Product Liability Insurance: What Is It and How It Works?

Product liability insurance can assist pay your legal costs if someone alleges that a product you sold, manufactured, or distributed caused an accident or damage to property.

Businesses that manufacture and sell their own products are constantly confronted with the prospect of risk linked with their operations, no matter how successful they are. Companies may not like to think about the possibility that one of their goods would fail or malfunction, resulting in an injury or discomfort in some form. Still, they should be aware of the chance that this could happen.

Despite the effort that small businesses put forth to guarantee that their items are of excellent quality, there is still the possibility that products will fail to function effectively. For example, a children’s clothes firm may create clothing that does not fit properly and thus poses a suffocation threat. A food service business may bake pastries that include a component that causes an allergic reaction in a customer, among other possibilities.

There is always the possibility of faults that can cause personal injury or property damage – significant risks that neither your company nor your clients can afford to take. A business owner can’t predict when a product will fail. On the other hand, a wise business person recognizes that product failures, recalls, and defects are inevitable and takes the required preventative measures, such as investing in product liability insurance.

There are numerous product liability issues to consider, ranging from allergic responses to minor parts being eaten to clothing that might actually suffocate children. Therefore, companies that make items of any kind should be aware of the appropriate insurance coverage to safeguard their organization in the event that they are found liable for troubles.

When a product fails, product liability insurance can protect a corporation from incurring financial losses as a result of the failure. Many small-business owners purchase it in order to protect their company, and in some circumstances, their personal assets from costly personal injury lawsuits filed by customers against them.

The protection provided by product liability insurance is not limited to manufacturers alone; it can benefit any company involved in the distribution and sale of products.

Even though the majority of businesses opt for a general liability policy, did you know that product liability insurance is expressly designed to cover things like faulty products? We will discuss the differences between them in the latter portion of this post.

Let’s learn more about the coverage provided by product liability insurance, how much it costs, what it covers and what it doesn’t, what are types of claims product liability insurance can protect against, and how to choose a policy that’s appropriate for your company.

What is product liability insurance?

Product Liability Insurance is a type of general liability insurance designed to safeguard your business from financial and legal ramifications resulting from bodily harm or property damage caused by a flaw in a product you sold, manufactured, or distributed. Product liability insurance may also cover claims for damages resulting from poor product instructions or a failure to warn on the product label.

Product Liability Insurance protects your firm against financial damage caused by legal and court fees incurred as a result of a prospective lawsuit brought by one of your customers. Consider the following scenario: a customer claims that a baby romper you sold her caused her child to choke. You could be facing a major legal charge against you and your firm, one that could drain all of your money and resources.

Typical situations covered by Product Liability Insurance include the following:

  • A customer injures herself as a result of a product’s defective packaging.
  • A customer purchased a drapery set from your firm that was incredibly combustible and caught fire, eventually destroying her entire kitchen.
  • A customer with a severe nut allergy discovers that your baked gourmet muffins include trace amounts of tree nuts.
  • Your homemade house cleanser caused extensive harm to one of your customers’ hardwood floors.
  • After eating old shellfish at your restaurant, a customer becomes ill with food poisoning, visits the hospital, and incurs medical bills as a result of your contaminated food products.
  • A customer’s pet develops unwellness after ingesting some of the linings in one of your pet toy products.

These are just a few of the situations in which Product Liability Insurance may be able to save you and your organization thousands, if not millions, of dollars in litigation, arbitration, or legal fees.

Who needs product liability insurance?

Product liability insurance should be considered if you are in the business of making items. Product liability lawsuits are more usually filed against manufacturers, who are more frequently found accountable.

You should also consider product liability insurance if your company repairs damaged products. This is because there is always the possibility that the injury or damage caused by the product could have been related to something that occurred as a result of your company repairing or customizing the product.

Finally, many sellers are taken aback when they discover that they are also subject to claims. While many laws limit a seller’s culpability, claims can become complicated when multiple parties claim responsibility for the same event.

As a result, many businesses involved in product manufacturing, distribution, sale, or repair will not collaborate with other organizations that do not have proper product liability insurance coverage in place. As a result, acquiring proper product liability insurance will almost certainly be required by your customers or business partners at some point in the future.

Product liability vs. general liability

Product liability insurance covers claims arising from using products that your business sells, manufactures, or distributes.

On the other hand, general liability coverage will cover claims relating to your business’s whole operations.

For instance, a general liability policy would cover this if a customer or partner visits one of your business locations and sustains an injury on the premises.

Another critical component of product liability insurance is that you are not protected for claims involving a product of yours that simply does not work.

Product liability claims arise when a third party sustains bodily injury or property damage due to your product’s flaw or poor design.

What complicates these types of claims is the fact that a fault might occur at any point during the creation of your product, from design to manufacture and distribution.

