Product liability: Business risks and responsibilities
Product liability is the legal responsibility a business has for manufacturing or selling dangerous or defective products—and it’s one of the biggest concerns for manufacturers and distributors. Faulty or dangerous products can harm or injure consumers, lead to costly lawsuits and cause reputational damage.
Product liability claims generally fall into three categories:
Design defect: This refers to a flaw or error in the design itself, making the product inherently dangerous despite being manufactured as intended.
Manufacturing defect: This is when a product is designed correctly, but a flaw in the production process causes the product to be defective.
Failure to warn: This refers to failing to adequately warn consumers about any known or suspected risks of using the product that would not be obvious to the end user, or failing to supply adequate instructions for the proper use of the product.
In product liability claims, it’s not just manufacturers that are on the hook: importers, wholesalers, distributors, retailers and others along the chain of distribution can be held liable when a product is defective or causes injury. While the legal environment is complex and no two claims are the same, here are a few things to be mindful of:
In Canada, product liability is governed by common law in nine of the 10 provinces and all three territories. The exception is Quebec, where product liability is governed by civil law. In common law cases, product liability claims are based on case law precedents and are assessed against a negligence standard, which means the plaintiff must establish that the defendant owed a duty of care, the defendant breached that duty, and the plaintiff suffered damages because of that breach.1
In Quebec, civil law consists of a set of rules that are applied to the given circumstances based on looking at the civil code first and then to prior decisions. The laws are especially favourable to consumers, which often means a more difficult defense of claims.2 For example, it’s presumed that a product has a defect and the onus is on the seller of the product to rebut this presumption.
In the U.S., there is no federal product liability law. Claims are typically based on state laws and brought under the theories of negligence, strict liability, or breach of warranty.3 The U.S. is one of the most litigious legal climates in the world and laws and regulations can vary drastically by state. Awards for damages can be significantly higher than in Canada.
In product liability claims, it’s not just manufacturers that are on the hook: importers, wholesalers, distributors, retailers and others along the chain of distribution can be held liable when a product is defective or causes injury.
How can manufacturers and distributors protect themselves? Will Killen, Senior Underwriting Specialist, National Underwriting, at Sovereign Insurance, outlines some key risk management measures:
Start with prevention: “Design with safety in mind, considering who the end users are, how the product will be used (or misused) and any hazards that could result,” says Will. In addition, products should be designed and manufactured to meet or exceed applicable standards and regulations. Consult with legal experts to ensure labels, warnings and instructions conform to applicable laws and regulations. Another preventative measure Will recommends is to develop a quality assurance (QA) program, which is a proactive strategy to help prevent product defects, and a quality control (QC) program, which helps identify product defects and ensures product quality is maintained or improved. “Incorporate customer feedback into the process and regularly review and adjust your QA/QC program,” he says.
Manage imported supplies, materials and components: Raw materials or parts can come from all over the world. However, different countries have different product safety regulations and standards. Will notes that manufacturers and distributors that import products or materials may be responsible for verifying the product is compliant with applicable standards and confirming that proper warnings are provided to the end user. “They should select and manage their suppliers of imported goods carefully, ensuring the proper product quality and safety standards are in place,” he says.
Create a product recall plan: “While prevention is key, so is preparation,” says Will. In the event of a product failure, having a formal product recall plan in place can help ensure consumers’ health and safety, as well as help limit financial losses or reputational damage.
Keep detailed records: Manufacturers should create documentation and record-retention policies to meet regulatory requirements and business objectives. These records can include manufacturing processes, inspection and testing records, customer designs and sign-offs. “Retaining records for a long period of time is important to help defend against a product liability claim that can arise years down the road,” says Will.
While every manufacturer and distributor wants to ensure its products are safe, there is a chance a product liability claim will arise. Defending against product liability lawsuits can be costly, so the need for insurance coverage is critical. Contact your broker to find out if your business has the right plan in place.
1 “Product liability in Canada,” Torys LLP, Aug. 10 2019
2 “What lawyers, manufacturers and sellers need to know about product liability laws in the province of Quebec,” Fasken, Sept. 15 2020.
3 “What is product liability?” FindLaw, July 2 2019.