Understanding the Liabilities in Manufacturing a Product

The issue of product liability is a true legal thorn bush. Manufacturers, who fail to understand how liability can impact in bringing a new product to market, are apt to find themselves nicked by the thorns.

There are three ways that a manufacturer can be held liable: strict liability, negligence, or breach of warranty. Strict liability means that a manufacturer is responsible for injuries caused by a product whose defect makes it unreasonably dangerous, despite the fact that they exercised reasonable care in its development.

If a manufacturer is accused of negligence, it means that they did not act with reasonable care in making sure the product was safe. The most important difference between strict liability and negligence is that if a manufacturer is charged with negligence, they will not be held liable if they took reasonable care to look for defects and to avoid them. However, if a manufacturer is charged with strict liability, that fact that an unreasonably dangerous defect exists in the product means that no matter how much care they exercised in its creation, they are still liable.

A breach of warranty is a determination that an assurance or promise about the quality of a product is proven false; that is, the product is defective or not in the condition a reasonable buyer would expect it to be in. The party making the warranty, the manufacturer, is liable to the party to whom the warranty was made, the purchaser. A warranty can be expressed in the description of the product such as describing a piece of clothing as colorfast. An implied warranty means that the buyer can assume certain assurances about the product to be true unless other wise stated. That’s why furniture that is used as a floor model is sold “as is.” There would normally be an implied warranty that the furniture is without nicks or dents. However, by adding the phrase “as is” to the sale tag, it removes the implied warranty.

As a product manufacturer, you also need to be aware of the three different types of defects. The first is the manufacturing defect. This stems from the way a product was made, as opposed to the way it was designed or labeled. An iron that doesn’t get hot enough to take the wrinkles out of cotton clothing is an example of a manufacturing defect.

A design defect is one that is arises from the way a product was designed, rather than the way it was made or labeled. For example, if an auto maker manufactures a vehicle that is so lightweight it’s likely to rollover in a collision, that is an example of a design defect.

A product may also be defective if a manufacturer fails to adequately warn consumers about risks involved in using it that aren’t immediately obvious. The failure to warn defect, as this is called, is the foundation of a number of cases brought against many of the major pharmaceutical companies over the last few years.

Manufacturing defects, design defects, or inadequate warnings are not the only ways a product can be considered defective. A product may be deemed defective if it fails to meet minimum legal standards for a product. However, even if a product does meet minimum legal standards, that does not usually protect a manufacturer from liability.

It’s important to remember that the type of negligence will influence the calculation of damages. In strict liability and breach of warranty cases, damages are limited to compensatory damages. While in negligence suits, the defendant can be awarded both compensatory and punitive damages.

Traffic Violation Cameras and Your Auto Insurance Premium

With the sudden presence of traffic violation cameras (red light, speeding, aggressive driving) in states across the country, many Americans feel that their privacy is violated.  Others believe that this is a government ploy for fundraising, or to replace the local police department.  Many people are curious as to the effect a red light camera violation will have on their insurance premium.

Since initiating the program a few short years ago, participating cities have seen very promising results from their investments.  Many have seen a 40% decrease in violations since starting the program.  Fines can be anywhere from $35 to $200, depending on the city in which the violation was issued and the speed over the legal limit at the time of the photograph.

If you are found in violation, the cameras take a picture of your car, with a motion-triggered shutter, which captures an image of you in your vehicle in addition to a zoomed-in image of your license plate.  Some cameras even take a few seconds of video.  Once the data is analyzed, you are issued a ticket through mail.

Some drivers have contested that if the vehicle owner is not the driver at the time of the violation, they should not have to pay the fine.  Most cities allow residents to appeal the citation in this situation.  Other states, however, hold the vehicle owner responsible regardless of who was driving.

There have been a few reports that suggested the cameras increase traffic accidents.  This is both true and false.  As the lights change from green to yellow, drivers begin to panic.  To avoid receiving a traffic violation, they are inclined to stop much more suddenly, which could cause minor rear-end collisions, and fender-benders.  However, more serious side-impact and head-on collisions caused by drivers speeding through red lights have significantly decreased.  As these crashes were much more hazardous, and resulted in far more injuries, the cameras are still viewed as a positive implementation.

