Product Liability Insurance 101
Product Liability Insurance provides solid protection for your business relating to the manufacturing or sale to the public of products, foods, medicines or other items. It is typically found under the Products-Completed Operations Insurance extension, as part of Commercial General Liability (CGL) Policy, this coverage provides protection against liabilities for losses due to injuries caused by malfunctions or defects in your products – including design defects or a failure to warn consumers about the dangers of using a product.
What is product liability insurance?
Product liability insurance protects business owners against liability claims and lawsuits arising from the products you sell, distribute, or manufacture. Some businesses that can benefit from product liability insurance include:
- Furniture stores
- Glass distributors
Damages covered usually arise from the defects, such as the design or labeling of the products. Product liability insurance helps your business cover legal fees, court costs, medical bills, and settlement rewards.
Protection For Product Liability Insurance Claims
Product Liability Insurance protects against the following claims:
- Manufacturing or production flaws that cause unreasonably unsafe defects in the product. For instance, there may be traces of dangerous chemicals in your product, which could be toxic to those using it.
- Design defects that make the product unsafe for use by the public.
- Failure to provide adequate defect warnings or instructions for using the product. These claims arise when products are not properly labelled or have warnings that are not explanatory enough to reduce consumer risks while using the product.
Depending on the outcome of the case, money may be awarded to the party that filed the claim for compensatory loss (including medical costs, economic damages and attorney’s fees) or punitive damages (designed to deter the defendant from repeating the action that caused the damage). At times, these serious product liability insurance claims have and can put organizations out of business because the awarded damages are so large.
What is covered with product liability insurance?
Product liability insurance only covers third-party bodily injury and property damage arising from the products you sell, manufacture, or distribute. This includes a defective product that causes someone to be injured, suffer an illness, or have damages to their belongings.
What is not covered by product liability insurance?
Product liability insurance only covers liability claims and lawsuits arising from a third-party injury or property damage incident because of the product you sell or manufacture. It doesn’t cover any damages that your employees incur or other damages to a third-party not related to the actual product you sell and manufacture.
For example, if a customer suffers an allergy reaction from a vitamin you sell, product liability insurance covers the costs related to the bodily injury. However, if a customer suffers a slip-and-fall accident on your premise, product liability insurance doesn’t cover the medical expenses and settlement awards.
Product liability insurance also doesn’t cover claims associated with negligence or failure to provide the service as promised.
How much does product liability insurance cost?
It depends on the type of coverage you have and how much coverage you have. A robust, comprehensive insurance policy will be more expensive than a basic package. You might also pay more for product liability insurance if your business is bigger. It’s important to know that commercial general liability insurance might not always include product liability insurance, so it’s essential to check with your insurance provider first.
Factors that impact insurance cost include:
- Number of employees
- The services you provide
- Business location
- Value and amount of equipment owned
- Annual and projected revenue
- Years of experience
- Historical insurance data
- Your deductible
Why Purchase Product Liability Insurance?
Even if you do not physically manufacture a product, you may be at risk for litigation and need product liability insurance. The actual manufacturer is not the only party that can be held liable for product flaws, defects and failures; retailers and wholesalers can also be found negligent. The logic here is that there is a stream of commerce that a product goes through from its inception to the hands of the consumer. If your organization had any part in that stream, you can be held liable for any problems that arise.
The Basics of Product Liability Insurance Coverage
- Generally, there is a limited and aggregate amount of product liability insurance protection under a typical commercial general liability policy, yet it may not be enough coverage to adequately protect your business. It is wise to discuss your exposure and product liability insurance limits and coverage in-depth with an ALIGNED Advocate.
- Product liability insurance premiums are based on the type of products sold, the volume of sales, where the products are sold to and the role of your organization in the stream of commerce.
- Properly disclosing all products sold to your insurer through your broker will ensure adequate product liability insurance protection at a fair price.
Limiting Product Liability Risk
Organizations should consider implementing these techniques to limit product liability risk:
- Develop a quality control program and distribute it to your employees. It should outline procedures for product safety, design, testing and inspection. It should also include information regarding traceability, guidance regarding customer complaints and a product recall program.
- Place serial or batch numbers on all products to ensure that they are traceable in case of a recall.
- Keep records of all information about your products, including testing, product performance, component percentages and complaints.
- Ask a legal professional to review warning labels, assembly and operating instructions, disclaimers and any other information distributed to consumers. If you need additional assistance, consult a product safety specialist.
- Ask a legal professional to periodically review contracts and hold-harmless agreements for use with your customers and subcontractors. Ensure that these contracts limit the liability you will assume for a quality product. Also consider obtaining certificates that evidence products liability insurance is carried by suppliers of components, parts and or finished goods is recommended.