by Randall Goodden
One of the most significant programs adopted by manufacturing corporations around the world today, is that of Product Liability Prevention. Many corporate executives don’t fully understand what we could be talking about when we bring up the subject of Product Liability Prevention, other than the typical aspects of product safety, warnings, and other engineering concerns. What they don’t understand are all the areas that this focus addresses, and the benefits derived.
Most manufacturing companies in today’s competitive industries, have fairly good Quality programs and product design and engineering efforts in place. Or, at least they feel they do. To maintain a high standing in industry and gain the competitive edge, manufacturers must make every effort to continuously improve and search for new areas of opportunity, or they’re soon eliminated.
Leading companies are certified to the ISO 9000 or other similar standards as it relates to their Total Quality program and effort. From another perspective, they may have even created their own Technology Centers for designing and testing the new products and materials for tomorrow. And yet, with all of these quality and engineering programs in place, numerous manufacturers continue to be hit by major product liability lawsuits. Some are even put out of business.
Ironically, some manufacturers fail to focus on this area for a variety of poor and misled reasons. One of the most popular justifications for some smaller manufacturers not to take an interest in this area, is that they have had little to no problem with product liability lawsuits in the past, so they don’t see the need to become interested. Then one day they find themselves involved in a defective product situation and are hit by 3-6 lawsuits within a year or two. The financial impact of the event is devastating, and in some cases, fatal. They really begin to learn from their mistakes at that point, if they’re still around. A similar analogy would be to compare product liability lawsuits to heart attacks. Do you wait to have a heart attack before learning the do’s and don’ts of proper eating and exercise? Some people do. Others who study the causes of heart disease and improve on what they’re currently doing will probably live longer.
Another scenario is that some manufacturers feel anything to do with the issue of product liability, potential lawsuits, and the study of law, is an issue for lawyers and not for the average non-legal degreed manager. They have no business trying to learn about legal issues if they’re not attorneys. This isn’t true, and would be similar to saying that you have no business studying health and medicine if you’re not a doctor. Anything can be learned, and this is a critical subject management has to have a better understanding of.
Financial Impact of Product Liability
The epidemic of product liability lawsuits in the United States results in many corporations now being required to pay substantial risk insurance premiums or defense costs, forcing what might have been healthy organizations into major deficits, if not bankruptcy. Insurance premiums for U.S. companies are twenty times greater than that of companies overseas. Not because the foreign manufacturers have these types of programs in place, but because we live in the most litigious country in the world and it’s not as big of an issue overseas, unless of course the foreign manufacturers are exporting products into the U.S. But the epidemic is growing in other countries nonetheless, and eventually it could be as bad in many other countries as it is here.
Defense costs and out of court settlements in product liability lawsuits impact the bottom line and drain the funds that would have otherwise gone into profit sharing and investment and growth. Yet many executive groups fail to see the opportunities available here and often view mounting premium costs as a necessary evil.
To the manufacturer’s disadvantage, the insurance industry claims that it spends as much on defending corporate policyholders against product liability actions, as it spends in actual losses. For them it’s heads they lose, and tails they lose. Because of this, insurance companies tend to focus their efforts on controlling the costs of legal defense, and pursue early settlements, despite the possible lack of credibility surrounding the case. These actions are definitely to the disadvantage of the manufacturer, but have become so common place that plaintiff attorneys as well as defense attorneys immediately begin to negotiate settlements in the earliest stages of an action.
Forming an Alliance
One of the things that is needed in this movement, is for insurance carriers to become more involved in working with manufacturing corporations in helping to put these programs into place. Corporations and their insurance carriers need to join forces in making a concerted effort to reduce risk and work as a team to address potential suits in order to turn this litigious situation around. This means that manufacturers need to start becoming actively involved in their own destiny, and the insurance industry needs to do everything possible to encourage it. Manufacturers need to understand the field of product liability prevention and play a significant role in helping the insurance carrier and assigned defense attorney in litigation. This is the beginning of a new alliance between manufacturing, legal and insurance.
Understanding Product Liability Prevention
Many corporate management teams think that product liability prevention merely deals with product safety issues, hazards analysis, equipment guarding and warning labels. Manufacturers and many product liability experts feel that the entire concern for product liability prevention lies with the Engineering group, so that is the target of their seminars, books and articles. Engineers, it is felt, are typically well educated in product safety concerns and have a good grasp on how to reliably design a product, and fully understand the devastating effect a product liability lawsuit can have on the organization.
Surprisingly, one recent study showed that out of 400 registered Engineers, 80% had no product safety training in college; and over 70% never attended a product safety conference or seminar. Along with that over 70% stated the concern over product liability was a major to extreme factor in their design decisions, and over 75% rated their knowledge of product safety as being adequate to excellent! How does this happen? If the product engineers really don’t have a grasp on product liability issues, then who is really watching the store?
For the product liability prevention effort to be effective, it needs to be thoroughly incorporated into the corporation’s documented Quality program. It can’t rest as an issue to be addressed by any one department. It involves numerous activities throughout the organization, and probably every department.
