4 Ways to Protect Your Business Against Product Liability Claims

By Colin McCabe

For businesses that manufacture or supply products or components of products to the public, there is a responsibility to ensure the safety and a duty of care towards those using them.

In the U.S. you have the Federal Trade Commission (FTC), and in the UK, the Consumer Protection Act 1987 (CPA). These agencies protect the general public from any damage, faults, or injury that may occur from use of a product. In addition, there are many other regulations that may be relevant to your particular industry.

Product liability in large relates to ‘‘defective’’ products which can be the result of design defects, manufacturing defects, or marketing defects (whereby warnings are not provided to any risks of use). A failure to provide valid warnings against risk is also considered a defect (although not a physical defect), and can result in a product liability claim, just as much as a claim for an actual defect in the manufacturing process for a batch of items or for the entire product design itself.

Product liability claims can potentially fall into millions of dollars worth of damages—and do so every year—with a high number of product-related injuries and deaths occurring. The estimated cost of these injuries is $12 billion annually. Obviously such a claim could cripple a small business, so what can you do to protect yourself?

1. Thorough product testing

Adopting continued product testing can help alert you to possible defects in a product’s manufacture or design. A failure to carry out effective product testing can result in manufacturer’s negligence, or a failure to recall a faulty/dangerous product. Always be able to prove that you have taken reasonable steps to avoid product defects and implemented a safe production process with regular testing and valid research where necessary.

2. Provide warnings on dangerous goods

Providing appropriate and effective warnings on product labels is necessary to allow the sale of otherwise dangerous goods. Without a clear warning against potential dangers, you can be left wide open to a claim. A clear example of this is the famous award of $28 billion in damages for a lung cancer victim who claimed a cigarette company did not advise her against the risks of smoking. Important disclosures on packaging will help protect you.

3. Review suppliers

A retailer, distributor, or business that repairs or makes changes to a product should put in place specific measures to review manufacturers' procedures and processes, and be comfortable with a supplier’s products or components. It is also highly recommended that legal contracts are put in place to confirm that suppliers hold ultimate financial responsibility for defects prior to supply.

4. Take out product liability insurance

While product liability insurance is not mandatory, any company that manufactures or distributes a product should be covered. Product liability insurance covers the compensation that will be awarded to the individual who is injured following a faulty product or design as well as any legal fees.

The exact policy coverage will depend on the nature and perceived risk of the product, so you will need to seek the right level of coverage appropriate to your needs. There may also be some exclusions in the terms, so make sure that you check these carefully and adhere to any stipulations that may be provided on certain product types. In most cases, businesses should arrange coverage between $1 and $5 million in product liability insurance.

Find the right insurance for your small business at The Hartford.