Since violations are usually issued as a civil penalty, in most cases they do not result in changes to your insurance premium or points on your license, except in extreme cases.  Driving safely, however, will always result in better insurance rates.

Experience Modification Ratings Do Not Have to Adversely Affect You

If you are an employer who has received an experience modification rating, it is imperative that you understand how it affects your workers’ compensation premium calculations to make your rating work in your favor.

Workers’ compensation coverage is known as a class rated insurance program. That means that an insurance company gives all employers within a state who fall into a given industry or class the same rate. This is an average rate which doesn’t take into consideration any individual characteristics of the employer. Since policy premiums are affected by the individual factors surrounding the business, carriers need a statistical method of differentiating one business in a given class from another. This is what an experience rating offers.

The experience modification rating is calculated individually for each employer who qualifies. In order to qualify, you would need to pay a premium in excess of $10,000 or a 3-year average premium of $5,000, depending on the state. The modification rating is a value that compares the claim profile of the employer to the claim profile that would be expected of an employer of similar payroll size in the same industry or class code. In this system, 1.00 is average, meaning the frequency and severity of the actual employer’s losses is equal to what the carrier would expect the employer to lose. A rating greater than 1.00 means the employer has experienced worse than expected losses during the rating period, and a rating of less than 1.00 indicates the employer experienced better than expected losses for the rating period.

An employer’s experience modification rating is calculated using claims data from the three most recently completed years. The current calendar year would be excluded because it would not give a full picture of the year’s losses.

Each claim’s paid and reserved value is listed. Then the frequency of claims is evaluated. An organization with only one large claim will be looked on more favorably than a second one with numerous smaller claims even if both companies’ losses are of equal dollar value. Since the second company is more prone to claims, for any claim over the highest dollar value claim, only a fraction of the amount in excess of that dollar value is used in the calculation. Also, in some states only a percent of the medical only claims are used in the formula. These adjusted claims are compared to the expected losses for the industry class and payroll size of the organization, and an experience modification rating is given to the individual employer. A rating that is less than 1.00 will reduce the company’s premium, while a rating that is greater than 1.00 will increase it.

Obviously, a company will want to find ways to lower their rating. One method a company shouldn’t try is to manipulate class codes when they are obtaining a policy in an effort to get the most payroll into the lowest rated class. This may actually raise the experience modification rating in the long run.

Because the rating is calculated from a comparison of actual losses versus expected losses, allocating payroll to less risky classifications will also put you in line for expected losses that are far lower than what you realistically experience. This increases the likelihood that your actual losses will be greater than expected for the classification, leading to a higher rating in the future. The best way to decrease your rating is to make safety a priority, which will eliminate losses and save you money in the long run.

When Should You Get Car Insurance for Your Teen?

As soon as they start learning to drive, whether they are starting with a learner’s permit or going straight to the license, you should inform your insurance company to have them added to your policy.  This is usually much more cost-effective than placing them on their own policy, especially if you are a safe driver with a clean record.  They will also be eligible for more coverage under your policy.

Statistics show that teens are more prone to accidents than those in other age groups, so starting out with the right amount of coverage is extremely important.

When your child goes to college, unless they are taking a car with them, you will probably want to switch them to “occasional drivers” under your policy.  Some other considerations:


  • You may qualify for a multi-policy discount if your child’s car is covered under your policy.
  • You may also qualify for a discount during the time your child is away at college.
  • Encourage your child to earn good grades, and take a driver training course.  Some insurers discount due to good grades, and for completion of training courses.
  • Serve as a good role model; your child will learn by example, so it is important to demonstrate good driving habits early on (i.e. not talking on the phone, using seatbelt, not drinking and driving.)


Decrease Your Product Liability Exposure Through Customer Service

There’s an old saying: “You can please some of the people all of the time, and all of the people some of the time, but you can’t please all of the people all of the time.” These words should become the foundation for any product manufacturer’s customer service policy – be ready to handle customer complaints because you will always have them. That means at the very least, you have a written complaint filing procedure and someone who is designated to follow it through to resolution. If the organization is large enough, you may actually have a specific department whose function is responding to complaints. Customers need an effective way to gain your attention about problems with your products other than a lawsuit.

