Small-medium businesses and defective product: how to be protected againts a claim.

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Toys, automotive, cosmetics, jewelery. Even in Europe, these are the production areas most affected by claims for compensation. Not only the large corporates, but also the small and medium-sized enterprises face sudden and costly recall campaigns due to their defective products. SMEs are not always aware of the risks they face, therefore they are more vulnerable.

In case of request of damage from defective product, how to defend themselves?

Victoria’s Secret, a world-renowned brand, has faced considerable expense when recalling more than 275,000 smartphone cases designed and sold with their own logo on the American, Canadian and Mexican markets . The irritating content spilt by some faulty plastic gaskets and caused dozens of skin irritations and burns.

An other example, is the fire at Grenfell Tower, west London, that killed 79 people and completely destroyed the residential tower block. It seems to have been caused by a defective refrigerator produced by the corporate Whirpool.

A possible explanation for the cause of the fire, is that the device burst into flames due to the malfunction of the compressor. The type of household appliance involved was produced from 2006 to 2009 and 64,000 products were sold worldwide.

The Company is still committed to tackling an other expensive withdrawal campaign of 3,500 dryers whose possible malfunction could cause injuries and further damage to consumers.

Takata, a leading airbag manufacturer for the top automakers, was responsible for the death and injury of many drivers of vehicles in which their own safety systems were installed.

Due to the high cost of repairing millions of the defected vehicles involved and the compensation of family members of the victims, the Japanese giant recently declared bankruptcy.

Which are the most dangerous products placed on the European market?

Only one case from 2016, is when Rapex, the computer platform through which the European Commission warns consumers at the instance of individual countries, denounced the malfunction and hazards of 2,044 products. According to the research: toys, automotive, cosmetics and jewelery are the most affected sectors of the market. 10% of the products reported were of extracommunity origin and sold online.

Which producers are legally responsible in Europe?

Due to the high number of non-standard manufactured articles being distributed in the market, the European legislation is very stringent.

The manufacturer is liable for damage caused by a defect in the product.

The law, in short, assumes this specific responsibility:

  1. to the manufacturer of the finished product;
  2. to the company who produces the raw material or a component thereof;
  3. to anyone who puts their own name, brand, distinctive sign, presenting themselves as producer of the goods.

Alongside the manufacturer, the importing distributing company of the defective goods is responsible for the damage caused by the production, marketing and/or sale of the defective product within the European Community.

How can we protect our business from a request of compensation regarding a defective product?

It should be noted that a claim for damages may arise not only from the single-end consumer, but also from the same large company to which we have sold our defective or non-conformed component / semi-processed parts.

Competitors may take advantage of this moment of weakness: a sudden request of compensation, especially being emphasised by the media could compromise reputation and consumer confidence.

For this reason, small and medium-sized enterprises should not be found unprepared.

Large corporations, are in fact prepared to face a large request of compensation on multiple levels. They use up-to-date measures to prevent and control the quality of their artifacts. In case of claim, they can count on the professional support of leading international risk managers and law firms.

From the insurance perspective, multinational companies are asking their suppliers and business partners – for compliance reasons – to produce their insurance certificate in order to prove their sufficient level of coverage against defective product risk.

Large businesses are the first to buy insurance limits for several millions of dollars. They are well aware that a costly claim may include:

  1. damage to consumers;
  2. legal fees;
  3. product recall;
  4. advertising campaigns to protect reputation and brand in media

For this reason, it is necessary to invest not only in research, but also in prevention and in the purchase of reasonable high insurance limits against Product Liability risk.

3 suggestions about how to prevent and address a claim for damages

  1. Checking our Suppliers’ Components

Resellers, distributors and manufacturing companies selling products manufactured with components produced by their partners should always carry out a careful research on the quality product and keep trace of the origin of every single component.

This is the case where the final consumer of our product addresses our company, complaining the malfunction of a component made by a third-party supplier.

Let’s indicate the above with an actual case.

A very famous German bicycle manufacturer has just launched a recall campaign for its own racing articles due to a manufacturing defect: a carbon fork manufactured by an external supplier.

The company have warned their consumers to stop using the bikes affected by that specific model of forks and suggested to return the bicycle to the dealer for reparation.

  1. Labeling

European legislation regulates the effective legibility of the use of products.

For example, in the cosmetics and childcare sector, it is suggested to highlight the presence of possible allergens.

Within the mechanical industry, the manufacturer is required to provide not only the user manual but also the technical hand book.

In the food sector, it is advisable to inform the consumer about ingredients that may cause intolerance disorders.

We quote another recent case.

Tesco, upon request of local authorities, immediately removed from its shelves a considerable number of defective products: one of its suppliers did not clearly indicate on the label the presence of milk and barley in their foods. Consumers were asked not to consume but to return the product to the supermarket where it was purchased.

  1. Buying Product Liability insurance

It is suggested to buy Product Liability insurance which may protect our firm by a request of compensation caused by our defective products.

Defective product insurance in general covers:

  1. death
  2. personal injury to third parties
  3. damage to third party goods and materials
  4. destruction or deterioration of things other than defective product
  5. damages resulting from interruption or suspension of activities.

The costs of recall, replacement and possible disposal of defective product may not always be covered by Product Liability insurance.

It is therefore very important to check whether even the indirect costs such as business volume losses, damaged business image and legal expenses coverage are included in our Product Liability cover or may be purchased separately.

Some insurance companies require the purchase of additional coverage against these above mentioned risks.

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