Product Liability Risks and Strategies

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1 Steel Founders Society of America Product Liability Risks and Strategies September 10, 2013 Gordon (Chip) Davenport Theresa A. Nickels FOLEY & LARDNER LLP 150 East Gilman Street Madison, WI Attorney Advertising Prior results do not guarantee a similar outcome Models used are not clients but may be representative of clients 321 N. Clark Street, Suite 2800, Chicago, IL

2 Who We Are Foley & Lardner LLP National law firm, offices across the country Began in Wisconsin, long history of representing manufacturers Leader in assisting clients with legal needs for Next Generation Manufacturing Gordon (Chip) Davenport Chair, Insurance and Reinsurance Litigation Practice Group Practicing 30 years Insurance litigation, commercial litigation, product liability litigation, class actions

3 Who We Are (cont.) Theresa A. Nickels Member, Insurance and Reinsurance Litigation, Distribution and Franchise Practice Groups Practicing i 8 years Insurance litigation, product liability litigation, distribution litigation, commercial litigation

4 What We Are Going To Do Today Talk about product liability risks, and strategies for managing them Series of scenarios Each scenario will pose a question You make the call! Prizes!

5 YOU MAKE THE CALL

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8 Scenario No. 1: Casting To The Customer s Design You cast impellers for large industrial pumps Customer provides the design Your casting is perfect Impeller fails, destroying the pump Customer has to replace the pump under warranty Cause of failure is improper design Are you liable?

9 Scenario No. 2: Casting to the Customer s Design Part 2 You cast casings for the industrial pumps Customer provides the design, but asks you to add welded lifting rings Lifting ring weld breaks, customer s employee is injured Cause of failure is defective weld Employee poyeesuesyou you Are you liable?

10 Scenario No. 3: Casting To The Customer s Design Part 3 Same impeller for industrial pumps Customer provides the design Your salesperson proposes p design and engineering g services to check the design Customer declines, says just tell me if you see anything obviously a problem, salesperson says okay. No design services included in contract Impeller fails, destroying the pumpp Customer has to replace the pump under warranty Cause of failure is improper design Are you liable?

11 Scenario No. 4: Casting To Your Design Same impeller for industrial pumps Customer hires you to propose improved design, then cast it You propose new design, customer s engineers approve it Impeller fails, destroying the pump Customer sues, claiming design was defective. You disagree. You believe the failure was caused by misaligned shaft Are you liable?

12 Lessons Learned No design involvement = your liability exposure is limited to your casting Any design involvement = potential liability for design defects

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14 Scenario No. 5: Insurance Coverage You cast a component part for John Deere combines John Deere does a production run of 100 combines incorporating the part Before the combines ship, it is determined that the part is defective John Deere has to replace the part in all 100 combines, which requires extensive disassembly and reassembly John Deere sues you for costs of doing the replacements You have typical general liability insurance policy Are you covered?

15 Scenario No. 6: Insurance Coverage Part 2 You offer design and engineering services You are hired to design a new and improved impeller for a customer s industrial pumpsp Impeller fails, destroying the pump Cause of failure is defective design Customer replaces pump under warranty, sues you You have typical general liability insurance policy Are you covered?

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17 Scenario No. 7: Insurance Coverage Part 3 You store a customer s s tooling Your contract with the customer requires them to maintain insurance coverage on the tooling Your employee accidentally runs a forklift into the tooling, damaging git beyond repair The damage is covered by the customer s insurance Are you in the clear?

18 Lessons Learned General liability insurance only covers you when your product causes injury to a person or damage to other property Does not cover your product itself Standard general liability policies may not cover design and engineering services May need professional services endorsement, or separate professional services policy Consider waiver of subrogation provision in customer contracts

19 Scenario No. 8: Insurance Coverage Bonus Question You cast a component part for John Deere combines Part fails, combine is damaged and knocked out of service Farmer gets a lawyer, who files a class action against John Deere and you Your casting was perfect, failure was not your fault But you have to defend the lawsuit You have a general liability insurance policy with a $100,000 retention, so the first $100,000 of defense costs are on you How can you avoid this situation?

