Phatboy Motorcycles, Inc., a motorcycle manufacturer, included the following note in its annual report:

Notes to Consolidated Financial Statements

9: Commitments and Contingencies

The Company self-insures its product liability losses in the United States up to $1.5 million.

Catastrophic coverage is maintained for individual claims in excess of $1.5 million up to $30 million.

1. Why are product liability losses considered contingent liabilities?

2. How can a contingent liability become a real liability for Phatboy Motorcycles?