A Product Liability Manual for Small Business Owners

Owning a small company is a lot like juggling. There are many things that go through your hands: customers, orders, deliveries, and most importantly, your products. Keeping everything protected is paramount, but especially your products, as they are the ones that ultimately make it into the hands of customers. And you don’t want your customers to juggle with any problems.

When a product with defects reaches the hands of a customer, there is a high possibility that your business will be held liable under the product liability law. Once that happens, your business can face different kinds of legal charges, meaning you can endure a big financial loss. Luckily, there is a way to escape this misfortune, but only when you understand the legal concepts behind product liability.

What is Product Liability?

Product liability, at its core, is a legal responsibility on the part of all parties—manufacturers, distributors, and sellers—to ensure that the marketed product does not cause any harm or injury to their customers. 

Since there is no nationwide standard for product liability in the United States, state-by-state jurisdictions have wide leeway in determining what constitutes sufficient proof of damages. Product liability may extend to include not only the original manufacturer of the defective product but also any companies involved in its production or distribution.

Types of Defects that Cause Product Liability

Even if your product is as simple as a hair scrunchie, you can still be held liable if it fails to do what it claims to do or if its design flaws cause harm. There are three main types of product defects:

  • Design Defects
  • Manufacturing Defects
  • Marketing Defects

Design Defects

Any flaw made in the period during the product planning process, even before it’s assembled and manufactured, can be attributed as a design defect. 

The onus of proof that a product has a design flaw rests with the consumer under the laws of most states. But, in states like Hawaii, California, and Alaska, it is the company’s responsibility to prove that their product is not flawed. If a victim can show that the manufacturer could have used a safer design, the manufacturer may be held liable for any resulting harm.

As it boldly explores the vague territory of what should have been done and what would have happened if [insert situation], design defect court action can be extremely costly and stressful for businesses. Unlike manufacturing defects, in which a product is obviously not what it was intended to be, design defects are notoriously difficult to identify and, as a result, are rarely upheld in court. 

Case studies show that it doesn’t matter if your product is just as safe as the competition’s and delivers on all of your customers’ expectations; you’ll still be held liable for any accidents that could have been avoided with a slightly different design. 

When making a design decision that could affect the safety of your product, it’s important to weigh the potential gains (such as reduced costs, faster production, or fewer manufacturing hassles) against the potential losses (in the form of customer injuries).

Manufacturing Defects

As mentioned above, manufacturing defects refer to situations where a product isn’t really what it was intended to be. They are the result of flaws that took place during the manufacturing process. As a result, they generally only affect a subset of the products sold, rather than the entire market.

Having that in mind, different parties can be affected by this defect. Maybe the defect hides behind one electronic part of the whole product, meaning that only the producer of that electronic part should be held liable for any customer harm. 

However, it is your responsibility to ensure that the product you sell is suitable for its intended purpose if it has a component of another product, or producer. Your knowledge and, more likely, your lack of knowledge about how your product is being used by another manufacturer will be relevant in a product liability action. 

Marketing Defects

One of the biggest product liability cases in the judicial history of the US is the 2002 court ruling after which Phillip Morris, a tobacco giant, had to pay a mind-boggling amount of $28 billion in punitive damages to a lung cancer patient Betty Bullock. Why so? Because the cigarette packaging didn’t have any type of label or warning about the negative effects of smoking on our bodies. 

Any lack of safety information, or even fake information, provided by a business can be interpreted as a breach of product liability law. That is why clothing labels have different information on how to wash and maintain garments, why laundry detergents warn you about keeping the products out of children’s reach, and so on. 

Make sure the product’s marketed functionality matches the actual functionality. You should also include instructions on how to use your product safely and any warnings about potential harm that could result from improper use on the product’s packaging or instructions.

Who Can be Liable for Defective Products?

Even though you can possibly be (hoping that you aren’t already) an owner of a defective product, you’re not the only one that can be held liable for harm provided. In fact, Law SB product liability lawyer states that anyone involved in the product’s distribution chain can be held held liable, including:

  • Manufacturers
  • Suppliers
  • Wholesalers
  • Retailers
  • Contractors
  • Consultants
  • Designers
  • QC designers
  • Health professionals

Zero Liability

Except in the case of a proven defect in a product or service, your business is immune to legal action. Of course, it is unlikely that there will absolutely be no mistakes, and consequently no legal responsibility. However, working towards that objective is essential for protecting yourself from damaging presumptions.

Find the flaws that could hurt people and fix them. Have a broad scope for your research. Defendants in lawsuits are frequently taken aback by the characteristics of products that courts identify as defects and hold them liable for, even if the defects appear later in the distribution chain.

Examining the product’s design and anticipating potential problems prior to their use is the first step in reducing risk. Remember that judges get the benefit of hindsight. They can provide feedback on how they think you should have improved the product.

