Magazine article Risk Management

Product Liability: Minimizing Manufacturers' Exposure to Corporate Criminal Liability

Magazine article Risk Management

Product Liability: Minimizing Manufacturers' Exposure to Corporate Criminal Liability

Article excerpt

Minimizing Manufacturers" Exposure to Corporate Criminal Liability

Corporate responsibility is a growing topic of debate in courtrooms, and recent events are pushing U.S. legislators to establish laws that determine and govern corporate criminalization. (See sidebar, p. 32.) The manufacture and distribution of defective products may soon become criminal activities, and the corporate officers and directors whose companies make the defective products could become the criminals.

The Ford/Firestone tire debacle and the resulting media scrutiny brought the issue of corporate accountability to the forefront of public debate (for a detailed analysis, see "The Power of Public Opinion," RM, May 2001). Thus far, the only federal legislation to be considered imposes criminal penalties against motor vehicle manufacturers for noncompliance with product defect reporting requirements. This kind of legislation, however, could quickly expand.

Loss Prevention Should Be Business Specific

Product manufacturers have typically dealt with the risks associated with their products in one of two ways: (1) through assumption of those risks (i.e., calculating sufficient company funds to cover any economic loss resulting from the product); or (2) by transferring the risk to another party (e.g., an insurer). >

The means of dealing with risk, however, should do more than protect a company's bottom line. To minimize the risk of criminal prosecution, product manufacturers should be able to demonstrate that they have made sufficient efforts to (1) identify the risks associated with a particular product; and (2) reduce the risk that someone will be injured when using that product.

A manufacturing business is responsible for a product from its conception to the time it lands in the users' hands. An effective loss prevention policy requires that the designer take all of the following into account:

* How the product will be used and how it can be misused

* Types of injuries the product may cause

* Possible alternative designs

* All necessary testing

* Materials to be used in the manufacturing process

*Warnings that should be incorporated into or with the product

* Information that should be included in the product literature and in the instruction manual

Steps to Prevent Criminal Liability

Because there are so many loss prevention requirements to track, the following set of rules will help you guide your organization through the maze of both civil and criminal liability:

Document the design process. Manufacturers must provide employees with the necessary framework for properly documenting all the steps involved in product development activities and decisions. Nearly all documents concerning the research and development of a product are discoverable in a civil or criminal trial and may be reviewed by a jury in a civil lawsuit or in a criminal case. A properly documented product file will therefore greatly reduce a company's potential exposure to civil or criminal prosecution.

With this in mind, product development files should be created with the assistance of the company's general counsel or an experienced outside firm to demonstrate that all product safety issues were considered and addressed in the design process. Through this approach, a company can demonstrate that it has a careful and thoughtful approach when introducing its products to the marketplace, thus reducing the risk of criminal charges against corporate management.

Quality assurance. The recognized quality assurance standard is ISO 9000. By implementing this standard (with its mandatory documentation requirements) into the manufacturing process, a manufacturer will have gone a long way toward reducing manufacturing defects and effectively reducing the risk of loss. The ISO 9000 documentation requirements also provide focus for initiating a product development documentation program. …

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