10 Ways A Non-Manufacturer Can Be Held Liable As The Manufacturer

When can a retailer, assembler or distributor be viewed as the manufacturer in courts for product liability claims?

Most retailers, assemblers and distributors of products are not aware of real degree of liability for which they are responsible.  Below are 10 ways you may be ultimately responsible for a defective product even though another manufactured the product:

1. You rebuild or remanufacture a product for resale;
2. You exercise control over the manufacturer such as providing product specifications;
3. You are the successor of a manufacture of an injury-causing product;
4. You are an employer and you modified a product or manufactured a product that injured your employee;
5. You represent yourself as the manufacture of the product to the public;
6. You apply your name, tradename or trademark to the product;
7. Your advertising leads the public to believe you are the manufacture;
8. Your sales methods leads the public to believe you are the manufacture;
9. The seller of the product is a subsidiary or agent of the manufacture and the manufacture exercises control over the seller;
10. You are the importer and distributor of a foreign product.

It is important that if a manufacturer makes a product for you that you clearly identify the manufacturer on a label or other markings of the product and you distinguish yourself as a distributor by “distributed by” or “made for” wording on the label or product.

Exposing Foreign Manufactures That Sell Defective Products

The million-dollar question for many is – will the new searchable database (Section 212) provided by the Consumer Product Safety Commission hold foreign manufacturers that ship defective products into the U.S. more accountable?

Now that the CPSC requires product and package markings that contains information such as source of the product, it should be easier to identify manufactures that sell defective products.

It is my belief that many U.S. manufacturers hope the searchable database (Section 212) provided by the Consumer Product Safety Commission that publishes the name of the product and the manufacturer will impose enough of an indirect cost such as loss of consumer confidence and company credibility that foreign manufacturers looking to do business in the U.S. will have to invest more in product research and safety and therefore, even the playing field for more U.S. manufacturers to compete with regards to product pricing. 

U.S. Importers could be one the biggest benefactors of the searchable database.  Since it is next to impossible to litigate product liability issues against foreign manufacturers, U.S. importers are typically held entirely accountable for the safety of foreign made products.  By having a searchable database that quickly identifies the names of problem foreign manufactures, U.S. importers will be in a better informed and less likely to bring inferior products into the U.S. that could result in costly product liability trials and product recalls.

While the overall goal of the CPSC is to protect the U.S. public from defective products, the changes could also help U.S. manufacturers by imposing some of the same costs on foreign manufacturers for testing and product safety that they must incur in order to do business in the U.S. and it could potentially help U.S. Importers by avoiding foreign manufacturers that have a poor history of safe products.

Common Mistake By U.S. Importers of Foreign Products

All too often, importers that contact me assume that the foreign manufacturers that they buy their products from share some liability in the event of a product liability claim in the U.S. - particularly if the foreign manufacturer says they have a product liability policy. 

Unless that foreign manufacturer’s policy has a worldwide endorsement that specifically states it will cover product liability claims in the U.S. courts, that foreign product liability policy is useless to the importer. 

The fact is the importer is at the top of the pyramid when it comes to responsibility to ensure that any products brought into the U.S. are safe for use by the American public.  This is why it is common for importers to be classified as manufactures for insurance rating purposes by the product liability insurance carriers because any product liability claims involving manufacturing defect will stop with the importer. 

So if you are an importer, do not assume that, even if the foreign manufacturer has a product liability policy, that the manufacturer has your back or will be responsible for any product liability claims brought in the U.S. involving your imported products.  It is more than likely you are on your own to handle any and all product liability claims.

My Product Is Safe – That’s What They All Say!

Possibly the most over used comment by product liability prospects is ‘my product is safe’ and usually followed by something regarding a low insurance premium because the product is so safe.

What I find most difficult about this statement is there is almost never any independent test data to back up these assertions and the products that are so safe are often being imported from a foreign manufacturer where the prospect likely has little or no control on the overall quality control.  However, those that do have independent test data to back-up their assertions are typically very well received by the product liability insurance underwriters and do receive better than average insurance premiums and rates.

Even if you product is safe, it is important to understand when you purchase insurance, you are participating in a product liability pool with businesses that sells products similar to your own or a similar class of products such as sporting goods, dietary supplements, etc.  One or two product liability claims can result in sever losses by your product liability insurance carrier; even if was not your product that caused the loss.

If you are one of the many that believe being a product liability insurance carrier is a license to print money, I strongly recommend that you go to www.recalls.gov.  The number of recalls in just one month will astound you.  To have a product recall there must be imminent danger that the product in question could or has caused bodily injury or property damage so all of those products being recalled represent potential product liability lawsuits.

