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

Notes to Consolidated Financial Statements Commitments and Contingencies The Company self-insures its product liability losses in the United States up to \($2.5\) million.
Catastrophic coverage is maintained for individual claims in excess of \($2.5\) million up to \($25\) million.
1. Why are product liability losses considered contingent liabilities?
2. How can a contingent liability become a real liability for Phatboy Motorcycles?