For instance, if someone sustains a bodily injury due to defective instructions and directions on the product’s label, you may still be held liable even though the device functions correctly.

How does product liability insurance work?

Product liability insurance isn’t only a warranty. It shields enterprises from the repercussions of a product that injures or damages third parties.

A product’s manufacturing, design, marketing, or misuse can hurt consumers. Even if a product is misused, your company may be held liable for any damages.

Your company must make amends. In the case of a lawsuit, product liability insurance can assist in safeguarding your company. In 2014, there were 58,496 injury/product liability cases, up 20% from 2013. In 2012, a product liability jury awarded an average of $3,439,035, with a median award of $1,503,339.20. Increasing claims and litigation costs have made product liability coverage critical for small firms.

A product liability lawsuit is costly and stressful, even though the legal fees are covered by product liability insurance along with medical and business damages.

What does product liability insurance cover?

According to industry standards, product liability insurance would normally cover the following costs connected with a personal injury or property damage claim:

Design defect

A design defect claim asserts that a product was designed in a hazardous or harmful manner from the start. This is distinct from a production or manufacturing flaw in that the cause of injury was not caused by poor craftsmanship or production but by the product’s intrinsic design.

For instance, a consumer purchases a children’s book that features a beaded page.

Due to the beads’ small size, the customer’s toddler chokes on one. While a claim for production or manufacturing defects may be brought, the consumer may also assert that the children’s book was inherently unsafe due to its design. That is, a children’s toy should not contain any minute pieces of material that could cause a child to choke.

Manufacturing flaw

As the name implies, this form of claim asserts that a fault in the manufacturing or production of a product resulted in a dangerous or unsafe product. Manufacture or manufacturing faults are any errors that occur during the product’s production, resulting in bodily injury, property damage, or economic loss.

For instance, a customer who recently purchased a pair of shoes from your firm stumbled and injured herself because the shoe’s heel was not securely connected to the sole. She has incurred medical expenses due to her accident and has sued you for manufacturing a shoe deemed unsuitable for everyday wear.

Without Product Liability Insurance, your business would be personally liable for all legal and court costs associated with defending this claim. Additionally, depending on the outcome of the claim, your business may be liable for the customer’s legal and medical bills.

Strict liability

Strict liability is the most unpredictable and difficult to predict or manage in terms of a product for a business owner. Customers can sue a firm under strict responsibility if they can prove a variety of plausible claims, even if the company did not intend to harm them or cause them harm. In such a circumstance, the corporation is liable for the defective goods, regardless of negligence or malice.

To establish strict liability, a customer must show the following:

  • That the product had a flaw that put the buyer in danger (i.e., the product did not simply have the potential to harm but really did)
  • The consumer was injured while utilizing it for its intended purpose. For example, a customer used paint thinner to thin paint rather than on himself.
  • After the purchase, no significant changes were made to the product. For example, a consumer who breaks a mug and injures his hand on the broken parts cannot blame the corporation for the flaw.

Misleading instructions (marketing defect)

A client may bring legal action against your organization for failing to provide enough warnings about potentially dangerous components of your product. The allegation is that a firm could not sufficiently and correctly advise the consumer of all obvious dangers and harm that the product could cause.

For instance, suppose you run a business that sells handcrafted natural cosmetics. A customer purchases one of your ointments with several harsh components that should not be administered to the face’s sensitive parts. She then applies the ointment to her eyelids, resulting in severe chemical scarring. Because your business did not adequately warn or teach the customer, she may bring a claim against you for defective or misleading warnings or instructions.

What’s not covered by product liability insurance?

It’s crucial to remember that product liability insurance is a third-party insurance policy, which means that it covers claims brought against you by someone else. This would not include someone who is a part of your company or who works with you on a regular basis.

Customers, vendors, and clients are examples of third-party participants.

The following items are not covered by product liability insurance:

Injury

An employee’s injury caused by a product flaw would not be covered by the insurance you have in place to protect you from product liability lawsuits. This is why firms get workers’ compensation insurance, which compensates for all of the expenses associated with an employee’s injury and subsequent recuperation.

Accidents involving third parties

As previously stated, if a client or business partner is hurt on your property, that is something that would be covered by a general liability insurance policy rather than by product liability insurance.

Expenses Associated with Policy Recalls

A distinct insurance product known as product recall insurance covers the costs associated with recalling a defective product. An endorsement to a product liability policy is frequently provided, although it is rarely included in a policy that does not have an endorsement.

Technology error

Suits involving technological devices are not covered by product insurance. It is via the acquisition of a technology error and omissions coverage that software companies and other technology companies can safeguard their businesses from claims arising from mistakes made during the development of software products that resulted in damage to third parties.

How much does product liability insurance cost?

The cost of product liability insurance is typically included in the premium for your general liability insurance policy. The average monthly cost of general liability insurance is $42.