Administrative Costs For Children, Household And Recreational Products On The Rise

Let’s face it the Consumer Product Safety Commission has come under increasing fire from congress and the public because of the overwhelmingly large number of product recalls over the past few years – especially for foreign products imported into the U.S. It has become obvious that CPSC lacked the resources to adequately oversee all the things necessary to keep the American public safe.  As a result, on August 14, 2008 the President of the United States signed legislation that will reform the laws and regulations governing the CPSC. 

The U.S. Consumer Product Safety Commission is the federal agency responsible for overseeing product-safety recalls of toys, household products, recreational equipment, some vehicles, and consumer products not under the jurisdiction of other federal agencies.

Because we provide product liability insurance to a large number of manufacturers, importers and distributors of children’s, household and recreational products, I was particularly interested in how much compliance with CPSA of 2008 was going to cost in order to comply.

Below are 4 new administrative costs for businesses that manufacturers, importers and distributors of children, household and recreational products must bear:

1. Permanent markings must be on all products to help identify them in the event of a product recall;
2. Businesses must provide registration forms to consumers and keep accurate records of registered consumers;
3. All children’s products must be tested by an independent testing company before they can be imported or distributed;
4. Warnings that are on or with the products must also now be included in the advertising.

Business owners that do not feel compelled to comply with the new CPSC statutes are subject to much harsher penalties.  Civil penalties will rise to $100,000 per violation and a cap of $15,000,000.  Criminal penalties have also increased permitting imprisonment and forfeiture of assets.  Also, state attorney generals can sue companies for violation of CPSC statues.

While we believe that more needed to be done to protect the American public from the high number of unsafe products being imported, we also understand that the administrative costs for small businesses in the U.S. continue to make it more difficult for these businesses to be profitable and stay in business.

How Purchasing Foreign Liability Insurance May Reduce Your Product Liability Insurance Cost

Many of the U.S. manufactures and distributors that contact me looking for a product liability insurance quote and export products to countries outside the U.S. are often unaware there is often a large difference between U.S. product liability insurance rates and foreign product liability rates.  In many cases U.S. exporters are not always aware that another option exist because local and general agents are not aware of all the options when it comes to product liability.

While it is, in most cases, safe to assume that your insurance policy will cover you in the event you have a foreign product liability lawsuit, it is important to understand that most of the U.S. product liability insurance policies will only cover foreign product liability claims that are brought back into the U.S. courts. 

The problem with allowing foreign product liability claims to be heard in the U.S. courts is it is usually much more expensive than the alternative of having the claim heard in the country of origin.   The first reason for this is contingency fees. In the U.S., lawsuits can be brought with little or no expense to the litigant and therefore, there is no cost to the litigant and no reason not to “roll the dice”.  The result is often frivolous and marginal lawsuits in the hopes of “hitting the jackpot”.  Contingency fees are simply a percentage of settlement or judgment awards so the litigant pays nothing if nothing is won or recovered by the litigant’s attorneys. The second reason is the liberal discovery rules in the U.S.  It has become an art for U.S. law firms to cover-up defendants with discovery materials. The cost for a defendant to comply is enormous. Even when it is obvious that the defendant has no negligence or role in the lawsuit, the defendants’ insurance carriers are often willing to pay thousands of dollars to get their names released from a lawsuit because it cheaper to settle than respond to all the discovery materials. The third reason is punitive damages.  Punitive damages allows the jury to reward further damages on top of compensatory damages.  If a plaintiff can show the defendants behavior was egregious and callous, punitive damages may be awarded.  While in many cases proving gross negligence can be a daunting task, foreign product liability litigants may have the luxury of venue shopping to find more favorable forums or courts in the U.S. to have their cases heard and therefore, increase the chances of finding a more sympathetic jury pool and receiving punitive damage awards.

In summary, for many U.S. exporters of products that are considered very high risk such as chemicals and critical aircraft and auto parts, foreign liability insurance will likely not be available. For all other U.S exporters, when the foreign liability insurance coverage is available it should save you considerable money by have purchasing this insurance and excluding Worldwide coverage on their U.S. product liability insurance policy.

The U.S. Consumer Products Safety Improvement Act of 2008 Mandates Searchable Database for Consumers

One of the most significant changes of the U.S. Consumer Product Safety Improvement Act of 2008 is the creation of a searchable database (Section 212) for consumers by the Consumer Product Safety Commission.  This one change could significantly impact a company’s reputation and product liability litigation.