First, we need to understand the full realm of Product Liability Prevention. Product liability prevention deals with all the following areas and more:
Customer Contracts / Agreements: Who currently reviews the contractual demands of the customer or terms and conditions of sale and knows what they contain if the company doesn’t have a Legal department? Who has a grasp on the liability laws that might exist for those shipping products overseas?
Product Design: The most critical first step in the product lifecycle. The least expensive time to recognize a potential problem and make a change. Teaching the management team how to hold effective Design Reviews; How to comprise the Design Review Team as well as the Product Safety Team, and teaching the Design Review Team their roles and responsibilities for achieving effective design reviews, and the Safety Team the elements of Hazards Analysis and Risk Assessment.
Marketing / Advertising: Focusing on the sales and marketing departments and efforts, and the ad materials for new products to ensure they don’t contain elements that could create potential product liability problems down the road.
Reliability Testing: Ensuring the corporation does perform adequate reliability tests on new products, as well as teaching them how to document and deal with possible product problems and negative test results.
Document Control: Teaching the entire organization how important the documents they generate are, and helping them recognize the potential dangers in what they write, the proverbial “smoking gun” documents, as well as teaching them how to deal with delicate management issues and decisions.
Warranties: Understanding breach of warranty, the issues of implied and expressed warranties, and how these things can enter into a product liability lawsuit if they’re not controlled properly.
Warning Labels & Instructions: Understanding when the need exists for developing warning labels, how to design them, their placement, the standards that exist for warning label design, what concerns should be incorporated into warning labels versus operating instructions.
Records Retention: Teaching the management team the importance of proper records retention, immediate accessibility, what types of records need to be maintained and for how long.
Supplier Selection: Going beyond product, price and delivery capabilities and D&B ratings, and addressing the issues related to product liability concerns, insurance requirements, indemnification agreements and more. Reviewing what the manufacturer’s own Purchase Orders state in fine print, ensuring they are adequately protected against the supplier’s or subcontractor’s mistakes and more.
Recall Procedures: Companies need to know what the game plan will be should they ever need to conduct a product recall, and not try to develop the game plan in that moment of crisis. Knowing the different options available, when to actually recall the product versus just sending out notices, other organizations that may need to be contacted by law, etc
Accident Reporting: Do employees in Sales, Customer Service, even at the switchboard and various technical help areas know how to handle an incoming call or notification that a product produced was at the center of an accident, fire, or personal injury situation. Do they know who to forward the call to, what to say and what not to say to the informer?
Accident Investigation: Teaching the manufacturer how to take a proactive role in instantly investigating an incident in the field, learning what to do and what not to do, as opposed to just turning over the situation to the insurance carrier for them to handle. The first notice of an incident can be a crucial period for gathering facts, and possibly even heading off a claim or potential suit if acted upon quickly. It is not the time to lie in the bushes and wait to see if the situation is going to go away.
Litigation Management: Teaching the manufacturer’s inhouse expert how they can play a key role in helping out with litigation management. Working with the insurance representatives and assigned counsel on the case, and helping answer questions, gather documents, conduct tests, etc. This is especially the case for those corporations that don’t have an inhouse Legal department.
As you can see, the product liability prevention focus is more than just a hazards analysis and warning label effort, although they are part of the big picture. It is also more than just an “Engineering” concern, and instead involves the entire organization. The fact that it involves so many areas of management is why the focus needs to be incorporated into the existing Total Quality program. The Corporate Quality Program is typically the only fully documented system of comprehensive controls and procedures within most corporations.
To effectively initiate such an effort, the entire management team needs to first learn what this focus entails. This is best handled through a well orchestrated inhouse awareness session or seminar. This can be handled by either the newly appointed inhouse expert, or an outside speaker and expert can be brought in. We want the entire management team to understand how the company could get into serious trouble, and what their individual roles are in product liability prevention. We want them to know how important this focus and effort is in everything they do.
The end results of such a session are very impressive and noticeable as the entire management team begins to speak a whole new language. They understand and thoroughly buy into the new concern and focus, and as a result, bring about substantial improvements to the safety, quality and reliability of the products they create from that point on as well as making dramatic improvements to numerous other areas involved.
Manufacturers should also take the opportunity to show their insurance carrier the comprehensive efforts now in place, which could possibly lead to reductions in premiums. I recently spoke at a conference co-sponsored by one large insurance company, and afterward an insurance representative approached me and said that what I was promoting was an underwriters dream. He said that he wished he knew whether new clients had such programs in place when he was quoting their premium. I hope that one day, through such an alliance with insurance companies, we would be able to “certify” companies in the area of “Product Liability Prevention”, much like what we already do in Quality Assurance with the ISO 9000 and other standards.
Product Liability Prevention is the next dimension in Quality.
Randall Goodden is the author of Product Liability Prevention – A Strategic Guide (Quality Press, 2000) and Preventing & Handling Product Liability, (Marcel Dekker Publishers, 1995). He has had numerous articles published in the leading Corporate, professional and legal magazines, and is a featured speaker at conferences and universities around the world. You can order Randall's latest book through Quality Press. For more information visit Randall Goodden's web site at http://RLGoodden.tripod.com .
Many more articles in Corporate Boards in The CEO Refresher Archives