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Dealer Beware

How to avoid a costly product liability lawsuit

Product LiabilityMany lift truck dealers remember the days when equipment sales were made with the exchange of a check and a handshake. It was understood that the dealer would repair or replace a defective machine, but the customer was responsible for its maintenance and safe operation. How times have changed!

Insurance claims for product liability have risen sharply in recent years and dealers have plenty of reason to worry—not only about the equipment they sell, but also about the process of transferring ownership to the customer. A few examples of claims situations illustrate the product liability risk every dealer faces.

  • A customer purchased a used machine from a dealer. A few years later, the customer lost his right hand when he reached into the machine while it was running. The claim alleged that the dealer failed to use care in the inspection and testing of the unit prior to resale and failed to provide adequate warning signs and safety guards. The dealer stated that employees normally attach warning decals or the manufacturer‘s safety guards, but the dealer could not recall what was or was not done in this instance due to the time that had passed.
  • In another situation, a dealer sold a forklift to a customer, who was later killed when the machine tipped over. This time there was no lawsuit because the dealer had instructed the customer about the use, hazards and inspection of the forklift and kept records to back it up.
  • Another dealer avoided a lawsuit alleging that a customer’s hand was crushed by a machine purchased from the dealership. The dealer had complete sales and service records showing that the dealership had sold other equipment to the customer, but not the machine that caused the injury.

The solution? Keep accurate records! It sounds simple, but busy employees can easily overlook or skip steps when informing customers about the safe operation of equipment they purchase. Dealers should establish procedures for keeping records of every sale, lease or rental. Insurance providers can develop programs to provide effective means of controlling the frequency and severity of product liability claims.

The program should include a “safety check” card for the customer to sign at the time equipment is purchased, rented or leased. This checklist assures that the dealership has provided necessary safety instructions and information to the customer. If someone is injured by that equipment in the future, the dealer has documentation to help defend a product liability lawsuit.

Association Safety Certification forms and similar manufacturer forms may also be used by some dealers as an equipment safety checklist. No matter what type of checklist or form is used, it is important to obtain the customer’s signature acknowledging that the appropriate steps were taken.

Selling Equipment “As Is”
Some dealers simply do not accept equipment on trade that has very little value. Other dealers will accept older machines on trade as a service to their customers. The disposal of trade-ins is handled in various ways. Some dealers send any equipment below a certain value to an auction house for disposal. However, a number of dealers have back lots where equipment is sold “as is.” Generally, it is not economically feasible to do safety checks or repairs on older equipment with low value. When no safety checks are done, the dealer’s liability in selling that equipment “as is” is questionable.

When a dealer sells equipment on an “as is” basis, it is important to examine the equipment and keep a written record of the inspection and any warning to the buyer. An effective risk management procedure is extremely important for this type of sale.

A dealership that sells items on an “as is” basis may not be protected from liability. Dealers should exercise “ordinary care” to determine the condition of the product to be sure that it is safe. This would include a reasonable inspection and a warning to the buyer of any known equipment defects.

Many jurisdictions adhere to the theory that a seller will not be liable for injuries resulting from the defective condition of a machine sold “as is.” However, some courts have held that a seller may be liable under a negligence or strict liability theory for failure to make a reasonable inspection or failure to adequately repair or replace defective parts even though the machine is sold “as is.”

Dealers should conduct reasonable inspections of equipment before selling to minimize and perhaps avoid potential lawsuits. Selling a piece of equipment “as is” will protect a seller for a breach of warranty. However, in cases of injury or property damage, a judgment of negligence may result if the seller knew or should have known about a defective condition. The bottom line is that a dealer may be held liable for a failure to inspect “as is” equipment or failure to disclose a known defective condition.

Dealers who are diligent about safety checks and record keeping for used equipment sales will limit their liability exposure. A used equipment sales checklist helps the dealer document the safety condition of used equipment obtained or serviced by the dealership before it is released to the customer. The checklist should be completed by authorized personnel and retained in the customer’s file.

Document All Service Work
Dealers who service equipment also face liability exposure. For example, suppose the overhead protective system has been removed on a lift truck a customer brings in for repair. The service technician notes the missing overhead guard on the work order but fails to mention it to the customer. Or, suppose the technician does mention it, but the customer states that the guard was removed intentionally because the truck is used in low overhead applications.

When the dealership performs service work, the technician should use the same or a similar checklist to document missing safety devices and to identify and document conditions that could compromise the safe operation of the equipment.

An authorized employee should offer the recommended repair or adjustment to the customer if the customer had not initially requested the specific repair and/or adjustment on the work order. The customer should sign the dealer’s checklist form if the recommended repair or adjustment is rejected. The service technician and/or the shop supervisor should also sign the form, verifying the accuracy of the information gathered. The checklist should be kept in that customer’s file.

Finally, there is an accountability factor. While the owner of the dealership is ultimately responsible for business operations, employees should be held responsible for performing and documenting safety inspections and communicating safety information to customers.

Dealerships that adhere to established procedures for inspections, record keeping and customer communication will be viewed more favorably by their insurers. More important, customers will appreciate dealers and their employees who demonstrate care and concern for their safety, and the lift truck dealership will be viewed favorably in the community. Now, that’s a deal you can shake hands on!

Material Handling Equipment Distributors Association
Bob Miller Meet the Author
Bob Miller is vice president and national account executive of Federated Mutual Insurance Company, located in Owatonna, Minnesota, and on the Web at www.federatedinsurance.com.


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