How Can a Manufacturer Prevent a Product Liability Claim

[WizKid22]

My question involves business law in the USA (All states), regarding Commercial Liability

I'm a professional engineer and the sole owner of an incorporated design services company. I have errors and omissions liability insurance, however my policy does not cover making, installing and/or selling a product.

I recently invented a small device that I'm using in a vintage automobile that I race as a hobby. The device works exceptionally well and some of the fellows at the track are quite interested in purchasing this device. I contacted the insurance company that provides my E&O policy, and as soon as I told them this device is used in an automobile they stated that it would be very expensive to get insurance.

If I were to sell this device, the quantity and total sales would not amount to very much I'm guessing perhaps a few hundred at most @ $100 = $50k tops and likely a lot less. As a hobby racer we use a lot of after-market performance parts and they usually come with a disclaimer that states for off road use only, use at your own risk. I would have a lawyer draft a similar disclaimer if there is any advantage.

IMO, the device is completely safe, I'm not concerned about the device failing and causing problems, I just don't want exposure if some unscrupulous person does decides this is a quick way to a healthy payout.

So is it possible to write a disclaimer that would actually provide a reasonable level of protection?

If not, are there insurance companies that cater to small business situations as described above that can provide coverage for a reasonable amount considering the low volume and very limited revenue this would generate?

Thank you in advance for your advice.

[Disagreeable]

If you plan on producing and marketing the device, I suggest you patent it and sell the patent rights to a separate company in which you own a 100% interest.

[adjusterjack]

So is it possible to write a disclaimer that would actually provide a reasonable level of protection?

No.

All the disclaimers in the world won't protect you if a defect in your product injures somebody.

If not, are there insurance companies that cater to small business situations as described above that can provide coverage for a reasonable amount considering the low volume and very limited revenue this would generate?

No.

It's the low volume that carries the highest risk.

I don't know where you have your E&O coverage, maybe it's low cost through an association or industry program, but getting into manufacturing is a whole different ballgame, especially with high risk products.

You might not be concerned but the insurance business works on statistics and can point to numbers of claims for particular types of products. Automobile performance products that are defective kill people. That's why the rates are high.

Find yourself a large independent insurance agent or broker that has access to many insurance companies on the standard and non-standard markets and see what they can come up with.

Either be willing to pay for the insurance or sell the patent to a company that's already in the performance manufacturing business where absorbing your product won't affect their insurance too much.

[WizKid22]

Thank you for your comments.

I'm located in Canada, my insurance company tells me they can provide commercial liability insurance for product sold in Canada for a reasonable premium (because us Canucks are less litigiousness), however I need to exclude the USA. I will look into this option.

I'm not sure what steps are necessary to prevent use of the device south of the border? If I state only for use in Canada and only ship to a Canadian address is that sufficient?
Perhaps if I sell enough in Canada, some entrepreneur will want to purchase the rights to manufacturer and sell the product in the USA?

- - - Updated - - -

If you plan on producing and marketing the device, I suggest you patent it and sell the patent rights to a separate company in which you own a 100% interest.

How would this protect me?

[adjusterjack]

I'm located in Canada, my insurance company tells me they can provide commercial liability insurance for product sold in Canada for a reasonable premium (because us Canucks are less litigiousness), however I need to exclude the USA. I will look into this option.

I'm not sure what steps are necessary to prevent use of the device south of the border?

There aren't any steps that will prevent use of the device south of the border. Someone will undoubtedly buy it in Canada and use it in the US.

If I state only for use in Canada and only ship to a Canadian address is that sufficient?

Maybe sufficient to get you low cost insurance but won't do anything to prevent a products liability lawsuit from the US. Since that where the highest risk is, that's where you'll most likely get sued from and you won't have coverage.

Perhaps if I sell enough in Canada, some entrepreneur will want to purchase the rights to manufacturer and sell the product in the USA?

Still won't prevent somebody buying your product in Canada and using it in the US.

[WizKid22]

Okay,

What if (worst case):

I incorporate a new business, sell the product through that corporation. No liability insurance for this corporation.
The corporation will have limited assets, pay the money out as dividends as it comes in.
Someone purchases the device, ignores the disclaimer, installs it incorrectly in there new Cadillac, drives it on the highway and crashes as a result, causing harm.
Company goes bankrupt as a result of the claim.
Can they pursue me (personally) for damages?

[adjusterjack]

Okay,

What if (worst case):

I incorporate a new business, sell the product through that corporation. No liability insurance for this corporation.
The corporation will have limited assets, pay the money out as dividends as it comes in.
Someone purchases the device, ignores the disclaimer, installs it incorrectly in there new Cadillac, drives it on the highway and crashes as a result, causing harm.
Company goes bankrupt as a result of the claim.
Can they pursue me (personally) for damages?

Yes.

And they could be successful at it.

See "piercing the corporate veil."

http://www.expertlaw.com/library/bus...rate_veil.html

[WizKid22]

Yes.

And they could be successful at it.

See "piercing the corporate veil."

http://www.expertlaw.com/library/bus...rate_veil.html

So it sounds like incorporating gives no protection to the shareholders unless the company is a public company?

[adjusterjack]

So it sounds like incorporating gives no protection to the shareholders unless the company is a public company?

Incorporating does give considerable protection to shareholders unless the corporation is an obvious sham.

This is an obvious sham:

I incorporate a new business, sell the product through that corporation. No liability insurance for this corporation.
The corporation will have limited assets, pay the money out as dividends as it comes in.
Someone purchases the device, ignores the disclaimer, installs it incorrectly in there new Cadillac, drives it on the highway and crashes as a result, causing harm.
Company goes bankrupt as a result of the claim.

"Piercing the veil" is also possible with a public company, just not as likely.

[WizKid22]

I respectfully disagree about the sham aspect, I stated a "worst case scenario":
The user used the device in a manner that it was not intended to be used in: on a highway in a regular automobile and incorrectly installed.
The product documentation states explicitly: for Off road use only, not for used on a public highway and to be installed by a qualified mechanic.
With this logic, one could argue that if I purchase a hammer and then smack myself in the head with it that the company that sold me the hammer is liable?

I'm not trying to be flippant, I'm trying to understand the true liability of selling a well engineered product that in all likelihood would have a minuscule risk of causing any problems if the consumer used it as intended.