Risky business: before a defective product becomes your downfall, learn how to protect yourself

Entrepreneur, March, 2005 by Mark Henricks

THE SEEDS of your destruction may sit on your store shelves or be used in your warehouse. Defective products that injure customers, employees, vendors or others who visit your company or buy its goods present a serious risk no entrepreneur can afford to ignore.

Such products are widespread. A November 2004 report by Consumer Reports found, for instance, 48 toys--or roughly 1 in 3 toys--its testers bought violated voluntary or mandatory safety standards.

And the financial liability for selling, using, lending or simply having unsafe products on your premises rests with you. "If they sell it, they're liable, period," says Frances Zollers, a professor in the law and public policy department of the Whitman School of Management at Syracuse University in New York One exception concerns products you are not in the business of selling. If, for example, you sell your old delivery van to another company and it causes an accident, you probably won't be liable, Zollers says.

Start managing potential liability by paying close attention to product labels, urges Jeff Blyskal, co-author of the Consumer Reports study. Underwriters Laboratory has seized more than 30 million counterfeit electrical products bearing counterfeit UL labels, Blyskal warns, so if a UL label looks odd, compare it to others. Also monitor government recalls at www.recalls.gov. Even perform your own tests for small parts, which present choking hazards for children, breakability and other risks.

Insurance products, such as product liability policies, can mitigate some risks. Workers' compensation is particularly effective because employees relinquish the right to sue when they accept workers' comp benefits. "It's much less complicated than not having it and then opening the door for legal action," says Mike Heembrock of the Chubb Group of Insurance Companies in Warren, New Jersey.

Whatever you do, be careful who you buy from and how much you pay. Avoid any product priced far below others in the market. Small companies at the ends of long distribution channels can reasonably expect that upstream firms have already checked out products. But that's true only if you deal with reputable companies. Says Zollers, "Know who you're dealing with."