Product Liability and How to Hedge Your Risks When Private Labeling from China

There’s one important thing importers may overlook- you, as the importer, are responsible for all aspects of your products. This includes ensuring that they meet any special regulations and, more importantly, that you are responsible for any product liability issues.

This last point shouldn’t be taken lightly. Imagine someone, let’s say her name is Sally, is using one of the horse saddles that you imported from Shanghai Fine Saddles Inc. when it suddenly disintegrates. This person falls off the horse and as a result breaks their neck.  Guess who Sally’s lawyer is filing the $10 million lawsuit against?

I should pre-face this article by saying that I am in absolutely no way a legal expert, but I've paid lots and I'm merely passing down knowledge I've paid for over the years. For product liability, it's of course very product-specific and impossible to give broad sweeping advice.

What are You Liable For?

You can be held liable in three cases for your products:

• There's a manufacturing defect in your product
• There's a design defect in your product
• You failed to warn the consumer about dangers of a product (re: product labeling)

A manufacturing defect means there's nothing inherently wrong with the bicycles you're importing, but someone at the factory forgot to attach the brakes. A design defect, on the other hand, would be in the case of the hover boards which kept catching fire. You're liable in each case so the difference in semantics isn't really applicable. However, as a matter of practicality, if you're private labeling an item which is more or less a duplicate/copy of an existing item that has been sold for years, the chances of a design defect is less than having a mechanical defect.

The third type of potential liability (and arguably the easiest to avoid) is product labeling and the failure to warn consumers about the non-obvious dangers resulting from the normal intended use of a product. In the case of a hair dryer it normally contains a “Keep away from water” warning label as the intended use will often be near water (in the bathroom) and it may not be obvious to everyone the electrocution danger from doing so. Your television likely won't contain such a label as the intended normal use is not in situations subject to water exposure. Intended and common use is an interesting caveat as the consumer and not the manufacturer decides this. Producers of mouth wash know that many people have been known to drink it to get drunk and subsequently Listerine and other washes almost always have warnings about drinking it, even though it was never intended to be a replacement for gin and tonic.

What Are You Not Liable For?

In a hyper-litigious world that we live in, there may not be much that you can't potentially be liable for. However, there's some broad areas where you're unlikely to be found liable:

• Uncommon and unintended uses of products
• Common knowledge of product dangers

You don't need to warn about every possible idiotic use of a product. There's no need to warn about the dangers of filing your nails in a food blender's rotating blades. This isn't normal use and it's in no way marketed as a manicure device.  When there's common knowledge about the inherent dangers of a product, there's no need to have a warning about it. Knives would fit this example- there's no need for knife manufacturers to put labels on every knife warning that they are sharp and can cut you. Of course, as anyone who has ever purchased a coffee warning that the coffee is hot knows, there's a tendency for manufacturers to make the assumption that humanity is a lost cause with no common sense. From a legal standpoint, making a similar assumption yourself may not be a terrible idea.

Ways to Guard Against Product Manufacturing and Design Defect Liability

There's a number of easy and inexpensive ways to limit the potential for defects in your products. The strategies below can be used by both the person importing a few hundred dollars worth of products and the person importing a few hundred thousand dollars worth of product.

• Avoid inherently dangerous products
• Vigilantly use warning labels on your products and mimic your competitors
• Identify the material that every important part of component must be made of
• Rigorously use third party inspections
• Ask to be added to a Supplier's insurance policy
• Look for ISO certification

The simplest way to hedge your risks against any product liability is to avoid inherently dangerous products. Simple, low complexity products with little risk of personal injury from use are accurate descriptors for such products. Dining room tables and car seat covers are great examples of products with limited product liability. The infamous hover boards and the product liability fiasco that followed was an example of a product that was inherently dangerous and extremely complex. A perfect storm for product liability.

You should vigilantly be labeling your products (most Suppliers will be happy to apply warning labels free of charge). The best way to determine what warning labels you should have applied is to research your competitors' products. Try to find PDF copies of their instruction manuals which will almost always have a list of warnings at the end and use these (you want these warnings to be ON your product though, not just in the instructions). If that fails, go to a store that sells a similar product to the one you want to import, inspect the product, and snap pictures of the warning labels.

While mechanical defects are more common with private label products than design defects, the former often occurs when Suppliers look to cut corners and save money, often by using lower quality materials. Suppliers often take the tact that if the importer doesn't specify something, then it's open for interpretation, i.e. they can mild steel screws, subject to rusting, instead of stainless steel screws. Any critical component you can identify, clearly specify as much as possible the material and get your Supplier to agree to it.

You should also be rigorously using a third party inspection like AsiaInspection. These inspections are cheap, about $300 per inspection, and they can test your products in China for you before you've paid your final deposit. The more you can specify exactly what you want done the better (i.e. inspect the 8 screws on the dining room table to ensure they are firmly fastened as shown in Diagram 3a). However, AsiaInspection has an abundance of default tests you can select from in their online interface, many of which you would have never even thought of.

You can also ask to be added to your Supplier's global product liability insurance as an insuree. The catch? Many Suppliers don't have such insurance. If they do, many are surprisingly happy to add you to their policy though.

Finally, you can look for ISO certification. ISO 9000 certification is at its heart a quality control system and basically a set of systems and procedures. If you're familiar with PCI compliance, ISO certification is like this but on steroids (and with actual audits).

Do You Need Product Liability Insurance?

You can purchase product liability insurance which will protect you to a certain extent against product liability claims but it is very expensive. For one of our recent insurance plans we paid around $5000 per year for $1 million liability with a $10,000 deductible. Lower risk products may pay closer to half of this. For many people just starting out, this cost simply isn't affordable and in my experience the vast majority of private labelers do not have insurance. So at what point should you consider purchasing liability insurance?

If you run a sole proprietorship opposed to a limited liability company, your first priority should definitely be to form a limited liability company  before purchasing liability insurance. If you do not, a product liability claim could result in personal bankruptcy for you which would be very bad.

For many people, the best time to get liability insurance is when a vendor requires it. Technically, if you're a professional seller on Amazon you need liability insurance for up to $1 million coverage (AMZ Product Liability and Veracity are two companies to look at). As I mentioned though, the vast majority do not have this insurance and I've never heard a case of Amazon asking for proof of insurance.  If you're wholesaling your items to any major vendors such as Walmart, Home Depot, etc. they'll likely ask to see proof of insurance.

Many small businesses choose not to purchase liability insurance under the pretext that the risk of a product liability claim is relatively low and if such a claim were to happen, it's easier and cheaper to shut down their company and start fresh. Many small businesses could simply not survive the impact of a (god forbid) personal injury or death resulting from their product. For large companies like the automakers, product liability claims are a relatively routine occurrence and a cost of doing business and they certainly need insurance.

Product liability insurance may be something you can forego for quite some time in your business. However, keep in mind there's a bit of a moral dilemma here. Not having the ability to financially compensate a victim of one of your products could be considered irresponsible.

Conclusion

We as importers have a responsibility to make sure our products are as safe for consumers as possible. Taking simple steps such as ensuring adequate labeling for your products, employing third party inspectors, and not importing inherently dangerous products are relatively easy steps to significantly reduce the potential for damages and injuries resulting from your products.

Do you employ any quality control testing with your products? Do you have product liability insurance? Or do you simply have any questions regarding product liability? If so, post your comments below.