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Product Liability

by dcap
7 replies
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Can anyone shed some light on the potential exposure for product liability (drop shipping vs. own inventory)? Whether selling on eBay, Amazon or via your website, what precautions does one take to avoid this exposure? Insurance, using an LLC, etc..???

Please advise.
#liability #product
  • Profile picture of the author Importexport
    Originally Posted by dcap View Post

    Can anyone shed some light on the potential exposure for product liability (drop shipping vs. own inventory)? Whether selling on eBay, Amazon or via your website, what precautions does one take to avoid this exposure? Insurance, using an LLC, etc..???

    Please advise.
    In either case, as the seller you are responsible for product liability claims.

    I once paid for top gun legal advice and was told that whatever disclaimers you make, or whatever insurance you have, you are still likely to end up in court if someone makes a claim and you resist.

    That advice went on to say that the best protection is asset protection. In other words, make sure you own nothing, then it can't be taken away from you. Legal costs for any defense in litigation can be crippling, so you don't fight it.

    They may bankrupt you, but with asset protection in place you can still enjoy what you have earned. It must be done correctly, and early. Seek legal advice on asset protection.
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    • Profile picture of the author OnlineStoreHelp
      Originally Posted by Importexport View Post

      In either case, as the seller you are responsible for product liability claims.

      I once ... protection.
      I am going to disagree with you quite a bit. Unless you are a private labeler, white labeler or selling a product you know can and will cause third party bodily injury and property damage (OTC cold medicines for example, or flame throwers), your legal liability is quite low. In all my years as a corporate risk manager, I have seldom (I can think of one with a large retailer where they just tossed it to my insurance company) seen a retailer get pulled into a lawsuit for product liability damages. In fact a lawyer is going to find out you are a drop shipper with no assets and not even bother, they follow the money.

      Let's assume you are a private labeler or white labeler. Look at your contract from the manufacturer and see what it says for liability due to manufacturers defect. What a Best Buy, Walmart and others do, is request a certificate of insurance from the manufacturer while being included as an "additional insured". What this means is, if they get sued, all they do is pop the lawsuit over to the manufacturers insurance company to handle the suit.

      If you were white labeling and needed to get insurance, the fact that you are whitelabelling will make your product liability insurance quite low. If you are making your own products, then this changes everything and is not being discussed here.

      So, I do agree above that competent legal advice is always the way to go, but lets look at a few ways you can protect yourself.

      Contractual Risk Transfer - This will always be the best way to protect yourself but of course as a new seller you will have limited negotiating room here. If you can get your supplier/wholesaler to add you as an additional insured, this is the way to go, but good luck with that. I doubt they will unless you again, are in a private label or white labeling agreement with them.

      While it may not keep you from ending up in court, a click through terms and conditions can help you enormously from everything from venue, to maximum damages. The key thing, make sure your cart provides the "agree to terms" functionality.

      Legal Entity that provides liability coverage: In the US that normally means Corp or LLC. What most people don't realize is LLC means Multi-member LLC. Many courts look at a single member LLC as just a sole proprieter. Make sure the other member is not your spouse, same as above, give 5 percent to your sister or brother. Do an S corp but realize there is more paperwork to the state many times.

      Make sure you get a registered agent to take service for you. If the sheriff shows up with a summons and you aren't there to accept it, well you will learn default judgement real fast. $99 a year, don't skimp.

      Insurance - Also known as Risk Financing. As a new seller you should be able to get a package policy for less than $1000 a year. This will include G/L (slip trip and fall), auto and product liability insurance in case you are worried about it.

      Mistakes can be made here to.

      "Oh I don't need auto insurance, I will just use my personal insurance. " Great, until Geico finds out you were using it for business and then says sorry, this claim is denied. Remember when your insurance company asked if you use this vehicle for business?

      "My home insurance guy says he can give me liability insurance". Great until a few things happen. You are required to provide a cert of insurance and find your insurance company is not up to snuff for GL. Or your insurance guy doesn't understand insurance and provides you a stock policy that doesn't really protect you. And Finally, if the claim happens, not only do you get cancelled on your G/L, but they cancel your home and auto policy at the same time, you are now to big a risk. Go to a broker that specializes in business policies.

      Insurance has several things that are helpful. One, it provides you some protection. Two, it gives you access to an panel attorneys you can use if you get sued. Three, you may need it anyway, like if you are doing a trade show or expo.