When you are developing a customer complaint procedure, the first consideration is standardizing the location in which to make a complaint whether it is in person, by regular mail or via email. This information should be communicated to customers on any written material included in the product packaging. Your employees should also be able to explain this procedure to customers when asked.

Whoever is designated to handle customer complaints needs to design a form that will encapsulate all of the necessary information to process the complaint, as well as information that can be used for analytical purposes should the complaint become the start of a trend. The form needs to be scrutinized by the R & D team who developed the product, line supervisors who are involved with its manufacture and senior management. As with any company form, it is always a good idea for corporate counsel to review the finalized version. The purpose of the record keeping system is to identify and communicate problems to the source that can correct them in addition to senior management.

The actual complaint processing is when useful customer service techniques can be practiced.  Be sure to get an accurate depiction of the problem and as much detail as possible, such as the circumstances of the problem, the duration of the problem, whether the customer has frequently encountered the same problem, etc. This data needs to be logged so that R & D can use it to begin investigations as to whether the defect is inherent in the product itself, or a manifestation of the product being used in a certain way or under a specific set of circumstances. Be quick in forwarding information to the next appropriate level so that you can give the customer a timely response/resolution. Keep the customer informed about the progress of their complaint if it goes on for a lengthy period. And above all, notify them as soon as it has been resolved, for example with a refund; or on a larger scale such as a product recall.

When you notify a customer, be sure to personalize the communication. If you are responding be regular mail or email, never use a form letter. Use language that is easily understood and avoid industry jargon or complex technical explanations. The complaint handler should always follow-up the letter with a telephone call to determine if the customer is satisfied with the resolution.

Handling customer complaints in this manner appears on the surface to be both time-consuming and costly. However, if you consider it as an investment in your protection against future tort action, this type of program is worth every penny. By taking no action or inappropriate action, you increase the risk of paying down the road when you find your company as the defendant in a lawsuit filed by an angry customer.

The Number of Uninsured Drivers Continues to Rise

Here’s a sobering statistic you might not be aware of: nationwide, when a person is injured in a car accident, the odds are about one in seven that the driver that caused the crash is uninsured. According to a recent Insurance Research Council (IRC) study, the estimated percentage of uninsured drivers rose from 12.7% in 1999 to 14.6% in 2004. The IRC studied data provided by eleven insurance carriers, which represents approximately 58% of the private passenger auto insurance market in the United States.

Uninsured Motorists, 2006 Edition looks at trends in the percentage of uninsured drivers by state from 1999 to 2004. In 2004, the five states with the highest uninsured driver estimates were Mississippi with 26%, Alabama with 25%, California with 25%, New Mexico with 24%, and Arizona with 22%. The five states with the lowest uninsured driver estimates were Maine with 4%, Vermont with 6%, Massachusetts with 6%, New York with 7%, and Nebraska with 8%.

The researchers estimated the number of uninsured drivers by using a ratio of insurance claims made by persons who were injured by uninsured drivers to claims made by persons who were injured by insured drivers. The study also includes recent statistics broken down by state on the frequency of claims made by uninsured motorists, the frequency of claims of bodily injury, and the ratio of uninsured motorists to bodily injury claim frequencies.

Given these statistics, it’s a good idea for people to protect themselves in case they are in an accident with someone with either no coverage or not enough coverage. That’s why the insurance industry developed Uninsured Motorist Insurance and Underinsured Motorist Insurance. Requirements for carrying this coverage differ from state to state. However, in general, states that are considered “no fault” auto insurance states mandate both types of coverage.

Uninsured Motorist insurance protects you when the other driver has no coverage. In order for your Uninsured Motorist coverage to help, the uninsured driver must be the person responsible for causing the accident. The types of coverage provided under this policy include:


  • Uninsured Property Damage: Covers you when the insured vehicle sustains property damage, but the at-fault driver has no insurance.
  • Uninsured Motorist Bodily Injury: Covers you, the insured members of your household and your passengers for bodily/personal injuries, damages or death caused by an uninsured at-fault driver. If you get into an accident in which the at-fault driver has no insurance, your policy will pay your medical expenses, up to the stated limits of your policy.
  • Underinsured Motorist insurance protects you when you are in an accident with a driver who does not have enough liability coverage. Again, this coverage only helps if the underinsured driver caused the accident. The types of coverage provided under this policy include:
  • Underinsured Motorist Property Damage: Covers you when the insured vehicle sustains property damage, but the at-fault driver is covered by a policy with a liability limit insufficient to cover all the damages.
  • Underinsured Motorist Bodily Injury: Covers you, the insured members of your household and your passengers for injuries, damages or death caused by an at-fault driver whose insurance is insufficient to cover the entire expense. If you have an accident with a driver whose policy limits are too low to pay all your damages, your policy will pay the difference up to the stated limits of your policy.


