Invacare 2011 Annual Report Download - page 61

Product Liability
The company’s captive insurance company, Invatection Insurance Co., 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 aggregate losses per policy year 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 Invacare’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 the 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 made are adjusted on a regular basis and can be impacted by actual loss awards and 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.
Warranty
Generally, the company’s products are covered from the date of sale to the customer by warranties against
defects in material and workmanship for various periods depending on the product. Certain components carry a
lifetime warranty. A provision for estimated warranty cost is recorded at the time of sale based upon actual
experience. The company continuously assesses the adequacy of its product warranty accrual and makes
adjustments as needed. Historical analysis is primarily used to determine the company’s warranty reserves.
Claims history is reviewed and provisions are adjusted as needed. However, the company does consider other
events, such as a product recall, which could warrant additional warranty reserve provision. See Warranty Costs
in the Notes to the Condensed Consolidated Financial Statements included in this report for a reconciliation of
the changes in the warranty accrual.
Accounting for Stock-Based Compensation
The company accounts for share based compensation under the provisions of Compensation—Stock
Compensation, ASC 718.The company has not made any modifications to the terms of any previously granted
options and no changes have been made regarding the valuation methodologies or assumptions used to determine
the fair value of options granted and the company continues to use a Black-Scholes valuation model. As of
December 31, 2011, there was $16,031,000 of total unrecognized compensation cost from stock-based
compensation arrangements granted under the 2003 Performance Plan, which is related to non-vested options and
shares, and includes $5,227,000 related to restricted stock awards. The company expects the compensation
expense to be recognized over a four-year period for a weighted-average period of approximately two years.
The substantial majority of the options awarded have been granted at exercise prices equal to the market
value of the underlying stock on the date of grant. Restricted stock awards granted without cost to the recipients
are expensed on a straight-line basis over the vesting periods.
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