Product liability protocols key to managing risk

Product liability protocols key to managing risk article image

The old wisdom of 'caveat emptor' - let the buyer beware - is giving way to a new adage: 'caveat venditor'  - let the seller beware. WARNING: 'This Superman costume will not enable you to fly'. Such a warning does not tell us that children have been jumping off roofs. What it indicates is that if a child put on his Superman cape and then launched off a roof his parents would find someone to sue. Most likely, they would take action against the cape’s manufacturer, following a host of precedents in United States courts finding manufacturers liable for failure to warn. The increase in seemingly frivolous warnings on manufactured goods reflects a changing market, where litigation is common and courts tend to rule in favour of the plaintiff. More and more frequently, victims of injury through use of a product are bringing liability suits against producers. And they’re winning. In a buyers’ market, manufacturers need to protect themselves against liability litigation. Even the most carefully researched and tested product may involve some risk, and sensible producers need a management plan in place to protect themselves, particularly as they move into overseas export markets.

Product liability

In layman’s terms, product liability is an area of business law that allows consumers injured by a purchased product to sue its manufacturer, retailer and distributor for liability. A court can determine whether the manufacturer, retailer or distributor can be held responsible for injury or damage to the plaintiff on the basis of:

  • failure to warn
  • inadequate user instructions
  • defective products.

A liability suit can be extremely costly for a business but there are ways to manage the risk and invest in adequate protection.

Product liability insurance

In case of litigation over an issue of product liability, it is wise for a corporation to have financial protection in place. Product liability litigation is often a drawn-out and extremely costly process. Even a single accusation of liability can snowball into a class action, where the company found liable has to pay legal costs as well as compensation to all parties represented by the suit. Liability insurance is an investment in protecting your brand and company from the financial penalties of product failure.

Overseas warranties

Most contracts stipulate that the seller must be able to provide a warranty bond. This requirement offers security to the buyer, so that if a product fails overseas the buyer can recover the full cost of their investment. According to the Australian Export Finance and Insurance Corporation, if an exporter cannot provide a warranty bond it is generally out of the running to secure a contract. The buyer needs to know that if the seller’s products do not meet contractual requirements, or fail after they have been on-sold, there is a reserve of money that can draw on. Banks usually require a business to have 100 percent of the value of a warranty bond before they will issue a bond on their behalf.

The Australian Export Finance and Insurance Corporation takes a more individualised approach and, if an exporter can demonstrate that their product is viable and they are selling to a trusted buyer, EFIC usually demands less security. In the rare case that an export contract is negotiated that does not require a warranty bond, it is still wise for the exporting business to have 100 percent of the value of the product in reserve. As Ross Campbell, whose company provides crisis management for businesses, believes, "something will go wrong, sometimes".

Product recalls and damaged brands

The key to maintaining your brand reputation during a product recall crisis is the efficiency of your recall and the strength of your public communication. Campbell believes that it is good business sense to plan ahead for the possibility that something might go wrong with your product. "It won’t happen that often but when it happens it can be vicious," he says. Exporters should have a ‘war chest’ of planning that can be implemented if a crisis occurs. Identify the key threats in advance, whether it is criminal tampering, product failure, a manufacturing fault or an error in information. Build benchmark communication strategies, prepared in Australia in line with local language and culture, that deal with these threats. "They can virtually be brought out and drip-fed according to the escalation process of the product recall," Campbell says. Businesses need a clear process in place that will halt production, pull products off shelves and retrieve products already sold from consumer hands.

Be prepared

In any product crisis, a business needs to communicate well with their customers. If recalling products from an export market, businesses need to be prepared to communicate with the government, regulators, retailers and the media. Campbell reminds Australian exporters that they are seven or eight hours away from even the closest export markets so businesses should have a local spokesperson trained to deal with a crisis as it breaks, in each of their markets. "Once you’ve built your risk analysis properly, you can do most of the work before it happens." He recommends having a crisis management team learn the product recall process by doing a couple of dummy runs so "they know who is going to interface with customers, they know who is going to interface with the media, who is going to talk to the regulator, they know how they want the information to flow in and out. All of that should be like clockwork because, like any good sporting team, you practise", he says. Planning for crises helps protect your market, maintain your brand reputation and business continuity. The more risk analysis and consequent planning your company has done, the better your communication will be in a time of crisis. Good communication and clear procedures will help restore public confidence in the event of a problem.

The biggest imperative

Rebuilding your brand is the biggest battle after something goes wrong. According to Campbell, it is essential for a business to have planned out how to go about rebuilding its corporate image in the wake of a crisis. The rebuilding work should begin as soon as the crisis management plan rolls out. In the case of a product recall or product liability suit a company needs to reassure its market, explain how it will manage the problem and how it will prevent similar issues in the future. There are countless examples of businesses that have never recovered from a product crisis. If you don’t want to be one of them, plan for brand recovery from the beginning and test scenarios. Campbell calls it product recall theatre. "In other words, do it. Act it out. Find the gaps. And continue to improve your plan."


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