Invacare 2006 Annual Report Download - page 25

Product liability claims may harm the company’s business, particularly if the number of claims increases
significantly or the company’s product liability insurance proves inadequate.
The manufacture and sale of home health care devices and related products exposes the company to a
significant risk of product liability claims. From time to time, the company has been, and is currently, subject to a
number of product liability claims alleging that the use of the company’s products has resulted in serious injury or
even death.
Even if the company is successful in defending against any liability claims, these claims could nevertheless
distract the company’s management, result in substantial costs, harm the company’s reputation, adversely affect the
sales of all the company’s products and otherwise harm the company’s business. If there is a significant increase in
the number of product liability claims, the company’s business could be adversely affected.
The company’s captive insurance company, Invatection Insurance Company, currently has a policy year that
runs from September 1 to August 31 and insures annual policy losses of $10,000,000 per occurrence and
$13,000,000 in the aggregate of the company’s North American product liability exposure. The company also
has additional layers of external insurance coverage insuring up to $75,000,000 in annual aggregate losses arising
from individual claims anywhere in the world that exceed the captive insurance company policy limits or the limits
of the company’s per country foreign liability limits as applicable. There can be no assurance that the company’s
current insurance levels will continue to be adequate or available at affordable rates.
Product liability reserves are recorded for individual claims based upon historical experience, industry
expertise and indications from a third-party actuary. Additional reserves, in excess of the specific individual case
reserves, are provided for incurred but not reported claims based upon third-party actuarial valuations at the time
such valuations are conducted. Historical claims experience and other assumptions are taken into consideration by
the third-party actuary to estimate the ultimate reserves. For example, the actuarial analysis assumes that historical
loss experience is an indicator of future experience, that the distribution of exposures by geographic area and nature
of operations for ongoing operations is expected to be very similar to historical operations with no dramatic changes
and that the government indices used to trend losses and exposures are appropriate. Estimates are adjusted on a
regular basis and can be impacted by actual loss awards or settlements on claims. While actuarial analysis is used to
help determine adequate reserves, the company is responsible for the determination and recording of adequate
reserves in accordance with accepted loss reserving standards and practices.
In addition, as a result of a product liability claim or if the company’s products are alleged to be defective, the
company may have to recall some of its products, which could result in significant costs to the company and harm
the company’s business reputation.
If the company’s patents and other intellectual property rights do not adequately protect the company’s
products, the company may lose market share to its competitors and may not be able to operate the com-
pany’s business profitably.
The company relies on a combination of patents, trade secrets and trademarks to establish and protect the
company’s intellectual property rights in its products and the processes for the development, manufacture and
marketing of the company’s products.
The company uses non-patented proprietary know-how, trade secrets, undisclosed internal processes and other
proprietary information and currently employs various methods to protect this proprietary information, including
confidentiality agreements, invention assignment agreements and proprietary information agreements with ven-
dors, employees, independent sales agents, distributors, consultants, and others. However, these agreements may be
breached. The FDA or another governmental agency may require the disclosure of this information in order for the
company to have the right to market a product. Trade secrets, know-how and other unpatented proprietary
technology may also otherwise become known to or independently developed by the company’s competitors.
In addition, the company also holds U.S. and foreign patents relating to a number of its components and
products and has patent applications pending with respect to other components and products. The company also
applies for additional patents in the ordinary course of its business, as the company deems appropriate. However,
I-21