If you haven’t reviewed your insurance coverage recently, talk to your insurance agent to review any gaps in your coverage. You may be putting yourself and your family in greater risk than you realize.

Sarbanes-Oxley and Internal Auditing for Construction Companies

No recent law has received as much attention as the enactment of the Sarbanes-Oxley Act. Although it was passed in 2002, the financial transparency issues it raises are still being discussed and debated three years later. Every industry has had its problems with interpretation and certainly, construction is no exception. Sarbanes-Oxley has cast a new light on the function of the internal audit department in any publicly held construction firm.

The center of all the controversy is Section 404. It requires companies that file annual reports with the SEC to discuss management’s responsibilities to develop and maintain adequate internal control over the company’s financial reporting process. As if that weren’t enough, the law also requires management to perform a self-assessment of the effectiveness of those internal controls. The process of scrutinizing financial reporting mandates that internal audits go beyond the usual definitions of loss prevention to take a much broader view of the company’s financial health.

This broader vision actually breaks down into a few different areas. The first is recognizing the growing demand for management’s accountability regarding capital stewardship. Internal audits should assume a more proactive role when it comes to providing decision support data. Accurate project scope definitions and cost/effort estimation models that are completed before a contract is finalized, and exemplify a project’s real cost and schedule to complete, will provide management the ability to make an informed decision about whether or not to proceed. Completing a scope definition midway through a project with a change order is an expensive fix for perceived risks that only weaken the firm’s financial state.

Internal audits need to have a watchful eye when it comes to assessing a project’s risk impact on the company’s capital reserves. It is no longer sufficient to assign a standard percentage of the contract’s value to allow for unforeseen events. There needs to be real transparency as to what the perceived risks are and their potential impact on the company’s finances in dollars and cents.

Along with the assessment of risk comes the allocation of risk. One of the biggest hindrances to management’s capital stewardship is inadequate contractual allocation of risk. For example, the firm failing to assign risks to those projects best suited by virtue of their operating margin or the nature of the firm’s expertise. An internal audit is needed to verify the firm’s contractual risks are well within its ability to maintain them without seriously impacting the firm’s capability to complete the project within budget and on time.

While these areas are not really new to internal auditing, the one area of uncharted waters is the company’s potential risks and costs associated with environmental, health, and safety issues. This is the area where Section 404 has made the biggest impact, by requiring increased transparency in reporting these risks.

Any activity the firm undertakes, whether a new project, retooling to become more competitive, or modifying a facility to accept a more diverse range of projects, will have some environmental, health and safety issues attached to it. Ensuring that solid internal controls are in place can minimize the potential impact of these issues. When internal audits consistently monitor these controls, company profitability is protected by reducing environmental, health and safety liabilities.

To that end, internal auditing needs to fully understand the company’s environmental, health and safety policies and how they are integrated with internal controls. Audit teams also need to review compliance documentation. Such documentation includes environmental, health and safety policies, procedures, checklists and training programs. Audit teams need to take a proactive stance by observing the system of controls to see if they work and making recommendations to management about areas that need improvement.

Sport Utility Vehicles Improving Rollover Safety Record

According to Newsweek, one in four automobiles sold in the United States is a sports utility vehicle. Every SUV purchase nets an average of $15,000, according to Forbes magazine, in profit for the vehicle’s maker. Because of this high demand and lucrative sales potential, the makers of SUVs have been accused of ignoring safety when it comes to the design and production of their products. The biggest safety complaint about the SUV is its high rollover record.

