Warning: The Perils of Products Liability

Making or Selling This Product May Be Hazardous to Your (Financial) Health

The waffle iron in our kitchen comes complete with 21 distinct warnings in seven languages concerning its use, including one—”Only use the appliance for food which is supposed to be cooked”—that is totally obscure. This is an example of the pervasive warnings routinely attached to products as a result of escalating liability claims. Judging from the warning labels attached to almost anything, no product is free from potential hazards. Don’t use a microwave to dry clothes (or your dog); don’t check for gas leaks with anything that can produce a spark—even a cell phone; don’t drive or operate machinery after you’ve taken a sedative.

Every product comes complete with an exhaustive list of how not to use it. Most of them are simply restatements of common sense. Although they sound dumb, there’s a real reason for their inclusion. They’re designed to protect the manufacturer and/or seller (and their insurers) from paying costly verdicts for the misuse of an otherwise harmless product.

The Legal Information Institute at Cornell University gives an “overview” of products liability law as follows: “Products liability refers to the liability of any or all parties along the chain of manufacturing of any product for damage caused by that product. This includes the manufacturer of component parts (at the top of the chain), an assembling manufacturer, the wholesaler, and the retail store owner (at the bottom of the chain). Products containing inherent defects that cause harm to a consumer of the product, or someone to whom the product was loaned, given, etc., are the subjects of products liability suits. While products are generally thought of as tangible personal property, products liability has stretched that definition to include intangibles (gas), naturals (pets), real estate (house), and writings (navigational charts).” That covers just about anything and anybody, making it an accurate summary of U.S. tort law on products liability.

The American Law Institute’s “Restatement of the Law Third, Torts: Products Liability” breaks down the definition into three distinct areas:

Manufacturing Defects—when the product departs from its intended design, even if all possible care was exercised.

Design Defects—when the foreseeable risks of harm posed by the product could have been reduced or avoided by the adoption of a reasonable alternative design, and failure to use the alternative design renders the product not reasonably safe.

Inadequate Instructions or Warnings Defects—when the foreseeable risks of harm posed by the product could have been reduced or avoided by reasonable instructions or warnings, and their omission renders the product not reasonably safe.

The first two have long been established as a basic part of tort law, and haven’t changed or expanded excessively in recent years. The third one, however, has been expanding rapidly, particularly in cases where the consumer/plaintiff alleges that there was a duty on behalf of the manufacturer/seller to warn of potential dangers.

Two well-publicized examples are cases against McDonald’s—one for burns from hot coffee and the other from obesity allegedly caused by eating too many Big Macs. Although McDonald’s won both, they still had to go to court to defend themselves, pay their attorneys and suffer bad publicity.

Failure to give hazard warnings increasingly subjects the defendant to costly verdicts. While it may be difficult to prove that a product is defective, or was wrongly designed, the “inadequate warning” standard is so broad that almost any lawsuit can be based on it. What is a “foreseeable risk?” What are “reasonable instructions or warnings?” It’s extremely hard, after the fact, to argue that whatever harm the product caused wasn’t foreseeable, and that it therefore should have carried the requisite warning. As a result commercial defendants are increasingly exposed to costly jury verdicts, and the costs of obtaining coverage have been escalating.

In addition, products liability is generally considered a “strict liability” tort; i.e., liability doesn’t depend on showing negligence, simply showing a defective product, or a failure to give adequate warnings, and a resultant injury is enough to establish a prima facie case of liability. It’s irrelevant that the defendant used great care, etc. All of these factors combine to make product liability lawsuits a large and lucrative area of tort law, and an expensive one in terms of jury awards.

A study published by LRP Publications, released at the beginning of 2004, examined recent trends, as compiled by Jury Verdict Research (JVR). The study noted that while it doesn’t include every jury verdict from every jurisdiction, it’s nonetheless based on a “sufficient sample of data to produce descriptive statistics for specific areas of personal injury litigation. The cases are collected in an impartial manner, with an equal emphasis on the collection of plaintiff and defense verdicts and with no intentional bias toward extreme awards or geographic regions.”

The study gives a detailed portrait of what kinds of products cause injuries, what the high, low and median recoveries are likely to be, what percentage of plaintiffs prevail, and what kinds of settlements have been achieved before trial.

It breaks down different kinds of products liability cases into three different groups—products liability cases involving industrial, construction, commercial and farm products; cases involving transportation products; and cases involving consumer and medical products. First, the study lays out the percentages, and then for each group it presents tables giving the awards. Finally, it discusses settlements.

As an example, asbestos falls in the first group. The study “examines all cases involving products containing asbestos in industrial, construction, commercial and farm products liability claims. Plaintiffs in these cases claimed that they suffered such conditions as mesothelioma, pleural thickening and lung cancer as a result of the presence of asbestos containing materials.” The “plaintiff recovery probability” is 74 percent, the highest of any of the 12 general categories.

The table below shows the amounts of the recoveries:

Asbestos cases, however, don’t generate the highest recoveries. According to the study, injuries and deaths involving electrical equipment, which have a 50 percent chance of success, produced the following recovery figures:

The JVR report also measures the recoveries from products liability cases by the type of injuries caused. The chart below details “the most frequently cited injury categories, the percentage of the total awards that fell within each range, and the median awards of each injury for consumer and medical products liability.”

While some of the links between the injuries caused and the products involved may seem tenuous, they are nonetheless real. A reading of the jury study shows that the more severe the injury is, the more effort a plaintiff’s lawyer makes to link the injury or death to a product. Two main reasons lie behind this. First, if the claimant was simply negligent, he gets nothing; but, if he can show that it wasn’t his/her fault, not only are all the defendants in the chain potentially liable, but that finding becomes prima facie evidence of a negligent act, thereby significantly lightening the burden of proof on the plaintiff and increasing the likelihood of a recovery. Second, the defendants are usually companies, and they are presumed to have insurance, i.e., “deep pockets.” While that’s true of tort cases generally, it seems to be an especially important factor in products’ liability actions.

As the jury study shows, those recoveries are frequently substantial. Insurance coverage therefore becomes a must for any company selling or handling products that reach consumers. The costs, however, aren’t cheap. It’s not possible to calculate a meaningful “average” rate for products liability, as each situation is more or less unique, but the net figures are comparatively low.

According to the Insurance Information Institute (I.I.I.), net premiums written in 2002 (the last year for which they are available) totaled $1,775,526, a decrease of 12 percent from the $2,018,399 written in 2001. By comparison, the net written premium for medical malpractice in 2002 exceeded $7 billion.

The decline is at least partially explained by the adverse combined ratio. According to the I.I.I., it was 355.3 percent in 2002 and 215.5 percent in 2001. It hasn’t gone under 130 in the last 10 years. By comparison, the combined ratio for med-mal coverage in 2002 was 140.8, and the highest in the last 10 years was 154.2 in 2001.

As the rates have risen, more companies are becoming self-insured, or are increasing their deductibles. Paradoxically, this has increased their awareness of the perils confronting them, and has spawned new initiatives by carriers aimed at increasing loss prevention and mitigation efforts in order to reduce defense costs and claims payments.

In the long run, that trend may prove a boon to all involved, not least in reducing the number of injuries actually caused by faulty products. In the short run, however, it has yet to take affect, and the next jury verdict study may see recoveries in products liability actions continuing to increase.