Product liability awards continue to swell in the U.S., creating a lack of capacity in the insurance market that has led to escalating insurance costs and extremely strict underwriting standards. Businesses are responding by developing business-specific loss prevention activities that go far beyond ensuring product quality. "It's important to recognize that loss prevention must be utilized in all aspects of a business because a failure to appreciate the need to prevent losses has the potential to cause a business disastrous economic loss," says Mark B. Seiger, an attorney with Edwards Angell Palmer & Dodge in Hartford, Connecticut.

Manufacturers must be concerned with everything from the adequacy of product design to how the end user actually uses the product. The key to minimizing risks in all of the factors relating to product design, engineering, and use is properly documenting how the business has considered each factor -- documentation that can stand up to scrutiny by a jury in the event of a civil lawsuit.

Leading manufacturers have good quality programs and product design efforts in place and meet ISO 9000 standards, which require mandatory documentation requirements within the manufacturing process, thus reducing the risk of loss. But product liability experts say that this is just the tip of the iceberg.

Randall Goodden, a consultant who conducts seminars in product liability prevention, sees the need for a corporate administrative team of three key people and proposes that the CFO be one of them. "Although the CFO isn't going to know the technical product, I see this individual as the intermediary with the insurance company for setting up local insurance representation and counsel when claims surface in different parts of the country," he says.

Goodden advises management teams to focus on the following areas:

• Contracts/Agreements: Does the company have sound contracts and agreements in place to help limit potential product liability exposure? These could be between the company and its suppliers, dealers, manufacturing reps, service companies, or customers. A supplier of a component part could get a manufacturer into as much trouble as it could by itself if there aren't certain safeguards.

• Product Design Previews: The design review is the first critical step in a product's life cycle and the least expensive time to recognize a potential problem and make changes. Companies should maintain a design review team and product safety team that review all new products to ensure quality, reliability, and manufacturability.

• Marketing/Advertising Concerns: It isn't just defective products that could lead to trouble; things that a company says to promote a product and/or images shown in promotional videos, on brochures, and on packaging could lead to a product liability lawsuit.

• Reliability Testing: Does your company routinely test new products to ensure that they will be safe and reliable? Some major recent cases were lost because of the lack of adequate testing. Even with such testing, do employees know what to do if the testing produces unfavorable results?

• Warning Labels and Instructions: Make sure that engineers follow international standards for warning label design.

• Records Retention: In a product liability lawsuit, records will be a key issue in your defense -- so maintain a sound records retention program.

• Document Control: Once you produce required records demanded by the court, what would these documents say? Most product liability cases are lost and punitive damages awarded because the plaintiff can prove through a company's own records that it had prior knowledge of a problem or defective condition and failed to react in a responsible manner. Make sure that employees understand what could constitute a dangerous document.

• Supplier Selection and Control: Without proper safeguards, mistakes made by the supplier of a defective component can get you sued. "Keep in mind," says Goodden, "that from a legal perspective, the more companies you can name in a lawsuit, the merrier, especially when your company has the deepest pockets." Make sure that you have adequate indemnification clauses and ask if suppliers and subcontracts carry liability insurance.

• Warranties: Make certain that your sales and management team know the difference between full and limited warranties and express and implied warranties. "That nicely printed warranty form may not be the only warranty you're going to be bound to," warns Goodden.

• Recall Procedures: Don't wait for a disaster to determine how to initiate a recall. Do you have procedures in place for the management team to follow? Do you know who would be in control, and does that person know the ways and means of conducting a recall or the outside resources available?

• Accident Reporting and Investigation: Most product liability cases start out as a reported incident and later grow into lawsuits. If you handle a reported incident properly from the start, you could not only prevent a lawsuit, but also maybe get the other party to drop the issue altogether. If you just forward every reported incident to your insurance company, it's almost assured that you'll take a loss, according to Goodden.

A loss prevention program that incorporates best practices in all of these areas can go a long way in negotiating insurance rates; make sure that your insurer knows about the processes and procedures you put into place.