Product Liability Insurance is a Critical Part of Business Insurance

Since August 2007, the media has reported several instances of toys and other products, manufactured in China, being recalled because of dangerous levels of lead or other chemicals in the product.

Retailers, suppliers, wholesalers and resellers should take special notice of these stories because they illustrate a seldom understood aspect of product liability law in the United States - supplier liability. It is critical for these businesses to understand the risk and to secure proper business insurance for the risk.

To illustrate supplier liability I will use Ohio Revised Code 2307.78:

(B) A supplier of a product is subject to liability for compensatory damages based on a product liability claim ... as if it were the manufacturer of that product, if the manufacturer of that product is or would be subject to liability for compensatory damages based on a product liability... and any of the following applies:
(1) The manufacturer of that product is not subject to judicial process in this state;
(2) The claimant will be unable to enforce a judgment against the manufacturer of that product due to actual or asserted insolvency of the manufacturer ...

The law of each state is different, but most states have adopted some form of supplier liability. That is, if the person claiming damage by a product cannot sue the manufacturer because that manufacturer is not subject to being sued, cannot enforce a judgment, or the manufacturer is bankrupt, then the claimant can pursue the supplier as if it were the manufacturer.

Now, how many Chinese manufacturers are actually subject to process from a United States court and how likely is it that a claimant can enforce a judgment? Answer: None and not likely. This puts a very real risk of liability upon the supplier - the local toy store, convenience store, wholesale supplier, etcetera. Product liability insurance covers against this kind of risk.

Some of these businesses do not carry product liability insurance that insures against this type of risk. Some will carry a form of this insurance as part of a business owners' package, but it may not cover supplier liability.

If your business sells products manufactured overseas, then you will want to insure for supplier liability with a product liability policy. You will want to review your current coverage with your insurance professional and ask if you are covered for such risk.