Your cost is determined by a variety of factors, including:

  • The amount of protection provided
  • Industry and risk issues are discussed.
  • Location
  • Employees in a company

Manufacturers are exposed to more risks, and as a result, they may end up paying more for this insurance policy.

How does business type affect product liability insurance costs?

Manufacturers, wholesalers, and retailers are all covered by product liability insurance. Product liability is usually covered under a commercial general liability policy, which also covers other liability exposures.

Product liability is an important aspect of a general liability policy for manufacturers. Because manufacturers rarely have third-party foot traffic, third-party liability exposures are limited. The sort of goods sold by manufacturers will determine the premiums charged.

With delivery vendors flowing in and out of wholesale operations, third-party vulnerability is higher than for manufacturers. Wholesalers may also be held liable for products they distribute. Wholesalers may be sued if they are irresponsible, give product labeling or advice, or assist with installation. Although some manufacturers include distributors as supplementary insureds on their insurance plans, wholesalers may not always be fully covered.

Wholesalers and retailers both face product liability risks. However, in many retail enterprises, the risk of retail operations outweighs the danger of product liability claims. Retail-specific exposures may have a greater impact on insurance costs than product liability risks for retailers who employ a general liability policy to cover product liability.

How does product type affect product liability insurance costs?

The sort of product that your company creates, manufactures, or sells is a significant element in determining the cost of product liability insurance for your company. The likelihood that a product can cause property damage or personal injury varies from one product to the next.

Product liability insurance premiums are structured to reflect the wide range of hazards involved. Companies that provide less risky products, such as office supplies and stationery, have cheaper insurance prices than others.

Furniture, electronics, and bicycles are examples of things that provide a greater danger. Food and beverages, and products used by youngsters, are also the ones that pose the most significant risk. Product liability insurance costs for these products will be among the highest in the industry.

How much product liability insurance is needed?

The amount of coverage you purchase is determined by the type and quantity of items you sell, the volume of sales, and the number of parties engaged in the manufacturing process.

As a general rule, the bigger the volume of output, the greater the risk that one of the goods would be defective in some way.

As your small business expands, this may become a greater source of concern in the future. Even if your involvement in the production, sale or distribution process is minor, product liability insurance is required by federal law. Speak with an agent right away to be sure you’re properly insured.

How can I get product liability insurance?

Purchasers of product liability insurance can do it either alone or as part of a larger general liability insurance policy.

In addition, a business owner’s policy, which might cover product liability insurance, is frequently available to small enterprises. A business owner’s policy (BOP) often provides protection for commercial property, general liability, and business income. Depending on the insurer, you may be able to purchase coverage for cyber liability, equipment malfunctions, hired vehicles, and other risks. A small business may benefit from the consolidation of insurance policies into a single package since the overall cost of the insurance policies is reduced.

A commercial insurance agent who is licensed in your state can assist you in finding insurance for your company. You may do your shopping and get a quote online. Alternatively, you might contact an insurance company and speak with a representative.

As reported by the Insurance Information Institute, the following companies will have the biggest market share in commercial insurance in 2020 based on the number of premiums written:

  • Chubb Limited is a British insurance company.
  • Travelers
  • Liberty Mutual Insurance Company

It is possible to obtain this type of coverage from a variety of other insurers. You’ll want to receive estimates from a variety of different insurers in order to make coverage and pricing comparisons more effectively.

Tips for getting product liability insurance

Here are a few tips that will come in handy if you are planning to get product liability insurance for your business.

Obtain a number of quotes

The cost of product liability insurance can vary dramatically from one company to the next. The most effective technique to determine whether or not you are receiving a decent bargain is to shop around and compare at least three quotations.

Take, for example, a BOP.

BOPs are policies that combine liability, commercial property, and business interruption coverage into a single policy that can be less expensive than purchasing the coverage separately in each of the categories.

Consider the trade-off between cost and value.

Consider the expenditures of a policy in relation to the coverage it will give. While a low-cost policy may be appealing, failing to have the protection you want in the event of a claim can be extremely costly to your company.

How to choose the best product liability insurance?

Every insurance quote you receive will be slightly different, but it will be easier to compare estimates if the coverage limits and deductible amounts are similar across the board. Taking a look at the following areas can assist you in evaluating the quotes:

Price

In an ideal world, the cost of the insurance coverage would be within your budget. Quotes that are a little over budget may still have potential, but those that are significantly over budget may need to be put away for later consideration.

Coverage constraints

Although the coverage limitations may differ between bids, if you provided the same information during the quote process, the coverage limits should be comparable. A higher coverage limit is generally preferable unless the cost is prohibitively expensive.

Deductibles

A greater deductible can help you save money on your insurance premiums, but it also means that your company will be responsible for the amount when a claim is submitted. Choose a deductible amount that will not place your company in a difficult financial situation if it becomes required to pay the deductible.

