LEGAL ISSUES FOR THE ENTREPRENEURS:PRODUCT SAFETY AND LIABILITY, INSURANCE

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Entrepreneurship MGT602

Lesson 20

LEGAL ISSUES FOR THE ENTREPRENEURS

LEARNING OBJECTIVES

1. To illustrate some of the fundamental issues related to contracts.

2. To understand important issues related to insurance and product safety and liability.

PRODUCT SAFETY AND LIABILITY

The Consumer Product Safety Act, passed in 1972, created a five-member commission that has the power

to prescribe safety standards for products. The commission also has the power to identify what it considers

to be substantial hazards and bar products it considers unsafe. The act was amended in 1990 to establish

stricter guidelines for reporting product defects and resulting injuries and deaths. Manufacturers could be

subject to fines of $1.25 million for not reporting product liability settlements or court awards.

Any new product should be assessed as to whether it falls under the law. If it does, the entrepreneur has to

follow appropriate procedures. Product liability problems are complex.

Recent attempts to reform the legislation passed in Congress but were vetoed by the President. Claims

regarding product safety and liability usually fall under one of these categories:

1. Negligence extends to all parts of the production and marketing process.

2. Warranty Consumers may sue when advertising overstates the benefits of a product or when the

product does not perform as stated.

3. Strict Liability. A consumer can sue on the basis that the product was defective prior to its

receipt.

4. Misrepresentation occurs when advertising or other information misrepresents material facts

concerning the quality of the product.

The best protection against product liability is to produce safe products and to warn consumers of any

potential hazards.

INSURANCE

The entrepreneur should purchase insurance in the event that problems do occur. Most firms should

consider coverage in specific areas as a means of managing risk in the business.

Common types of insurance include:

Property insurance.

Casualty insurance.

Life insurance.

Worker's compensation.

Bonding.

Each of these types of insurance provides a means of managing risk in the new business. Some insurance,

such as disability and vehicle coverage, is required by law and cannot be avoided. Life insurance of key

employees is not required but may be necessary to protect the venture. The entrepreneur should consider

the increasing insurance premiums in cost projections. The entrepreneur should determine what kind of

insurance to purchase, how much to purchase, and from what company. Skyrocketing medical costs have

significant impact on insurance premiums, especially workers' compensation. Insurance companies

calculate the premium for workers' compensation as a percentage of payrolls, type of business, and prior

claims. Some states are undertaking reforms in this coverage.

Promoting safety through comprehensive guidelines and being personally involved with safety will help the

entrepreneur control costs. Health care coverage is an important benefit to employees and a significant cost

to businesses. A self-employed entrepreneur has limited options. If you are leaving a corporate position,

consider extending your health care benefits with a COBRA, which allows you to continue on the same

health policy for about three years. Individual health care policies hare available. One rule is to never rely

on a handshake if the deal cannot be completed within one year.

Entrepreneurship MGT602

The courts insist that a written contract exist for all transactions over $500. The safest way to conduct

business deals is with a written contract. Any deal involving real estate must be in writing to be valid.

Leases, rentals, and purchases all need written agreements.

Four essential items in an agreement to provide the best legal protection:

1. All parties involved should be named and their roles specified.

2. The transaction should be described in detail.

3. The exact value of the transaction should be specified.

4. Obtain signatures of the persons involved in the deal.

KEY TERMS

Copyright

Right given to prevent others from printing, copying, or publishing any original works of authorship

Trade secret

Protection against others revealing or disclosing information that could be damaging to business

Licensing

Contractual agreement giving rights to others to use intellectual property in return for a royalty or fee

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