Consumer Liability

Key Takeaways

• Consumer liability requires consumers to prevent negligence when using products or services.
• Liability policies can range from simple terms for everyday transactions to complex multi-party agreements governed by laws.
• The McDonald's hot coffee case is a landmark example of consumer liability litigation.
• The Electronic Funds Transfer Act limits consumers' liability for unauthorized electronic transactions.

What Is Consumer Liability?

Consumer liabilities are contractual obligations that hold consumers accountable for negligence in their activities while using a product or service. Consumer liability policies range from simple policies for transactions to complex multi-party policies governed by laws, such as the Electronic Funds Transfer Act. A McDonald's coffee case, in which a 79-year-old woman was scalded by a cup of coffee bought at the chain's restaurant, is considered a landmark in consumer liability cases.

Delving Deeper into Consumer Liability

Typically, consumer liability is delineated in the fine print of a contract or a terms of service document, and the responsibility for reading and obeying the terms of the policy is in the hands of the consumer.

Consumer liability policies range from simple policies governing transactions, such as purchasing non-refundable tickets, to more sprawling policies such as those delineated in the Electronic Funds Transfer Act. The Electronic Funds Transfer Act details how consumers can limit their liability in the case of a lost or stolen credit card.

A lawsuit involving a 79-year-old woman who was scalded by a cup of coffee she bought at a McDonald’s restaurant drive-through is considered a landmark in consumer liability cases. The jury in this case ultimately sided with the plaintiff, placing the responsibility for the injury on the restaurant rather than the negligence of the consumer. This case ended with an out-of-court settlement for the injured party. The case became very influential in the way that companies communicate with their customers about their products and establish the warranties associated with them.

If a product on the market is determined to be defective or injurious, a company will often issue a voluntary recall for that product. While the success of injury claims in these circumstances varies widely, a recall will frequently set the groundwork for consumer liability in response to continued use of recalled products.

How the Electronic Funds Transfer Act Affects Consumer Liability

The Electronic Funds Transfer Act was established in the U.S. in 1978 in response to the popularity of electronic banking. Electronic banking removed the paper trail provided by checks and a degree of human interaction formerly involved in financial transactions. The Act is meant to serve as a protection for both consumers and financial institutions by setting liability limits in the event of unauthorized electronic financial transactions.

Specifically, this law states that consumers may be exposed to limited liability for unauthorized electronic transfers in certain circumstances. The policy states that a consumer who realizes a credit or debit card has been lost or stolen must report it to the issuing bank within two business days, or else the bank is limited in their liability to refund any losses. Consumers are also provided a 60-day window to challenge banking errors and correct them before a challenge is considered null and void.

Real-Life Scenarios Illustrating Consumer Liability

Suppose Imran uses his credit card to purchase a product from a manufacturer's website. The manufacturer declares bankruptcy the next day and is unable to deliver the product. Imran asks the manufacturer for a refund. Under existing consumer liability laws, the manufacturer is required to refund Imran's cash.

If Imran would have used his debit card to conduct the transaction, then he would have to file a claim as a creditor after the manufacturer's bankruptcy filing. The difference in treatment between both cards is primarily because the Electronic Fund Transfer Act and Federal Reserve Board Regulation E governs debit card and ACH transactions, while the Truth in Lending Act and Regulation Z are responsible for defining consumer liabilities in credit transactions.