Farley Motors, Inc., a motorcycle manufacturer, included the following note (adapted) in its annual report:
Notes to Consolidated Financial Statements
7 Commitments and Contingencies (Adapted)
The Company self-insures its product liability losses in the United States up to $3,000,000.
Catastrophic coverage is maintained for individual claims in excess of $3,000,000 up to $25,000,000.
Requirements
1. Why are these contingent (versus actual) liabilities?
2. How can a contingent liability become an actual liability for Farley Motors? What are the limits to the company’s product liabilities in the United States?