Interpret a company's contingent liabilities
Response to the following problem:
Wheels, Inc., the motorcycle manufacturer, included the following note in its annual report:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Part): Commitments and Contingencies
The Company self-insures its product liability losses in the United States up to $3.8 million (catastrophic coverage is maintained for individual claims in excess of $3.8 million up to $26.3 million). Outside the United States, the Company is insured for product liability up to $26.3 million per individual claim and in the aggregate.
1. Why are these contingent (versus real) liabilities?
2. In the United States, how can the contingent liability become a real liability for Wheels, Inc.? What are the limits to the company's product liabilities in the United States?
3. How can a contingency outside the United States become a real liability for the company?
How does Wheels, Inc.'s potential liability differ for claims outside the United States?