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Getting the Jump on Liability Issues

(July 2006) posted on Wed Jul 05, 2006

Smart managers mitigate risk to an acceptable level.


By Marty McGhie

In today"?s business world, we encounter some measure of risk in almost everything we do. Whether we are hiring a new employee, producing a product, dealing with a customer, or borrowing money from the bank, we are constantly evaluating and accepting risk. The smart and successful manager weighs the risks and makes decisions that will most often mitigate risk to an acceptable level.

If you are successful in that process, your decisions will generate
assets to the company. If not, however, you might incur liabilities. Some of these liabilities may result from the products we generate"?liabilities you may not even be aware of.

Two types of liability
To illustrate, allow me to relate an experience our company recently encountered. Several months ago, we produced some pole banners for a retail establishment"?s parking lot. The banners were double-sided, printed on vinyl, and were installed to hardware attached to the light poles in the parking lot"?pretty standard stuff. We produced the output and outsourced the install (we were the "face"? of the install to the client).

Then, a few weeks ago, a fairly strong wind came through the area, blowing down one of the light poles that had a banner attached to it. Thankfully, no one was injured and there was no property damage"?other than the pole and, of course, the banner
with its hardware. The client called to inform us of the incident. In addition, they told us that they felt that we were liable for the damages because we didn"?t do the proper due diligence to determine the wind-load capacity of the poles created by having the banners attached.

I"?m not simply venting my frustration here or criticizing a client (in fact, we"?re working this out with our client and they are being very reasonable). Rather, I relate this experience to you in an effort to help you think differently about the liability you may face with the products you"?re producing.

From a legal perspective, there are two different types of liability you can incur. The first type of liability is tort liability. Tort liability occurs when you intentionally commit an act that causes damage. For example, if you deliberately use materials that are unsafe or outside of engineering specs to save money; if your product fails causing personal or property damage, you could be held liable for tort damages due to your intentional negligence.

Getting the Jump on Liability Issues
A different type of liability occurs when an unintentional act, even something outside your control, causes damages"?this is called consequential liability or consequential damages. This type of liability is more difficult to identify, more difficult to prevent,
and more difficult to control in terms of damages.

For example, let"?s assume you have the job of producing all the trade-show graphics for a client"?s booth; you also have agreed to ship them and install them for your client. But, machinery breaks down, you are late on the job, your delivery truck breaks down, etc. As a result, you are never able to actually deliver the graphics to your client. Your client ends up having
no graphics and, essentially, no booth at the show.

So what are your damages? The easy one is the cost of the graphics"?it would be pretty difficult to charge your client for those. Consequential damages, however, also become part of the equation here: Do you owe your client for the rental of the booth space? How about the client"?s travel and lodging expenses? What about the salaries and wages of those hired to work the booth? Here"?s a big one: Could you owe money for the loss of business they experienced (or will experience in the future) for not having a booth at this trade show? You can see that this can quickly snowball and become a very big problem.

Preventative measures
By now you probably get the point: Consequential liability can have serious ramifications on your company"?s bottom line. So what can you do to prevent this kind of consequential liability? I have three recommendations:

First, establish sound business practices. For example, don"?t ever compromise on safety. Put together a comprehensive safety program ensuring employee safety at all times and all locations. If a project is complex, spend the necessary time and money to prevent problematic situations. Hire an engineer if you need to and use subcontractors that are contracted and licensed to do the required work. Yes, these are commonsense suggestions, but it"?s amazing how many of us take the shortcut
route, keeping our fingers crossed that the project will go smoothly "just this once."? Typically, however, if you are trying to cut corners, those are the projects that will generally get us into trouble. So get into the habit of applying good business sense.

Second, purchase the right amount of insurance. In addition, meet with your insurance company"?s representative and ask them to help you identify situations and experiences they may have had with other clients. Determine if you have adequate insurance to cover these types of potential issues (as well as any other scenarios you can come up with). If your insurance company does not know or is not sure, fire them and hire someone who does know. A proactive and knowledgeable insurance representative can save you a lot of heartache and money. And in addition to your own insurance, you need to verify that all subcontractors you use are fully insured and that you are named on their insurance policy as an additional insured. This way, if there is a problem, your insurance coverage will be secondary to theirs.

Third, get legal help. The ideas and examples I"?ve noted in this column have just scratched the surface. I"?m not an attorney, so don"?t assume that I have given you anywhere close to the total amount of legal advice you may need. Discuss these types of situations with your attorney, and then structure your business organization and practices in a way that will prevent you from incurring unnecessary liabilities.

No "?mini"? problem
Recently, our shop wrapped a BMW Mini Cooper. "While it"?s there, why don"?t you take it out for a spin?"? the customer suggested. So as not to offend her, I obliged.

As I drove the Mini around, however, I noticed that the vehicle"?s back windows and the rear window were not wrapped in perforated vinyl"?I couldn"?t see out of them. My only reference for looking behind me were the car"?s two tiny side mirrors. Consequential liability was the first thing that popped into my mind. I immediately (after my little ride, anyway) talked to the sales rep and had her e-mail the client, advising her to wrap the windows in perforated vinyl so as to prevent a possible accident in his future.

We should all condition ourselves to think about these types of liability issues, and avoid the problems down the road. Better for you, and your client, if you evaluate up-front the worst-case scenario and consider how you can change that now.

Marty McGhie (marty@ferraricolor.com) is VP finance/
operations of Ferrari Color, a digital-imaging center with Salt Lake City, San Francisco, and Sacramento locations.


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