This lax attitude toward safety, however, is an item of the past. The National Highway Traffic Safety Administration (NHTSA) recently released new rollover results for 2006 and 39 SUVs earned four-star ratings, which was the highest rating earned by the vehicles tested. No SUV earned the top ranking of five-stars. Under this ratings system, a vehicle rated at five-stars has a rollover risk of less than 10%. A four-star vehicle has a 10% to 20% risk, and a three-star vehicle has a 20% to 30% risk.

Newly tested SUVs that received four stars included: the Chevrolet HHR, Honda Pilot, Toyota RAV4, Subaru B9 Tribeca, Hyundai Tucson, Mercedes-Benz ML Class, Suzuki Grand Vitara and four-wheel drive versions of the Chevrolet TrailBlazer.

Among top-scoring SUVs, the HHR had a 14% chance of rollover and four-wheel drive versions of the Pilot had a 15% chance.

The four-wheel drive version of the Nissan XTerra had a 25% percent chance of rollover, the highest percentage among the new SUVs tested. The two-wheel drive version of the XTerra, the two-wheel drive Chevrolet Tahoe and Hummer H3 each had a 24% chance of rollover, and all received three stars.

The new statistics also reveal that SUVs have shown consistent improvements in the area of safety. Only two-dozen SUVs received four stars last year, and just one SUV earned the ranking in 2001. In addition, the agency noted that 7 in 10 new SUVs are equipped with electronic stability control. This feature is an anti-rollover system that automatically applies the brakes if the vehicle begins to skid, which helps to stabilize the vehicle. Government studies have found stability control reduces single-vehicle sport utility crashes by 67% compared with the same models sold in previous years without the feature.

Since 2004, NHTSA has asked auto manufacturers to voluntarily install electronic stability control because of its proven potential for saving lives.  As a result, nearly all automakers now offer electronic stability control as standard equipment on a total of 57 SUV models, and on 6 SUVs as an available option. This is up from 20 standard and 14 optional in 2003. NHTSA is expected to issue a new proposal later this year specifying a performance criterion for stability control.

Premium Damage Control for Workers’ Compensation Insurance

When you obtain workers’ comp for your business your initial premium rates are based on your company’s payroll and the average cost of insurance in your particular industry.  This premium rating will continue until your business becomes eligible for an experience rating.  An experience rating will take into account the amount of claims filed in order to determine your loss ratio compared with your industry average.  In general, an employer will need to be insured for at least two consecutive policy years to become eligible for experience rating.  Simply put, if your company follows safety prevention and files fewer claims than expected the amount of your premium will be positively affected.

Businesses can reduce their workers’ compensation costs in other ways.  One method is to split payroll for an employee who performs two different tasks, each one governed by a different risk classification.   Separate payroll records must be kept and duties specifically identified.  If an employee splits time equally between office work and a higher risk job duty, you could potentially decrease this employee’s risk factor by 50 percent for as much as half the workday. 

The same can be said for classifying workers correctly.  Misclassification is a common oversight leading to higher worker’s comp premiums.  The National Council of Compensation Insurance (NCCI) provides more than 700 job classifications in a publication called the Scopes Manual.  Most states use this manual as the basis for their classification schedules.  Since workers’ compensation premiums are directly impacted by your reported job classifications, it is well worth your time to verify both your company and employees are classified correctly.  Keeping track of changes in job duties throughout the year is also important. If an employee is promoted to a less risky position, your premiums will be lowered accordingly.

Since your workers’ compensation premiums are based on payroll you may be able to reduce your payroll totals by deducting overtime pay.  Some states will allow you to make this conversion for purposes of calculating your payroll.  Again it is important to keep detailed records to produce accurate payroll data. 

Approximately thirty-one states allow employers to reduce their premiums by paying a deductible that is generally between $100 and $5,000.  Your state insurance department or insurance broker can inform you if this is an option for your business.

It is also important to maintain an excellent safety record.  Utilize proper equipment and clothing to prevent accidents and injuries.  Be sure to train employees well in safety practices and procedures.  Create a safety manual for all employees.  And always follow the Occupational Health and Safety Administration guidelines related to your business.

Since many states have different regulations that govern workers’ compensation it is important to consult expert advice in this area.  An experienced agent that understands your business can work as your advocate with an insurance company, guide you through the classification process, and lead you to credits that lower your premium.