close

Articles

PRODUCTS LIABILITY RISK REDUCTION 101 FOR CLIENTS

By: Steven A. Karg

You are in the middle of defending a products liability case and you think, “if only my client had foreseen this problem and designed it out, or if only my client had inspected the product before it left the plant and had documented its condition.” Many of our colleagues have had this experience and have passed along some 20-20 hindsight to their clients. But there are pro-active ways to help your clients limit their products liability exposure in advance. Clients do not want to read law review articles or court cases to make sense of it all. Indeed, products liability law can be confusing to most laypersons and should be explained in the simplest of terms. What follows is a summary of practical advice, written in a layperson’s terms, which can benefit many clients that operate in a product’s chain of distribution.

Manufacturers, distributors, retailers, suppliers, and any other entity involved in the chain of distribution of a product can be liable for personal injuries caused by it. To minimize the risk of a products liability disaster, such entities should consider the implementation of an affirmative products liability management plan. They should evaluate their products liability risk, and then employ pro-active strategies to reduce it, eliminate it, or shift it to others. Without an affirmative prevention strategy, products liability can consume profits and even cause bankruptcy. Although there are many creative methods for dealing with this risk from the simple to the complex, the following information offers some basic advice that can help to manage it.

Typically, manufacturers of defective products have primary responsibility for damages caused by their products. Although distributors and ultimate purchasers can also be liable to an injured end user, distributors and ultimate purchasers are generally entitled to common law indemnity from a defective product’s manufacturer as long as the defect originated with the manufacturer and the distributor or purchaser did not contribute to the defect. However, in cases where the manufacturer is insolvent or otherwise judgment proof, an indemnity can be meaningless. Given the interplay between the liability of manufacturers, distributors and ultimate purchasers, each can employ different strategies for managing their products liability exposure.

Manufacturers shoulder most of the risk borne by companies in the chain of distribution because manufacturers are in the best position to improve products. This primary responsibility leads to the most obvious management strategy: the production of a reasonably safe product. The lofty goal here is to produce a product for which there is no reasonable safer alternative design, that is manufactured as designed and without fault, and that uses appropriate warnings and instructions to eliminate risks that could not be eliminated through reasonable design. Achieving this three part goal requires advance planning and expertise.

The first prong of the “reasonably safe product” goal is to produce a product for which there is no reasonable safer alternative design. To produce such a product, you must keep abreast of, and employ, the state of the art. To maintain the state of the art, it is important to employ experienced and knowledgeable design personnel, closely monitor competing products, keep active in related industry organizations, closely monitor and comply with applicable minimum standards, correct design defects as you acquire knowledge of them, and perhaps hire a qualified safety consultant or professional to review and improve the product. To demonstrate your efforts in the event of a later products liability claim, document your improvement efforts along the way. Of course, these efforts can be prohibitively expensive, however, funds spent on these efforts up front can reap exponential dividends later in avoided liability expense. In addition, an improved product should result in improved sales.

The second prong of the goal is to manufacture the product as it was designed and without fault. Achieving this goal requires a good quality control effort. Such an effort begins with the careful purchase and inspection of quality materials and components. If the materials or components comprising the product fail, the product will fail. Next, closely monitor the manufacturing process to avoid and identify manufacturing anomalies. And finally, inspect completed products for proper operation and compliance with manufacturing standards, and then document these inspections and the results. In most cases, an injured plaintiffÕs counsel will have a difficult time proving that a manufacturer did not comply with an intended design if the manufacturer can produce documentation that the product passed an inspection occurring shortly after manufacture.

The last prong of the three part goal is to incorporate adequate warnings and instructions to eliminate risks that could not be eliminated through reasonable design. In most cases, achieving this goal requires the use of a safety and warnings consultant. Only experienced professionals can locate the fine line between inadequate warnings and too many warnings (the “billboard effect”), can prepare instructions and warnings that properly address the foreseeable audience, and can help identify and comply with applicable warnings standards. Once the appropriate warnings and instructions are determined, the manufacturer must take appropriate measures to ensure that the information is delivered in a manner calculated to reach the end user. This can be accomplished through the proper place-ment and distribution of the information. Again, manufacturers should document delivery of these materials and save contemporaneous copies and samples to be produced later if needed.

Distributors and sellers can help reduce their exposure in several ways. First, they can take steps to make sure that they do not alter or affect the product in any negative manner. Typically, if a distributor has not damaged or redesigned the product, it can look to the manufacturer for indemnity. Where possible, the distributor or seller should inspect the product both upon receipt and delivery. To prove the condition of the product later, the distributor or seller should document such inspections. A distributor or seller should also make efforts to buy from viable manufacturers and suppliers. If the distributor or seller cannot collect on an indemnity judgment against the manufacturer or supplier, the indemnity is worthless and the purchaser can be left shouldering the responsibility.

Obviously, besides producing or selling a safe product, manufacturers and distributors can reduce risk through products liability insurance. Although such coverage is expensive, it can save a business from bankruptcy. Make sure that the policy covers liability for products manufactured or sold during the policy period and continues to cover such products after the policy period expires. Moreover, make sure that the policy provides sufficient coverage given the expected exposure level and that it covers injuries occurring in each of the geographic areas where the company’s products are expected to be distributed and used.

A third risk reduction strategy for product manufacturers or sellers is to seek contractual indemnification from their product purchasers. Yes, believe it or not, at least in some states such as New Jersey, a manufacturer or seller can contract with the purchaser of the product for indemnity against the manufacturer or seller’s own products liability. Under the right circumstances, a manufacturer or seller can even obtain contractual indemnification from an employer/purchaser for injuries to an employee-user of the product, notwithstanding the otherwise applicable workers’ compensation protection which typically bars employer liability for employee injury. Although contractual indemnities may not be practical for all situations, such as those involving the direct sale of consumer products to an ultimate consumer, they can be useful where a sophisticated commercial purchaser is willing to accept the risk due to the prevailing market or need. Here, a contractual indemnity can be an effective tool for reducing products liability exposure.

There are many additional ways to reduce your clients’ products liability exposure that are beyond the scope of this primer. Clients should carefully consider risk reduction plans suited to their particular situations. It may be helpful to suggest a products liability audit to expose unknown risks so that they can be eliminated before a problem develops. Some advanced planning now can save your clients’ businesses or their profits.

This article is reprinted with permission from the Volume 16, Issue 4 (1999) of New Jersey Defense, a publication of The New Jersey Defense Association. The information contained in this article should not be construed as legal advice, and readers should not act upon such without professional counsel.