11/9/2012

Who’s at Fault When a Product Fails?

Whether it’s the news of a salmonella outbreak traced back to a peanut farm in New Mexico or the frightening correlation between a steroid injection linked to stroke and a particular kind of meningitis, recalls are everywhere. How do you determine liability?

By Mary Anne Medina

Recalls of products that are and have been on the market are an occurrence about which we hear with regularity. In the last several months, there has been an increase in the reports of recalls and alleged problems—sometimes even death—as a result of products made available to the public. 

Whether it’s the news of a salmonella outbreak traced back to a peanut farm in New Mexico or the frightening correlation between a steroid injection linked to stroke and a particular kind of meningitis, recalls are everywhere. Other instances include Fisher-Price, which recalled its baby video monitors due to babies becoming wrapped in the cords and strangling, as well as the “Monster” energy drinks, which are allegedly linked to the deaths of several teenagers who consumed multiple cans in a short period of time.

These recalls, complaints, and allegations about products are in our news and published for the public to review on agency websites like the Consumer Products Safety Commission (CPSC), the Food and Drug Administration (FDA), and others.                                                                                                                             

When a product is recalled, who is liable for the damages that have or will be caused by it? The duty owed by those companies that produce or manufacture goods is to provide a product that is safe when used for the purpose that it was intended. In the U.S., we have come a long way in the inspection of products and the restrictions and requirements thereof. We also have progressed in our processes to hold those responsible, or liable, for damages that may be caused by unsafe products. Not only can the manufacturer be held liable, but also the distributor, salesperson, retailer, and others for a breach in the duty owed to produce a safe product.

The rapid increase in product liability cases is often said to be in direct correlation with the increased awareness of the responsibility to protect the consumer. Product recalls are also to protect the manufacturer and others involved in an effort to limit the liability exposure. While product recalls may be costly to a company, they are less costly than the potential lawsuits and penalties that may be imposed for the failure to recall a product.

In times past, the law was caveat emptor, or “Let the buyer beware.” But in the present day, the law has changed to strict liability. When the law of strict liability is applied, it makes the seller responsible for all of the defective products that threaten the safety of consumers.

Who Is Liable?

Let’s examine the injectable steroid recall and take a look at who could potentially be held liable.

As of Oct. 16, 2012, the CDC has reported 297 cases of fungal meningitis in 16 states, including 23 deaths that may be associated with the recall of the steroid injections. (The CDC predicts these numbers to rise.) The CDC and the FDA recommended the complete recall of all drugs that were produced by the New England Compounding Center known as the NECC, which is located in Farmington, Mass.

Fungal meningitis is a type of meningitis that, in this case, is caused by the aspergillius mold, which is a common mold that somehow got into the vials of injections and tainted them. In similar outbreaks in the past, experts in mycology (the study of fungi) have stated that “In the absence of sterility and in an environment of highly concentrated steroids, fungi grow aggressively.” Not everyone who received the injections has been harmed. This particular type of meningitis affects the elderly or those with a compromised immune system.

The duty owed by the manufacturer is to provide a product that is safe and effective and that the method for the production of the drug ensures that the quality-controlled environment is sufficient enough to provide the purity and quality of the drug.

If it is determined that the duty owed was not met, then the manufacturer can indeed be deemed liable. But who else may be deemed liable? It is only when the physicians or those using the product do not heed the warning in the case of the injectable steroids manufactured by the NECC. It is only when the physician or those distributing or selling the products do not comply with the rules of the FDA that they could potentially become liable.

What Are the Damages?

Determining damages in a products liability case is often complex and, as said in the adjusting world, may have a “long tail” on it. In the peanut butter recall, 30 states were affected because the product was sold at many major retailers, including Trader Joe’s, Whole Foods, Target, Walmart, and many others. There have been more than 36 people reported ill from consuming the products, and the numbers are expected to grow.

There are over 400 products recalled from the peanut processor Sunland, Inc., located in New Mexico. The products span a variety of ice creams, peanut butter, frozen sandwiches, moon pies, and many other products containing peanut products. Sunland has now recalled everything that was made in their plant since 2010, due to the lengthy shelf life of some products.

So what are the damages and who could be liable? When a product is recalled, there are first-party damages, which are the damages to the company that manufactured the product. Those damages include, but are not limited to: the costs associated with notifying customers; actual costs to properly obtain the product back and properly dispose of it; extra personnel to handle the recall; business interruption and income loss; and damage to reputation and brand identity.

The manufacturer may also be deemed liable for damages to a third party for, but not limited to: the recall expenses to obtain and ship the product back; monetary compensation to replace or compensate those who purchased the product; cost to find replacement products; damage to reputation; loss of business; and other damages. If other companies purchased the product and manufactured it under their labels or brands, there could be additional damages claimed and liabilities determined.

You can see how these types of damages could be difficult to investigate and determine for indemnification purposes.

We cannot dismiss the magnitude of those directly harmed and for those who suffered the loss of a loved one. Perhaps one of the most difficult responsibilities of those in the claims industry is handling and settling injury and death cases. It’s only made more difficult when dealing with injuries and deaths resulting from the very medicine that was supposed to aid in health and recovery. These damages are the most difficult to assess and sometimes more costly than the manufacturer can compensate or recover from. In illness and death cases resulting from the peanut recall or any other food or product, it is just as difficult to measure damages and compensate those harmed. It is sometimes only through the courts that these types of damages can be determined and settled.

Products liability cases are complex and require experience and thorough investigation in order to determine what duty is owed and what duty is breached. The resulting damages are even more difficult to assess. Unfortunately, this is an ever-growing area of claims handling and defense litigation.  


Mary Anne Medina is an instructor and course developer for Vale Training Solutions. She has extensive experience in claims process redesign and claims handling training, with an emphasis on liability loss adjusting. She has been a CLM Fellow since 2010 and can be reached at MMedina@vale-ts.com.



Mary Anne Medina is an instructor and course developer for Vale Training Solutions. She has extensive experience in claims process redesign and claims handling training, with an emphasis on liability loss adjusting. She has been a CLM fellow since 2010 and can be reached at MMedina@vale-ts.com.

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