20 Scenario No. 9: Strategies to Manage Product Liability Exposure You cast casings for large industrial pumps Customer provides the design, but asks you to add welded lifting rings Lifting ring weld breaks, causing injury to customer s employee Cause of failure is disputed, either defective weld or improper handling Employee sues you Your contract with customer contains clause stating that customer holds supplier harmless from damages Are you liable?

21 Indemnification Provisions i Be specific as to what is covered Example: Customer agrees to indemnify and defend supplier against any and all claims, lawsuits, or causes of action by any third party relating to products or services provided by supplier, including all costs of defense, unless negligence or other legal fault of the supplier is established by a judgment or other final adjudication in a court of law Vague language g will just buy you a fight

22 Indemnification Provisions i (cont.) One sided v. mutual Mutual: Customer and supplier shall indemnify and defend each other against any and all claims, lawsuits and causes of action, including defense costs, related to the indemnifying party s performance or failure to perform under this Contract One-sided: Only to customer or supplier s benefit

23 Indemnification Provisions i (cont.) Enforceability issues Indemnity provision should be conspicuous If provision inures to your benefit, consider having customer initial next to provision

24 Scenario No. 10: Strategies to Manage Product Liability Exposure Part 2 Customer sends out RFP for casting of impellers for large industrial pumps Customer provides the design, but requires you to review and approve it Your RFP response contains terms and conditions, including hold harmless provision in your favor as to the design Customer responds with purchase order, ode, with terms and conditions on back side which do not include hold harmless provision

25 Scenario No. 10: Strategies to Manage Product Liability Exposure Part 2 (cont.) Your casting is perfect Impeller fails, destroying the pump Cause of failure is improper design Customer has to replace the pump under warranty Are you liable?

26 Scenario No. 11: Strategies to Manage Product Liability Exposure Part 3 You design and cast a component part for John Deere combines Your order acknowledgment states all warranties are excluded Your part fails Customer claims you breached the implied warranty of merchantability Does your disclaimer defeat the customer s claim?

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28 Scenario No. 12: Strategies to Manage Product Liability Exposure Part 4 You cast component for overhead crane Customer uses crane in its manufacturing operations Your component fails, causing crane to fail When crane fails, item it was lifting falls and is destroyed Customer s s operations o are shut down for aweek because crane is out of service

29 Scenario No. 12: Strategies to Manage Product Liability Exposure Part 4 (cont.) Your contract with the customer is silent as to what damages are recoverable Are you liable for: (1) damage to crane; ;(2) the item that was dropped; (3) lost profits suffered by manufacturer because operations shut down for a week?

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31 Scenario No. 13: Strategies to Manage Product Liability Exposure Part 5 (cont.) You cast a component for circular saws sold to consumers Your contract with the circular saw manufacturer properly disclaims all warranties Your part fails, consumer severely injures hand Do warranty disclaimers prevent claim against you by consumer?

32 Lessons Learned Indemnification Must be clear as to what claims are covered Should be conspicuous If possible (depending on bargaining power) draft provision to your benefit only. Second best is mutual. Worst is customer s s benefit only.

33 Lessons Learned (cont.) Battle of the forms Make sure your purchase documents say you do not accept contrary terms. If customer sends an acknowledgment or other document containing any terms, send the document back with a clear notation that you do not consent to the terms contained in the acknowledgment and the terms in prior document control.

34 Lessons Learned (cont.) Disclaimer of warranties Warranty disclaimers require specific language (e.g. must mention the word merchantability ) in order to be enforceable. Disclaimer language must be conspicuous. Add bolding and/or underlining and use bigger font. Limitation of remedies Consider a provision stating that neither party is responsible for consequential damages or lost profits. Consider a provision stating that customer s remedy is limited to repair or replacement of defective part.

35 Lessons Learned (cont.) Consumer claims Best way to protect yourself from consumer claims is with indemnification provisions and insurance.