If you own a business that sells either a product or service, you need products liability insurance and completed operations liability insurance.
Product liability insurance is a contractual agreement between an insured and an insurance company under which the insurance company will provide defense (both legal and financial) against financial loss arising out of the legal liability (incurred by or claimed against an insured because of bodily injury or property damage) resulting from the use of a covered product.
Products liability can also include liability incurred by a contractor after a job is completed, which is called completed operations.
During my forty-three years in the insurance business (2013) I have been involved in the placement of products liability for a large number of businesses. Some, like dance schools, rarely have use for their Products Liability Insurance. Others, like manufacturers, consider Products Liability to be a huge risk for them . . . and they’re right.
Products Liability usually doesn’t take effect until the product leaves the insureds premises, but some risks have an on premises exposure, like restaurants. For those the Products Liability policy has to be endorsed to allow coverage on premise.
One of the largest losses I’ve seen for a day care, both as a company underwriter and as an excess and surplus lines agent, was a child choking to death on a doughnut. The caregiver made the doughnut and provided it to the child. The loss could have been considered a professional liability loss; and the claimant’s attorney did raise that possibility by claiming lack of supervision. However, the jury decided it was a products loss and awarded the parents of the child who died over $300,000. That was in the early 70’s so that would be about $1.2 million in today’s dollars.
In addition to the large award, the insurance company paid out an additional nearly $50,000 in defense costs.
In many products cases the defense cost goes far beyond the award. For example, Products Liability can be endorsed to include Product Recall Insurance. This coverage comes into play when a product might have liability issues or a product defect.
Depending on your age you might “recall” some of these:
1982 – Tylenol Scare
1986 – Excedrin Tampering
1994 – Intel recalled Pentium Processors
2000 – Burger King recalled 25 million plastic toys
2008 – The USDA recalled 143 million pounds of processed beef
2010 – Toyota recalled several million vehicles due to faulty throttle pedals
This list is only partial and meant to give a flavor.
In 2010 McDonald’s recalled 12 million promotional drink glasses featuring Shrek. The paint on the glasses had traces of cadmium, which can cause cancer. Although the risk was low, McDonald’s offered to return the $2 price paid for the glasses. I do seem to remember McDonald’s having a similar recall in the early 70’s with lead-painted glasses. Those featured McDonald’s characters. These collector’s glasses still are sold actively on eBay.
Product Recall Insurance can be endorsed to include Loss of Profit, Replacements Costs, Rehabilitation Expense, Customer Loss of Gross Profit, and others.
Obviously the insurance company would strongly defend against any suit with Products Recall potential. Manufacturers are already compelled by law to recall as needed and can by severely punished for failure to recall. A frivolous lawsuit could end up having dire consequences.
Often Products Liability coverage includes the cost of consultants who are knowledgeable of the steps needed for Product Recall. Those steps might include:
- Notification of intent by the manufacturer to authorities.
- Consumer hotlines are created.
- Manufacturer attempts to identify serial numbers or batch numbers involved.
- Announcements are released advising the consumer to return the goods.
- Consumer compensation depending on many factors.
Plaintiff attorneys watch for Product Recall events because they can easily become class action suits. Often if a manufacturer has to recall their products the rehabilitation cost involved in reclaiming their good name can be much worse than the cost to recall and replace their products.
The adequate labeling of a product is a conundrum for any manufacturer. They have “a legal duty to warn of any danger from the intended or unintended but reasonably foreseeable use of its products. This duty extends to those using or purchasing the product, as well as to those who could reasonably be expected to be harmed by its use.”
That duty manifests itself in the many labels we see on products, the disclaimers we hear on TV ads and the printed material that falls out of boxes when buy an over-the-counter drug. From personal experience I can tell you that reading drug literature is important. I have a heart condition and take numerous pills. One day I asked my physician if a weakness I’d noticed in my legs could be the result of one of those drugs. He asked me if I ate grapefruit, which I did quite often. I quit eating grapefruit at his recommendation, because it was interacting in a negative way with one of the drugs I was taking to reduce cholesterol.
The manufacturer has a duty to warn the user when the product is dangerous, when that danger is either known, or should be known, by the manufacturer, or when the danger exists when the product is used in a way that can be expected, and the danger is not obvious to the user.
That last requirement opens the door to plaintiffs acting like they’re the stupidest people on the face of the earth. There is a urban legend about two men incurring great bodily harm when they used a lawn mower to trim a hedge. I first heard about this nearly forty years ago and have never found documentation. However, I’ll try to illustrate my above point through the following quiz.
During my career I have placed products liability on many manufacturers, both as an underwriter for insurance companies and as a licensed insurance agent. When I started in the insurance industry products liability was almost a afterthought. I went through an intensive two-year trainee program and it was barely mentioned. Court rulings changed that quickly in the early 70’s.
Four of the manufacturers I placed were:
a.) A manufacturer who built fiberglass car bodies to go on a VW chassis. These came in a kit and were quite popular in the early 80’s,
b.) A manufacturer who made a product that looked very much like mini-tire chains that were meant for the elderly to strap over the shoes to avoid slipping on ice,
c.) A national distributer of bubble bath for children, and,
d.) A manufacturer who sold balers nationwide that created those large round alfalfa bales that weigh about a ton. (Regular “small” bales on our farm weighed about sixty-to-eighty pounds.)
