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What you need to know about product liability and lawsuits

Insureon Staff.
By Insureon Staff
February 29, 2020
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Product liability claims can wreck a small business. Learn who can be held liable for product defects, what causes these lawsuits, and how you can reduce your company’s risks.
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Releasing a defective product on the world can cause big trouble for small businesses.

Defects and liability risks affect product manufacturers, designers, distributors, wholesalers, and retailers. Physical or digital items that omit adequate warnings, injure a third party, or cause a wrongful death can lead to lawsuits for any party involved in the product.

Lawsuits related to product liability can drain a small company’s bank account quickly. 

According to the Insurance Information Institute, the median product liability lawsuit settlement was nearly $1.5 million in 2017. That’s higher than any other type of personal plaintiff injury claim that the organization tracks. 

Understanding what causes product liability lawsuits and taking steps to manage risks can ensure public safety, potentially save your small business a fortune, and help keep your reputation in excellent shape.

What causes a product liability lawsuit?

Each product liability lawsuit is unique, but they all share a few common traits. A business can be held liable for damages caused by a product if a plaintiff can prove:

  • The product was defective;
  • The defective product caused an injury;
  • The injury caused losses; and
  • The designer, manufacturer, or retailer had a duty to provide the buyer with a safe product.

At one time, only a product’s purchaser could file a liability lawsuit for defects. Now a variety of third parties can file these suits under most state laws. 

For example, if a pedestrian is injured because a driver’s car brakes fail, she could name the car designer or manufacturer in a product liability lawsuit. If found liable in court, the vehicle maker would have to reimburse the pedestrian for medical bills, lost wages, and other damages.

Compare product liability insurance quotes online today

What is a defective product?

A defective product is an item unfit for its intended purpose. Product defects can be due to lack of instructions, missing warning labels, and inaccurate product information or ingredients. Defects render a product that is typically safe dangerous to use.

There are three major types of product defects:

  • Design defects: A product with design defects exposes consumers to risk even when they are using it properly. To recover damages for a dangerous product, a person must identify the defect, show how it caused harm, and prove that they were following instructions.
  • Manufacturing defects: These defects occur when manufacturers fail to follow a product’s design plans. This includes using incorrect parts, making assembly mistakes, or allowing contamination by hazardous materials. 
  • Marketing defects: Product marketing defects are caused by insufficient instructions and warnings or improper labels that result in harm. To prove a marketing flaw in court, the injured party must identify the misleading information and show how it caused damages. 

What to do if you suspect a product defect

Besides harming your customers, defective products can hurt your reputation and your bottom line.

Personal injury attorneys advise taking immediate actions if someone reports a product defect, including:

  • publicly acknowledging the alleged product problem in a statement
  • contacting retailers, wholesalers, or distributors that sell the product
  • developing a plan to fix the defect, which could entail a product recall and reimbursing affected consumers

Product recalls can be voluntary or mandated by government agencies. 

Businesses that recall a product should consult the United States Consumer Product Safety Commission’s (CPSC) Recall Guidance webpage. This resource includes an extensive handbook, a checklist, and guides for notifying the public. The CPSC also offers a list of recalled consumer products that includes information about the number of affected items and whether they’re sold outside the U.S.

Tips for reducing product liability risks

Carrying the proper insurance is the first step in shielding your business from lawsuit costs. But avoiding a court date entirely is always the best option. 

To minimize your risk and ensure customer and client safety, follow these supply chain management (SCM) best practices:

Perform detailed product testing and quality assurance

If your business designs or manufactures physical or digital products, verify that your testing methods are solid before items reach the general public. 

The CPSC requires manufacturers of regulated goods to test products in an in-house or third-party laboratory. Designers and manufacturers of children’s products must troubleshoot goods in a laboratory certified by the CPSC.

Quality assurance software and systems can help businesses identify product flaws before they cause major problems. These systems typically include features for tracking product defects, managing supplier quality control, and maintaining regulatory compliance.

Include and double-check product labels

Any product that carries a risk of harm should have prominent warning labels.

Be as specific as possible about potential product risks and how users can avoid issues. You may want to include graphics and warnings in multiple languages.

Review product labels to be certain that all information is accurate and detailed. For example, a catering business that fails to disclose nuts in a food product could face a lawsuit if a consumer has an allergic reaction and requires medical care.

Regularly inspect and clean manufacturing equipment

Defective equipment can create product flaws. Inspect, test, and clean manufacturing machinery on a regular basis. 

Faulty equipment can also cause employee injuries, leading to workers’ compensation claims and lawsuits.

Track retail status

Many SCM applications track product shipments from the time they leave the manufacturing plant until a buyer purchases an item. 

Implementing an SCM system can allow you to quickly identify faulty products and stop them from reaching customers.

Navigating a product liability lawsuit

If your business faces a product defect lawsuit, contact your insurance provider immediately and seek advice from a specialized product liability attorney. Insurers can often recommend these attorneys.

Depending on the lawsuit, an attorney may advise you to:

  • collect documentation from all employees or contractors who worked on the product
  • preserve an example of a flawed product from a defective batch
  • request a confidential order to safeguard proprietary product information

Businesses found liable for product liability claims must pay damages, court costs, and attorney fees.

How to protect your business from product liability lawsuits

Most small businesses can’t afford product liability cases, even if they’re found not guilty. Maintaining the right insurance policies is key to protecting yourself from costs that could sink your business. 

If your company designs, manufactures, and sells items, consider investing in these coverage options:

  • General liability insurance: Most small businesses carry general liability insurance to protect against injuries to third parties and property damage. Many of these general liability policies also cover product liability claims.
  • Product liability insurance: If your general liability insurance policy excludes damages caused by products, ask your insurance agent about adding a product liability insurance rider to your coverage. Purchasing a product liability rider gives you extra protection that a general liability policy would not normally cover in exchange for a higher premium.
  • Product recall insurance: Product recall costs can add up quickly. A product recall endorsement to your general liability insurance policy covers the costs of notifying customers and disposing of faulty items. 

Following best design, manufacturing, and sales practices is critical to avoiding product liability risks and lawsuits. Requiring your business partners to play by the same rules and carry their own insurance policies offers an even greater layer of protection.
 

Complete Insureon’s easy online application today to compare quotes for product liability and other types of insurance from top-rated U.S. carriers. Once you find the right policy for your small business, you can begin coverage in less than 24 hours.

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