into one of three categories:

  1. Design defects.
  2. Manufacturer defects.
  3. Marketing defects.

This primer takes you through each type so you can identify potential risks.

Product Liability from Design Defects

According to "Types of Defective Liability Claims" on Nolo.com, a product may have a flawed design if the flaw presents a foreseeable risk when a product is used as intended. Imagine, for example, a line of top-heavy vehicles that tend to roll over on sharp corners. If the driver isn't reckless and the problem occurs in many vehicles of the same make, then the most likely culprit is an error in the product's design.

Product liability laws vary by state, but many require the plaintiff to show that the problem could have been avoided if the designer had gone with a different plan. That plan, however, needs to be…

  • Reasonable for the manufacturer to produce.
  • Affordable even with the modification.
  • In line with the product's purpose.

However, if strict liability laws apply, the plaintiff may only need to show that the product had a defect, caused damage, and was used properly. Learn more in "How Strict Liability Laws Affect Small Businesses."

Product Liability from Manufacturer Defects

You can also be held liable for products with manufacturer defects, which are flaws that occur during production. Manufacturing defects usually affect only a small group of products because the problem isn't the design but a mistake made by the person assembling the product. For example, the assembler might…

  • Fail to follow the designer's plan.
  • Use the wrong fasteners.
  • Attach parts incorrectly.
  • Allow hazardous materials to taint the product.

Take the example of the top-heavy vehicle, but in this case the problem isn't the design. Instead, let's say there's a batch of vehicles that have the rollover problem and they came from one assembly plant. If an investigation reveals that the manufacturer strayed from the original design, the issue is a manufacturing defect.

Product Liability from Marketing Defects

These defects are sometimes called the "failure to warn" defects. A product might have a marketing defect if it has…

  • Insufficient instructions.
  • Improper labels.
  • Inadequate warnings.

In this example, say the vehicle isn't necessarily top heavy. In fact, it's beautifully designed and the manufacturer's work is impeccable. It just rolls over if you take a corner too fast. Conceivably, an injured driver could sue the makers for not including that information in the driver's manual.

How Do Defective Products Lead to Lawsuits?

Any business involved in bringing a product to market can be sued for product liability, including…

  • Designers.
  • Product manufacturers.
  • Component parts manufacturers.
  • Wholesalers.
  • Retailers.

Additionally, the Cornell University Law School's legal dictionary states the term "product" can be applied to non-tangible items, including…

  • Gas.
  • Pets.
  • Homes.
  • Navigational charts.

When it comes down to it, your exposure to a defective product lawsuit may be greater than you originally assumed. And a suit can be a major drain on a small business's resources and reputation. It costs time and money, and if a lawsuit makes the public think your product as unsafe, consumers will most likely look for alternatives.

Getting sufficient Product Liability coverage can help you handle lawsuit expenses, but you'd probably prefer to not have trouble in the first place. Read the blog post "What Is Product Liability?" for tips on preventing product liability lawsuits.

Product Liability Insurance: Further Reading