Product Liability and Your Small Business

Defective or dangerous products cause thousands of injuries every year in the United States. Product liability law, which sets liability for injury caused by defective or dangerous products, differs from ordinary injury law. These laws can make it easier for an injured person to recover damages.

Product liability law refers to consumers holding the manufacturer or sellers liable for placing a defective product into the stream of commerce. When a small business owner opens their doors to the public, they also create a potential product liability claim.

This article reviews how product liability affects business owners. Keep in mind that employee injuries are generally covered by workers' compensation insurance, which you can also learn about on FindLaw.

What Is a Product Liability Claim?

There are no federal product liability laws. Under state laws, products must be suitable for the purpose the customer expects. Defective or faulty products are unsuitable for use.

If a defective product causes injury to a consumer, they can bring a product liability claim against everyone responsible for bringing the product to market.

State laws affecting product liability focus on negligence, strict liability, or breach of warranty. Commercial statutes based on the Uniform Commercial Code also affect product liability. Product liability claims are expensive for small businesses.

Responsible Parties

Product liability only affects products sold in the marketplace. That is, someone must have purchased the item from a retailer or wholesaler. If you buy something at a yard sale, product liability doesn't apply.

A product must "enter the stream of commerce." Someone must sell the product in the course of business. Any individual or entity involved in the chain of distribution bears some liability. Multiple parties may be involved, depending on the product's complexity.

• The product manufacturer is the entity that built or assembled the item. The manufacturer may also be the company that ordered the product constructed.

• A manufacturer of component parts may be liable. For instance, Dell Computers assembles computers using components from many other manufacturers. Any of those companies may also be liable in a personal injury case.

• Distributors may have some liability if they're aware of the risks involved in the product. For instance, drug and pharmaceutical distributors must provide drug interaction information to pharmacists. Failing to provide information about known adverse or allergic reactions would lead to liability.

• Wholesalers buy products in bulk and then sell them to smaller retailers. Wholesalers may also sell to end users, like Costco. In both cases, they may be liable in product liability lawsuits.

• Retailers selling to consumers are at higher risk than all others—they know where they bought the product. Ironically, retailers are least responsible for most defective products. They only sell finished products.

The purchaser doesn't have to be the person injured by the defective product. If someone purchases an item and a family member is injured using the product, the family member has a claim. But some states have laws limiting liability risks to a purchaser's immediate family. In other words, neighbors, friends, and strangers couldn't sue if they suffered an injury.

In most cases, used products are outside the chain of distribution. There is no way to show that the product was not altered by a third party in a way that caused the injury. But in some cases, claims against used product retailers may succeed, depending on the product.

Types of Product Defects

In a product liability case, the plaintiff has the burden of proving the product is defective. The plaintiff must also show that the defect caused the injury and that the defect makes the product unreasonably dangerous. Just because you cut yourself with a knife does not make the knife defective or too dangerous to sell. Something in the manufacture or design of the item itself must make it hazardous.

Three types of defects give rise to manufacturer or supplier liability: design, manufacturing, and marketing.

Design Defects

A design defect exists in a product from the outset. Design defects are inherent on the drawing board. A chair with three legs on one side is defective because it tips over when the user leans back.

A design defect also requires a showing of negligence. A three-legged chair might be a modern art piece. Product liability means showing the designer or manufacturer knew the item was hazardous and sold it for general use. If the seller knew of equally effective alternative design and didn't use it, the plaintiff may have a claim for strict liability.

Manufacturing Defects

A manufacturing defect occurs when the product's manufacture doesn't meet the product's intended specifications. Manufacturing defects often happen due to errors during assembly. For instance, a shipment of iron could contain impurities, leading to a run of knives with a weak spot in the blade. These knives could snap when used, causing injuries. While the knives are usually safe, one batch is not.

Manufacturing defect cases often lead to product recalls. They're easier to prove than design defect cases since they involve safe products with unusual flaws.

Marketing Defects

Marketing defects include improper labeling, insufficient instructions, or failure to warn consumers. A negligent or intentional misrepresentation of a product may also result in a product liability claim. For instance, cleaning supplies contain labels warning against mixing bleach with ammonia. Failing to include these warnings is a marketing defect.

Marketing defect cases can be difficult to prove. Consumers must show they read the labels, but the warning was inadequate.

Unavoidably Unsafe Products

Some products must be dangerous to be effective. A chainsaw is inherently dangerous. A chainsaw that could not injure anyone would be useless. These products must include all reasonable safety devices and warnings. Users and consumers of these products must understand their risk.

Manufacturers and suppliers of unavoidably unsafe products must give adequate warnings of the dangers and risks of their products. Manufacturers of these products often have additional product liability insurance coverage to avoid financial loss in the event of legal action.

Strict Liability

In most liability claims, the plaintiff must prove negligence. That is, the plaintiff must show that the defendant:

1. Had a duty to the plaintiff;
2. Breached the duty in some way;
3. The breach of duty caused the injury; and
4. The plaintiff suffered actual harm

Under strict liability, the court assumes duty and breach by the defendant. Consumers must be able to buy products that are safe for their intended use. The burden is on the manufacturer to prove that the manufacturer wasn't negligent. For sellers and providers, they must show they did everything possible to ensure the product was safe while it was on their shelves.

For instance, a knife company might ship out a batch of steak knives and then discover that the production run contained a flaw. The retailers who sell the knives may not be liable for the flawed knives if they sell the steak knives sealed in boxes received from the manufacturer. But suppose the manufacturer sends a recall notice a week after shipping the flawed knives. In that case, the retailer will be liable for each day the product remains on the shelves.

Product Liability Insurance

Most small businesses have general business insurance. A basic insurance policy covers your business for bodily injury and property damage caused by ordinary hazards. A general liability insurance policy is adequate if someone slips on a puddle and sprains their ankle.

Product liability insurance covers defective product claims. If you have the type of business that sells products to customers or is part of the manufacturing supply chain, you may need this insurance. It can help you cover the court-ordered damages and legal fees that come with a product liability claim.

Bundled business owner policies (BOP) often include product liability coverage without an additional premium. You can also add product liability coverage to your existing business owner's policy if it isn't already included. Check with your insurance company to see if your business needs this type of insurance.

Defending a Product Liability Claim—Get Legal Help

Product liability cases are complex. They may involve multiple defendants. Small business owners need legal advice for the best outcome. If you're a small business owner faced with a potential product liability injury claim, you should discuss your case with an experienced business and commercial law attorney. An attorney will explore all possible defense options and strategies available to you.