Product design liability

Question

I own a engineering company in which I design products to serve as a proof of concept for companies to use to gauge commercial interest and funding. I also design products that may either in the exact same design, or similar are manufactured by the company, and sold commercially. I never manufacture or sell end products

I typically work on products that have little to no risk of injury, but recently have changed to more "dangerous" products. Such products have lithium batteries, high voltage systems, ect..

In either of the cases I described (me doing initial prototype, or design to be manufactured) am I/my company held liable for damages caused by my designs?

If so, will having the client (their company) sign a release of liability form help protect myself? Considering I don't manufacture, market, sell, repair, ect the product.

Answer 1

There are multiple forms of liability for defective products.

• One form of liability is warranty liability, which arises from an express or implied contract with a purchaser of the product and only applied to parties to the contract. Usually, the only way you could be sued for breach of warranty liability is by the company that employed you for breaching your contract with them, and only pursuant to the terms of that contract. It would be unusual for you to be sued on this theory, although this is the most likely theory for the company you do business with to sue you upon. It cannot be insured against, but you could refrain from making the warranty in the contract in the first place and instead disclaim any warranty in the contract. You would have personal liability only if you personally guaranteed the contract with your customer, which would be very unusual.

• Another form of liability is strict liability in tort for a defective product. This is imposed without regard to privity or fault, but is generally imposed on a manufacturer or importer of goods if the product is either manufactured in a defective manner or designed in a defective way. It is not usually imposed under the law upon an employee or subcontractor of such a firm in the absence of proof of fault. You can insure against or have an indemnification clause from the company you do business with to protect you against this risk, but it will rarely prevail against you anyway on the merits before or at trial.

• A third form of liability is for negligence. This asserts that either your company, or you personally (with the company vicariously liable for your actions) failed to act with reasonable care in a manner that foreseeably caused harm to another. This is liability that you and your company could face and are likely to face if a product you design has a defective design. This risk can be insured against, and/or you could have the company you did business with indemnify and defend you from any liability pursuant to the contract and waive any right to sue you for simple negligence. You can only be held personally liable if the plaintiff can show that you personally committed the negligent act - otherwise only the company is liable and you are protected against liability in excess of the value of the company's assets (which are probably minimal at any given time) by corporate limited liability or the equivalent.

• One could even alleged, a la Rouge One, that you designed a product that was intentionally defective[1] and hold you and your company liable for that, although this would be an usual fact pattern and very hard for a victim of the defective product to prove. This liability cannot be insured against or indemnified, although the defense costs to defend you against mere charges that you did this are often covered by an insurance policy or an indemnification agreement. The most recent example of this kind of liability in the real world was when VW engineers intentionally designed emissions computers to thwart emissions tests. The conduct could give rise to criminal convictions and to punitive damages as well as to compensatory damages related to the harm caused by particular defects in the product you designed.

Indemnification clauses and waivers of liability for simple negligence and disclaimers of warranties are all very common in contracts between design contract firms like yours and their customers. You should probably insist on these clauses (or some of them at least) if you do not do so now.

Products liability insurance has to be purchased separately and isn't part of your comprehensive general liability insurance coverage or homeowner's insurance, and you probably aren't covered directly by your customer's insurance unless there is an indemnification clause in their contract with you. But, products liability insurance is also very expensive. Many people would consider it a necessary and indispensable cost of doing the kind of business that you do, but some people don't pay the high cost and accept the immense risk that comes with being uninsured.

[1] In Rogue One, a Star Wars movie, it was revealed that the designer of the Death Star for the Empire intentionally included a design defect that was not located by anyone else involved in the project (something that was made possible because he was in charge of the project, although he did so under duress). Massive damage to property and thousands of lives were lost when this intentional defect that he intentionally leaked to the Rebel Alliance was exploited in a battle by Luke Skywalker in A New Hope. It was then exploited a second time by the rebels in Return of the Jedi, again causing massive loss of life and property damage and probably also causing catastrophic harm to the Ewok Moon.

Answer 2

In either of the cases I described (me doing initial prototype, or design to be manufactured) am I/my company held liable for damages caused by my designs?

Absolutely. The damaged party can sue you directly under tort law or, more likely, when your client gets sued they will join you as a defendant.

If so, will having the client (their company) sign a release of liability form help protect myself

To some extent. If you get sued you can, in turn, sue your client: assuming you win against them and assuming they have the money, they will have to reimburse you for your losses.

Of course, no self-respecting client would accept such an indemnity clause: one of the things they are paying you for is to stand by your work and assume responsibility if you screw up. One of the things you should be charging them for is assuming that risk.

You can outsource some of the risk at a cost by buying a Professional Indemnity insurance policy. Please note that, unlike general insurance, PI is a "claims made" policy: you have to have the insurance when you make the claim not when the damaging event occurred. This means you must keep a policy running even if you no longer do this type of work until the statute of limitations expires. Make sure you factor that into your pricing.