Protecting Your Small Business From Product Liability Claims

As a small business owner, you may believe product liability claims don't affect you. Your company does not manufacture anything from raw materials. Everything you sell is already tested. Distributors and retailers are safe from product liability claims, right?

Not always. Depending on the nature of the claim, even store owners and retail sellers may have liability in a product claims case. Product liability law protects the customer, so everyone in the supply chain, from the manufacturer to the final seller, has some responsibility for any harm that results.

Product Liability 101

Product liability involves products that are defective in some way and cause harm to the end user. Each state has its own product liability law based on tort law negligence. Product liability law holds everyone in the stream of commerce liable for the harm. This includes manufacturers, assemblers, wholesalers, and retailers. Even small shops that only sell the finished product can be liable.

There are three types of product liability. Understanding these basic types helps explain why many parties are liable and how businesses can protect themselves.

• Design defects are flaws in product development. Something about the design of the product is faulty. Design flaws are usually caught during quality testing, but not always.
• Manufacturing defects are errors in a particular run of products. A mistake in the manufacturing process can create a batch of products with a dangerous problem, even if the product is otherwise safe.
• Marketing defects are products that may be safe but have inadequate warning labels. Hazardous products must contain warning labels or inserts advising users of the hazards. Insufficient or confusing labels are a type of defect resulting in liability.

Responsibility for Product Defects

A business owner is not directly responsible for design or manufacturing defects. However, you are responsible for ensuring your customers know of potential risks. For instance, cigarettes cause cancer, and tobacco companies have dealt with product liability cases for many years. Small businesses still sell cigarettes but must obey state laws regarding selling them to minors and displaying warning signs.

In cases where a product causes serious injury or death, the federal government may order a recall of the product. Some recent product recalls have involved contaminated meat and produce recalled by the FDA. In these cases, small businesses are responsible for removing the products from their shelves and giving customers refunds or rebates as required.

Legal Protection for Small Businesses

Product liability claims are usually brought under one of three legal theories:

• Negligence claims that the seller knew the product was defective or harmful but sold it anyway. Small businesses are likely to encounter this claim if they manufacture a product themselves.
• Breach of contract claims arise when the business promises the product will work as advertised and fails to do so. You may face a product liability claim under this theory if you sell a product with a guarantee or warranty.
• Strict liability means the product was inherently dangerous, and the plaintiff should recover damages as a matter of law. In a strict liability case, the plaintiff does not need to show negligence or a contractual relationship.

Any legal claim can be devastating to a small business. Liability claims often involve attorney costs, legal fees, and the claim award. If you find yourself facing a product liability claim, you need legal advice immediately.

Product Liability Insurance

Manufacturers and companies at risk for product liability lawsuits usually have product liability insurance coverage. Small businesses may not think of the need until it's too late. Others may hope their standard business insurance will handle any personal injury claims. Your property insurance may cover standard slip and fall injuries but will probably not protect you against a product liability claim.

You can expand your general liability insurance policy to include product liability insurance. This works if your business is not likely to encounter the large-scale claims that tobacco companies or pharmaceutical manufacturers receive. Insurance company experts suggest that if you use this type of product liability coverage, you use a proactive risk management strategy to keep possible hazards out of your shop or factory.

Legal Defenses

Most legal defenses will involve your attorney proving the plaintiff mishandled the product in some way. These are not the defenses under discussion here. You must think like your customers and end users to keep your insurance premiums down and reduce your liability. That includes friends, family, and even yourself.

For instance, a product labeled "not for individual sale" means you may not break the package and sell the individual units. The retailer's main defense is that they sold the product in the same condition they received it.

If a manufacturer includes a display or signage with the product, include that in your own product display. Ensure that all instructions or warnings that come with the product are visible with the product.

If you have any concerns about the product's performance or safety or receive complaints from your customers, make careful notes and consider removing the product from your shelves. Contact your attorney right away.

Hire an Attorney To Help Manage Your Exposure to Product Liability Risk

Small businesses are in a precarious position in product liability claims cases. You can't afford to get caught as the last business standing if someone else's product design fails. Discuss your product liability concerns with a business and commercial law attorney in your area to review your legal and insurance options.