Ratings

When acquiring insurance, it is critical to ensure that the firm issuing the policy has the financial wherewithal to pay any claims that may arise from the policy. According to the Insurance Information Institute, five independent agencies provide ratings on the financial strength of insurance companies: A.M. Best, Fitch, Kroll Bond Rating Agency (or KBRA), Moody’s, and Standard & Poor’s. A.M. Best is the most widely used rating agency (or S&P). These organizations use different rating schemes and may not always agree on the same things, but by comparing a few scores, you can come up with a consensus judgment.

Why is product liability insurance important?

Simply put, firms must take steps to safeguard themselves against rising dangers. Product liability lawsuits can be filed against even the most cautious of manufacturers.

According to the Consumer Product Safety Commission of the United States of America:

  • In 2016, an estimated 240,000 toy-related injuries were addressed in emergency departments of hospitals across the United States.
  • In 2013, there were an estimated 144 unintended CO poisoning deaths that were not caused by a fire that was related to consumer items.
  • In 2018, there was an estimated yearly average of 28,300 emergency department visits as a result of product instability or tip-over events involving televisions, furniture, and appliances.

If your company distributes products to the public, you must consider product liability insurance. Your items may cause harm, property damage, or even death. You may be able to win a long and expensive legal battle against you and your company even if you are confident in your product’s quality. Notably, product liability cases are among the most costly to litigate.

Any financially prudent business owner should consider product liability insurance. While businesses can take precautions to mitigate risk, nothing can be guaranteed when items are in the hands of customers. Product liability insurance gives you peace of mind knowing you have a strong safety net in case of an accident.

Companies that potentially benefit from product liability insurance include:

  • Vendors of perfume and
  • Appliance retailers
  • Toys, apparel, accessories, and gear stores for kids
  • Retailers of clothing
  • producers, wholesalers, and distributors
  • Wholesalers of home goods
  • Manufacturers
  • kennels
  • Resellers
  • Specialty food stores or bakeries

Product liability insurance for sellers on Amazon

Small businesses selling on Amazon can acquire product liability insurance through Amazon Insurance Accelerator, a digital network.

After making $10,000 in sales in a month, Amazon bounds third-party sellers to purchase product liability insurance. Small businesses in the United States can use the Amazon Insurance Accelerator to acquire product liability insurance rates from firms like Chubb, Harborway, Hiscox, Liberty Mutual, Markel, and Travelers.

Tips for saving on product liability insurance

Businesses can reduce their product liability insurance premiums in many different ways.

Good risk management is the most critical and evident of these considerations. The fewer claims you have, the less you’ll have to pay in insurance premiums and vice versa.

Companies that manufacture, market, and distribute items must exercise extreme caution to ensure the quality of their products. If they want to ensure that their products are free of defects, they must implement testing methodologies and undertake highly stringent quality control procedures.

It goes without saying that staff training is critical in this process, as the quality of their labor is frequently a determining factor in the overall quality of your finished products.

Ensure that your business partners who manufacture, distribute, or sell your goods are reputable organizations that are also adequately insured before entering into a partnership with them.

Since only larger businesses will have a genuine need for a standalone product liability policy to satisfy precise coverage requirements, the majority of companies will be able to simply add a product liability endorsement to their general liability policy. Since it is typically purchased in conjunction with a general liability policy, bundling the general liability insurance and buying it as part of a business owner’s policy might be an excellent method to save money on this coverage (BOP).

Final word

As a business owner, you should always endeavor to give your customers the highest-quality items possible. Not only does it serve as an effective marketing strategy, but it also protects your company from being held liable for a wrong product. While this is still true, given the rise of large-scale manufacturing and the demand generating challenges that even small firms are now facing as a result of the internet, there is no way to guarantee the quality of every single item that you sell to the general public.

As a result, product liability insurance is critical in protecting your company from financial risk that may arise due to a faulty product. Not only does product liability insurance provide you with peace of mind in the event of a severe allegation, but it also allows you to innovate and produce new products, thereby maintaining the entrepreneurial spirit that inspired you to start your company in the first place.

John Otero

John Otero

John Otero is an industry practitioner with more than 15 years of experience in the insurance industry. He has held various senior management roles both in the insurance companies and insurance brokers during this span of time. He began his insurance career in 2004 as an office assistant at an agency in her hometown of Duluth, MN. He got licensed as a producer while working at that agency and progressed to serve as an office manager. Working in the agency is how he fell in love with the industry. He saw firsthand the good that insurance consumers experienced by having the proper protection. John has diverse experience in corporate & consumer insurance services, across a range of vocations. His specialties include Major Corporate risk management and insurance programs, and Financial Lines He has been instrumental in making his firm as one of the leading organizations in the country in generating sustainable rapid growth of the company while maintaining service excellence to clients.

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