CPSC is required to establish a searchable data base by October 2010 on the internet that consumers can access.  The information provided will identify the name of the product, the manufacturer’s name and provide reports on deaths and injuries caused by the product.  In order to make sure that no information on the website is materially incorrect or trade secrets are not exposed, manufacturers will be allowed to review and comment on the information before it is posted on the database.

This one change should help potential U.S. importers and distributors of foreign products to identify problem foreign manufactures and as a result, reduce the number of unsafe products brought into the U.S.  It may also increase product liability litigation because U.S. consumers will be able to identify more easily whether their product in question has a history or potential for harm and assist with gathering important facts to assist them with their product liability lawsuit.

Understanding Minimum and Deposit Premium

Minimum and deposit premium is the amount of due at the inception of the product liability policy.  Even though the policy is “ratable (subject to adjustment based on rate per sales)”, under no circumstances will the annual earned premium be less than minimum premium.

In other words, the product liability policy may generate additional premium on audit because of an increase of actual sales over the projected sales, but will not generate a return premium, if actual sales fall short of the projected sales.

Why No Refund? – Understanding Product Liability Audits

One of the least understood things about product liability audits is the perceived unfairness of why there is no refund of premium at the end of the policy period from the insurance carrier, if actual sales fall short of projected sales.

An important point with product liability insurance is – the more sales you have the lower rate per $1000 of sales you deserve. In other words, if you have two distributors that sold the exact same products and one distributor had $1M in sales and the other distributor had $10M in sales, the distributor with $10M in sales should receive a lower rate per $1000 of sales than the distributor with $1M in sales.

The primary reason product liability insurance carriers do not offer full refunds, if actual sales fall short of projected sales, is it opens up to much of an opportunity for abuse by the policy holder by over estimating their projected sales and therefore, causing the insurance carriers to not earn a fair rate of return for the overall risk.

To better understand this point, see the two hypothetical illustrations below:

Illustration 1 – Based on current system in which no refund is provided if actual sales are less than projected sales.

• Projected sales are $15M
• Based on this projection, the insurance company provide you with a $8.00 per $1,000 of sales
• Annual premium or Minimum and Deposit Premium is $120,000

Illustration 2 – Insurance Carrier provides a full refund if actual sales are less than projected sales.

• Projected sales are $35M.
• Based on this projected sales, your insurance carrier provided you with a $6.00 rate per $1,000 of sales.
• Annual premium is $210,000
• At the end of policy period your actual audited sales are $15M.
• Because you receive $120,000 refund from the insurance carrier, actual paid premium is $90,000.

If the insurance carriers would offer full refunds when actual sales fall short of projected sales, there is not a business person alive today that would not invest $90,000, if they could guarantee a return of $30,000 at the end of twelve months.

Of course, the information above is an oversimplification and applies almost exclusively to Excess/Surplus product liability policies.  Excess/Surplus insurance carriers are responsible for providing product liability policies for most of the high risk products on the market and those products that may be unique or new to the market and not insurable by the admitted market insurance carriers. 

Product Liability Insurance Premium Audits – What You Need To Know

In all my years in the insurance business, there is nothing that seems to push a business owner of the edge more than the end of the year premium audit.

I am not completely sure, but I have a pretty good idea why business owners hate insurance premium audits so much. It has to do with a combination of feeling they are being taxed for their success, imposition on valuable time and privacy being invaded. 

But be warned, if you are a business owner reading this blog, not cooperating with an insurance auditor rarely works in your favor.

The first thing every business owner or officer should realize is, the auditor assigned to conduct the audit for the insurance carrier is typically paid by the job and not by the hour. So the longer you put off the auditor, the more likely the auditor will simply declare your account “uncollectible or uncooperative”. Once this happens, your frustion level is now guaranteed go up by about 1000% and the following four things are likely to happen:

1. If you are lucky and can convince the auditor to come back out to perform the audit, you may find an auditor with little patience and unwillingness to hash out the small details that could save you money.
2. The insurance company performing the audit may multiply your previously projected sales by two and send you a bill for the additional premium.
3. If you renewed your insurance with the same insurance carrier that tried to unsuccessfully audit your business, the insurance carrier may elect to cancel your existing insurance policy.
4. The insurance carrier will turn he the debt over to a collections agency.

If you are thinking – “I will just get my insurance from another insurance company”, be aware that most insurance carriers will not want to work with a business that has been non-renewed because of a year end audit. This is a ‘red flag” that you are a problem client and will likely have the same problems with them, since sales audits are standard operating procedure in the product liability industry.