      Edit: I am not an attorney but I was a corporate risk manager for two Fortune 500 companies before striking out on my own...
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  • Profile picture of the author Mary Popowa
    If you sell from your own website for example eCommerce store, write your T&C and put a box that customer should mark before processing to checkout.
    For example if you selling party supplies in your T&C write "unless stated our products are not suitable for children under age of 3, children above 3 years old should be supervised by adults. We will be not responsible for any injuries while handling our products"
    If you selling skin care write something like this "please note that we (your website name or company) reseller not manufacture for our products, we will be not responsible for any allergies ...etc it may cause..."
    Write as much as possible to have zero liability for your products. If customer will mark the box and proceed to checkout it mean he/she read and agreed with your T&C prior making order.
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  • Profile picture of the author dcap
    Thanks to all. Great advice. I am a principal and partner in a successful financial services business. Unfortunately, I know all too well about the exorbitant costs and distractions of litigation. Hence, my cautious approach to any new venture and the need to mitigate potential exposure.

    Much appreciated.
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  • Profile picture of the author malia
    I am going to disagree with you quite a bit. Unless you are a private labeler, white labeler or selling a product you know can and will cause third party bodily injury and property damage (OTC cold medicines for example, or flame throwers), your legal liability is quite low.
    I am going to piggyback on this and add to this that I am not a business insurance broker or legal professional, just sharing my experience w insurance.

    If you are purely a retailer of the products of others, you should have a general liability policy. This can be as cheap as $500 and usually will top out at $1K as Online wrote. The reason being is if you are sued, you do WANT an insurance company "going to bat" for you.

    Now if you are purely a retailer, what will happen if you get sued is they will "go after" the manufacturer. They call this "pass through liability".

    If you are the manufacturer or brand, then you will pay more for your policy as you have to cover the claims because it's unlikely the insurance company will be able to go after the actual company that manufactured the product.

    If you are an importer, your product liability costs will skyrocket, especially if you import from China (sorry but true). The cost will not drop until you have had years of history w no claims. In my personal case, no importing $564, importing $2800 annual premium. Most underwriters are wary of covering small importers for product liability. STILL.

    How you can mitigate risk
    1- You can ask to be added as an additional insured to your suppliers' policies, probably wont happen
    2- You can ask for proof of their liability policy (insurance certificates), common request
    3- Use a business structure that shields your personal assets
    4- If you are importing, use lot and serial numbers to track products (if possible)
    5- Avoid products w a track record of liability issues (look at what gets recalled)

    Any website or packaging disclaimers are absolutely useless, because you cannot "disclaim away" someone's legal rights. Popowa is wrong, you don't get to re-write law via your company policy.
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    • Profile picture of the author Mary Popowa
      Originally Posted by malia View Post

      I am going to piggyback on this and add to this that I am not a business insurance broker or legal professional, just sharing my experience w insurance.
      We all here sharing our experiences, in my 8+ years of selling online through my own eCommerce store: people never read T&C, the only people want ever to go after you if they know that you'r a wealthy business owner in that case you probably have lawyers to protect yourself, if not you'r not professional. You have to protect yourself before even opening anything at all and I cant stress enough about it.
      What I can say for sure if you write in your product description "made in China" people will not expect hight quality, however now everything made in China, Barby dolls for example...would you even try to go legally after them and ask what kind of plastics they using? NO, because they write all composition on the packaging box plus its a hazardous toy and not suitable for small children.
      They already say everything on the box, its up to you. Cristian Dior has a factory in China, will you go legally after them because of that? NO, they honestly write on the label "Made in China".
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  • Profile picture of the author malia
    You have to protect yourself before even opening anything at all and I cant stress enough about it.
    And I stand by my statement. You can put whatever you want in your T&C, if someone decides to take legal action, or report to a governing authority, your T&C does not supersede the consumer's rights.


    Years ago I was the founding plaintiff in a very large class action lawsuit against a very large wireless carrier that printed in their T&C a change to the definition of "nights and weekends". This was at a time when unlimited calling anytime was not in favor.

    Nonetheless, the company printed this T&C and would not modify my contract when I challenged it. This led to a very large lawsuit that dragged on for years and in the end of it, this company paid out over $80 mil.

    Now I'm not saying that anyone will get sued like that but the reality is that there were governing rules that superseded whatever the company put in their T&C and thus it was not in compliance with regulation and they had to settle.

    There are a myraid of legal entities covering internet transactions. In my state, California, it can fall under the office of the attorney general or a number of other organizations depending upon the industry. In addition it falls under mail order law and FEDERAL interstate commerce law.

    I have witnessed, time and time again, the mom and pop internet operator flagrantly violate laws that they don't even know exist. For example, do you know that in California a gift certificate cannot expire? I wonder how many other states have this law.

    All I can say is write whatever you want. It doesn't supersede law. And if someone thinks because they have a "click to agree" T&C that they are COVERED they are truly mistaken.

    Know what the risks are. Also, thinking that only people with deep pockets get sued is utter and complete BS.

    Small claims court shows us otherwise.
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