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A Guide to Product Liability for Business Owners

what is product liability on left, right is a column of three screens of products including shorts and other unidentifiable stuff

For decades, tobacco companies sold cancer-causing cigarettes to consumers with no label or warning of the potential harm they could cause. But these companies were in for a rude shock when smokers who developed lung cancer began to sue the cigarette makers for damages. In 2002, tobacco giant Phillip Morris was ordered to pay a lung cancer patient named Betty Bullock a whopping $28 billion in punitive damages. It was one of the largest personal injury awards in US history. The grounds for the case were built on a legal concept called product liability.

What is product liability?

Product liability is a term for the legal responsibility manufacturers, distributors, and sellers can incur if a product causes harm or injury to consumers. Modern product liability law is generally derived from tort law, which focuses on compensating those who were victims of civil wrongdoing. 

In the US, because there is no federal product liability law, the legal criteria needed to prove damages can vary significantly from state to state. In some cases, product liability can implicate multiple businesses throughout the supply chain, including manufacturers of component parts, assemblers of the product, and stores that marketed and sold the defective product to consumers.

Types of product defects that can create product liability

There are three types of product liabilities for which a company can be held legally responsible.

  1. Design defects
  2. Manufacturing defects
  3. Marketing defects

1. Design defects

Design defects refer to flaws in the plans for the creation of a product. Design defects exist before the product is ever manufactured or assembled. According to most state laws, a consumer has the burden of proving that a product has a design defect. However, in Hawaii, California, and Alaska, a business has the burden of proving that its product is not defective. Design defects can be very costly to a business because they apply to every individual item sold. A producer is liable for design errors if the victim can prove that a company could have used a safer design. 

2. Manufacturing defects

Manufacturing defects are the result of deficiencies that occurred during the production process. Because of this, they usually only affect a portion of the products sold, not all products on the market. 

3. Marketing defects

Businesses can also be on the hook for product liability based on how they market their goods. If a business uses improper labeling or fails to warn consumers about the potential dangers of its products, it can face legal action. Some of the most famous marketing defect cases in history were lawsuits against tobacco companies like Phillip Morris (which subsequently changed its name to Altria) for not properly informing consumers of the health risks of their products.

How to avoid defects and liability

There are several precautions a business can take to minimize the risk of being sued for product liability.

  • Ensure design safety. Make sure that the design of your product has no unintended consequences, especially consequences that can threaten a consumer’s health or safety. You can create safety measures to test the finished product yourself or hire third-party product testers.
  • Test component parts. If your product uses component parts that you bought from other companies, make sure to test these for safety as well.
  • Market accurately. Ensure your marketing accurately reflects what the product is supposed to do. Instructions or packaging should explain how to use your product safely and include warnings of potential injury from product misuse.
  • Use a risk-utility test. This measures the risk of harm a product design might have relative to its potential utility. Risk-utility tests are often used in product liability court cases.
  • Purchase insurance. You can purchase product liability insurance to lower the risk that a product liability case causes your small business to go under.

Who is responsible for product liability?

Any business involved in the production process can be held liable for product defects. This includes product designers, manufacturers of component parts, wholesalers, marketing teams, and the business that sells the final product. To win a product liability case, the consumer must prove that the product had a flaw that was the primary cause of injury or harm.

The criteria required to prove a product liability claim depend on whether the plaintiff is accusing the manufacturer of negligence, violation of strict liability law, or a breach of warranty. The criteria are as follows:

  • Negligence. The plaintiff accuses the manufacturer of failing to behave with the level of care that was to be expected, and claims that this lack of care caused harm.
  • Strict liability theory. A business or individual is held responsible for damages for a person injured, even if there was no evidence of negligence or fault.
  • Breach of warranty. The manufacturer is held responsible for producing a product that doesn’t meet the reasonable expectations of the consumer. These expectations can either be explicitly stated in a warranty document upon purchase or they can be implied by product advertising.

Businesses can defend themselves from product liability claims in a number of ways, in some situations even if they sold defective products. These include:

  • Assumption of risk. In these cases, the injured person understood the potential risks or the harm caused was unrelated to the product.
  • Altered product. In these defenses, a company argues that the product was modified and became defective after it was no longer under the control of the company in question.
  • Contributory negligence. This defense asserts that the consumer was in some way responsible for misusing or damaging the product.
  • Contractual relationship. This defense usually is invoked after a consumer signed a product liability waiver, barring them from seeking damages if a product is defective.
  • Statute of limitations. In some cases, if the plaintiff doesn’t file a claim within a certain period, the case will be rejected.

What is product liability insurance?

Product liability insurance is a way of protecting businesses from potentially devastating claims. It is often included in general business insurance policies. The average cost of product liability insurance in the US is $99 per month for small businesses, according to the business insurance company AdvisorSmith. However, this cost varies widely by industry. Businesses manufacturing potentially hazardous materials can expect their insurance costs to be higher than those that make relatively low-risk products.

Product liability insurance FAQ

What are the different types of product liability claims?

The main types of product liability claims require plaintiffs to prove that a product has a design defect, that a defect occurred during manufacturing, or that a company’s marketing or labeling failed to warn about potential risks.

Any business involved in the creation of a faulty product can be liable. This also can include a retail seller or the manufacturer of component parts of a product.

Who is liable for product liability?

What does product liability insurance protect against?

Product liability insurance provides financial protection in the event your business is a defendant in product liability litigation. This financial protection can help cover the costs of a legal defense and pay any damages awarded to consumers.

What is the most common cause of product liability claims?

Manufacturing defects are the most common reason given for product liability claims, according to Dolman Law Group.

What happens in a product liability case?

During product liability lawsuits, consumers try to prove that the product a business sold to them caused harm or did not meet reasonable expectations. The accused business may try to refute these claims using a combination of evidence and legal strategies.

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