Questions to Ask Yourself

True, being in court and proving the accuracy of your products sounds like a nightmare, but there are questions you can ask yourself as a small business owner to avoid legal inconveniences. Some of them are:

  • In what ways are we responsible? 
  • To what extent must we adhere to predetermined norms in terms of product design? 
  • Can we tell how thoroughly our products need to be tested? 
  • Where do the dangers of our packaging lie? 
  • How does product service influence our legal responsibility?
  • If we’re being sued for something, what kinds of defenses do we have at our disposal?

However, there are cases in which you don’t necessarily think about every single scenario in which your product can be used, or mistakenly used, especially when some things just seem logical.

Product’s Intention

As you analyze the product’s design, consider how well it will accomplish the operations for which it may be used. Don’t limit your assessment to how you expect people to use your product. The “thing speaks for itself,” as the Latin saying “res ipsa loquitur” goes, means that the defect at issue would not be there if it weren’t for the negligence at issue.

Because of this, there are lawsuits where the plaintiff is never vindicated. It’s not the product’s fault if the heating blanket “won’t work” if you forget to plug it in the electricity, if the champagne cork smacks you in the face, or if you heat your lunch in a not-microwave-safe container. It’s the fact that customers used the product beyond its possibilities, or without considering the user manual or safety precautions.

The obligation is on you, as well as on manufacturers and retailers, to inform your buyers of the risks and hazards associated with your products. That way, they are able to make informed decisions. Safe use instructions are as important as any cautionary labels on a product. The ultimate responsibility is on you to use proper labeling practices.

Many types of consumer product labels are subject to state legislation. If a company or individual violates a law that would have protected its consumers’ health, it may be held liable for product liability.

Insuring Your Products

Another way to “keep your hands clean” in a position where your product, as well as your business, holds you accountable for any harm is to consider buying insurance. Product liability insurance protects against physical harm and property damage caused by the manufacturing process, sale, handling, distribution, or disposal of a product.

Coverage under this policy extends to representations and warranties, as well as the failure to provide required warnings and instructions. Whether the insured is the manufacturer, retailer, or wholesaler, they are protected by this policy. 

Additional insureds typically do not include third parties who handle or sell the insured’s product. A vendor’s endorsement can be purchased to provide this protection. However, coverage will be provided if the insured has a monetary obligation to a third party as a result of a court order or a signed contract.

Your insurance provider and plan will determine the specifics of your product’s coverage. However, product recalls are not typically covered by a typical insurance policy. That could put you on the hook for the costs associated with fixing or recalling any defective products.

Product recall insurance is something that can be purchased from a third-party provider, or it can be researched to see if it is an add-on service offered by your current insurer. Furthermore, if you sell products from multiple manufacturers or ship a large volume of products internationally, recall protection may be a prudent investment.

Product Insurance Brings Comfort

If you have product liability insurance, your company won’t go into a tailspin whenever a customer sues you. There is no risk of going out of business due to a lawsuit filed by a customer who was injured while using a product you made or shipped.

Additionally, product liability insurance for small businesses provides financial protection. Given how cheap it is, there’s really no excuse to delay. And once the insurance is in place, you won’t have to worry about paying any legal fees or damages awarded to a customer who claims they experienced a problem with your product.

Plus, you can keep your business running and grow in the years to come. If you take on a business partner, release a new product, or begin shipping products to a new market, you can rest easy knowing that product liability insurance has you covered. In addition, you will be in a better position to repair your reputation through effective marketing, even if it has been damaged.

Insurance Costs

The cost of product liability insurance can range widely based on factors like the company’s size, the coverage level desired, and the insurance provider chosen. Product liability insurance isn’t that expensive, and most small businesses can afford general liability insurance, which includes product liability.

The annual premium for such protection averages around $1200. The alternative way of looking at product liability insurance is as a percentage of your annual earnings. For most businesses, this amounts to about $0.25 per $100 in sales.

The peace of mind and financial security that product liability insurance provides is well worth the relatively low premiums. Your budget team can probably handle the extra expense.

The Takeaway

Putting products on the market always comes at a cost. And that price does not have to include only the costs of production and distribution; it can be much higher if it is determined that your product causes problems.

This is precisely the reason why it is important to understand the principles of product liability and to keep an eye on any defects that can be identified, from the very idea and design of the product, all the way to its placement on the market.

In order to to minimize the risk of being sued for product liability, always keep an eye on:

    • Designing safe products. Ensure that your product’s design doesn’t endanger the health or safety of consumers in any way. Both internal and external product testers can be employed to ensure the safety of the final product.
    • Testing all or any component parts. Conduct safety testing on any third-party components used in your product.
  • Marketing truthfully. Provide instruction manuals for proper use and state any cautions about potential harm that might result from improper use on the product’s package or inside the product manual.
  • Safety testing. This evaluates how dangerous a product is likely to be in relation to how helpful it may be. In matters involving product liability, the courts frequently employ risk-utility tests.

Investing in insurance. If you own a small business and are concerned that a product liability lawsuit may put you out of business, you can protect yourself by purchasing product liability insurance.

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