Which of the above products liability accounts do you think had the most frequency of loss?
Frequency is important to Products Liability underwriters in that any loss has the potential of becoming a large claim and defense cost for even a small claim can be substantial.
If you said c.) A national distributer of bubble bath for children, you would be right and either glanced ahead for the answer or have an amazing underwriting acumen and should start a Property and Casualty company to leverage that talent.
The bubble bath came as a powder with the warning on the front of the box to use only as directed. The instructions told the user to fully dissolve the powder in the bath water before placing the child in the tub. Many, many people failed to either read, or heed, the instructions because children would suffer minor burns from the caustic solution that the bubble bath would create before it was dissolved. As we said around our office, “Dissolved it’s fun, before that, there’s none.” None of the injuries proved to be serious and usually the matter was resolved with a package of products from the manufacturer. The resolution normally followed someone pointing out the large warnings on the box.
The baler company also had a large amount of losses. Farm machinery is inherently dangerous. Juries usually will not award large sums because of the contributory negligence that is normally involved. Contributory negligence occurs when the claimants/plaintiffs do something that “contributes” to the damage they suffered. In the case of farmers, this often occurs because farmers will remove protective shields from machinery to facilitate parts repair and maintenance. Juries will award large amounts to children injured on farm equipment, because they believe the children are unable to judge the risk involved in being around machinery.
To my knowledge the car kit manufacturer didn’t have a paid loss.
I actually didn’t place the Products Liability on the footwear “tire chains”. I was an underwriter at the time and the specter of an elderly man or woman being caught in a escalator was more than I could overcome.
I also turned down the Product Liability on the Hillary Clinton nutcracker. I thought it was too politically charged. That product made it to market. Evidently the manufacturer found a more courageous underwriter, or went to the market without coverage.
Insurance companies have as tough a time as manufacturers judging their own risk. Years ago I worked for a very large insurance company. They had just installed their first 1-800 number for claims. They wanted to announce it to their policyholders and came up with a cardboard placard with two plastic bubbles on it. The card said take two of these (two aspirin in the one bubble) and call our toll-free number with this (a dime in the other bubble.). We had huge boxes of these in storage in our office. The company was trying to decide if it would be cost effective to have someone rip open the cards for the dimes. They had discovered it was illegal to give people drugs . . . including aspirin.
Given all of the above, imagine how hard it is for a manufacturer to satisfy the requirement to have “adequate” warning on their labels. The plaintiff attorney can always argue that since the client was injured the warning obviously wasn’t adequate.
The manufacturer can have three kinds of warning defects.
a.) Failure to warn,
b.) Failure for that warning to be “adequate”, and,
c.) Failure to adequately instruct.
The courts seem to believe the warnings are most effective if stuck to the product itself. I supposed if the pill manufacturers had stuck something directly on the pills about grapefruit, I would have read it. If I had been permanently injured and decided to sue I suppose I could have been as stupid as needed to be a “creditable” witness. In fact, I held myself totally responsible for not taking the time to read the material that came with the pills.
The defense attorney would have labeled me a “sophisticated user”. Through interrogation he would have learned that I understood Products Liability Insurance enough to turn down both the Hillary nutcracker and the footwear tire chains.
Courts have held that the manufacturer is relieved of his duty to warn if the product is sold to a sophisticated users.
The drug company would have also launched a defense against my suit stating they had done as much as possible to educate doctors and pharmacists who are “intermediaries” the drug companies rely upon to warn users.
If you want to see an example of Product Liability causing a manufacturer to make disclosure through its labels, consider football helmet manufacturers.
Helmets now have a label that says, “No helmet system can protect you from serious brain and/or neck injuries including paralysis or death. To avoid these risks, do not engage in the sport of football.”
This wording obviously wasn’t written without a great deal of consideration. The law requires a prudent procedure to develop warnings.
We actually have an interesting Blog post on this very topic of product liability insurance.
Most products sold in the United States are used by people who do not read English, The law requires symbols and graphics to help communicate the danger. I don’t want to think about how the manufacturer of a football helmet would communicate the possibility of a life of paralysis through graphics and symbols, but I’m quite sure the manufacturer spent time considering it. Many court cases are decided more on the effort to design an adequate label, than on its effectiveness.
I consider myself an expert on few things, but this much I know after raising three males. There is no such thing as an effective warning when dealing with a teenage male. Their sense of invulnerability overrules common sense. Think about how dangerous texting while driving is and how many teenagers do it incessantly. Perhaps there should be warning labels on smart phones . . . and steering wheels.
Courts have held that “a product is defective because of inadequate instructions or warnings when the foreseeable risks of harm posed by the product could have been reduced or avoided by the provision of reasonable instructions or warnings by the seller or other distributor, or a predecessor in the commercial chain of distribution, and the omission of the instructions or warnings renders the product not reasonably safe.”
The courts further demand that the warning labels convey a fair indication of the nature and extent of the danger in the mind of a reasonably prudent person.
It’s a bit hard for me to place the phrases “reasonably prudent person” and “teenager” in the same context. However, since teenagers are injured every day playing football, the labels must be working, or the manufacturers couldn’t continue in business. My guess is many juries may be applying a strong dose of assumption of risk.
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