What is Product Liability Insurance and Who Needs It?

Every business that produces and sells goods to customers should be protected with product liability insurance to avoid serious risks that could cost them a lot of money.

Therefore, all restaurant owners, manufacturers, distributors, retailers, wholesalers, designers and other small business owners aimed at selling are recommended to purchase this type of small business insurance since that’s the best way of ensuring their long-time survival on the market.

Defective products can cause a lot of inconveniences, especially if you are uninsured. This post will give you essential insights into the entire concept of product liability, its coverages and the common situations where it can help.

What is Product Liability Insurance?

Product liability insurance helps small businesses cover the expenses that arise when a sold product hurts someone, makes them sick, or damages their property. It is mostly included in a general liability policy, but you can purchase it as a stand-alone plan as well.

The cases when faulty products hurt someone are quite common, and the fines and court expenses due to lawsuits can be quite high. Product liability coverage can help you pay for all the costs that you’d typically pay out of your pocket and save you and your business from failure.

What is Considered a Product Defect?

As you know, your customers can sue you for selling a product defect. Such products mostly include spoiled food, inaccurate directions and broken toys, and each of them falls under the following categories:

• Design flaws: This category refers to errors with a product’s design that can be quite dangerous. For example, if a company that designs children’s apparel produces clothing that fits improperly and causes a suffocation hazard, it can be sued by parents whose child was affected by such manufacturer’s error.
• Manufacturing flaws: Imagine that your company produces a collection of furniture with faulty parts. A customer buys a chair from that collection, sits on it, and falls. The next thing you know is that you’re being sued for injury caused by your product.
• Advertising flaws: Advertising flaws describe inaccurate labels found on food, cosmetics and even medicines. When a product description doesn’t contain the information about existing allergens, a person who may not be supposed to use it can see it as a harmless product and take it. Again, your company can be sued for putting someone’s life in danger.

It’s essential to know that you don’t have to be responsible for any flaw to be sued. Even though the failure is a result of the defect occurred somewhere in your supply chain, you, as a manufacturer, will be held liable.

Such a situation is better known as “strict liability,” which means that a customer can win a product liability lawsuit against you by proving the following:

• A sold product had a defect: If you sold a swing set to a customer who fell off it because of the broken chain, they could expose it as a proof of a product defect.
• A customer was injured or suffered severe losses: If a customer has visible injuries or damages, it will be easier for them to win a lawsuit. However, if your product defect didn’t leave any actual injuries on your customer’s body, their claim may not be valid.
• The defect caused the customer’s injury: If a customer can demonstrate that your product defect is responsible for their injury, their side may win a lawsuit. However, their claim will be rejected without actual proof.
• A customer was using the product according to the instructions: If the customers were using the product as it was intended when the accident happened, their chance for winning the lawsuit would be much higher. Still, if the product was used for other purposes that weren’t considered safe, the claim probably won’t be valid.

If a customer can prove that the item they bought from a particular company is responsible for their injuries or property loss, it can be a nightmare for business owners. Luckily, product liability insurance can save them from the steep expenses that can affect a company’s reputation and performance.

Customers can also file a claim against restaurants, cafes and bakeries that served them spoiled or contaminated food or drinks that caused poisoning or other severe consequences.

What is Covered with Product Liability Insurance?

Product insurance is there to help you cover the financial losses caused by your product. That said, you will be protected in case of:

• Product liability lawsuits: If a customer decides to sue you because your product caused bodily injuries or property damage, a product liability policy will pay for legal costs, which can go up to $4 billion.
• Illness due to toxins in products: Such disease usually happens due to improper product labeling. Namely, manufacturers who don’t list all the product ingredients, including allergens, can be sued for putting someone’s life at risk.
• Accidental contamination: This occurs when a product is accidentally tainted with a substance that can be harmful to consumers.
• Accidental product defect (Property damage): Such a situation occurs when a product’s been poorly designed or insufficiently tested. For example, if a company sells you a phone charger that causes overheating or similar inconvenience that could damage your phone, you can sue it.
• Food poisoning: If your restaurant or bakery serves food that’s contaminated with bacteria, viruses, or parasites, you can be sued by all the customers who have had the symptoms of foodborne illness.
• Medical expenses: If an injured customer needs medical assistance, your product liability policy will pay for all the costs of medical care and necessary medications.
• Wrongful death: If your customer dies because of your product defect, their family members can sue your company for negligence and unlawful actions.

Sometimes, product liability insurance can pay for the following things as well:

• Lawyers: Your product liability policy can pay for the lawyers that will defend your business on the court.
• A settlement: If the other party is willing to resolve the lawsuit out of the court, product liability insurance will cover for the cost of compensation.

What is Not Covered with Product Liability Insurance?

It’s vital to know that your product liability coverage won’t be effective in all situations in which your customers get hurt, or their property becomes damaged.

The situations that may require additional policies are:

• Slip and fall injuries: If someone slips and falls on your business property, you’ll need general liability insurance that will protect you from such lawsuits.
• Employee injuries: When your employees’ injuries are work-related, you’ll need a workers’ comp insurance. According to the law in most states, all the business are required to have the worker’s comp.
• Product recalls: The costs of product recalls will be covered with product recall insurance, which includes notifying the customers, shipping replacements and inventory losses.
• Lost inventory: A product liability policy won’t cover inventory loss that occurs due to product defects.
• Professional liability: When directors or business officers are responsible for a product malfunction, you’ll need professional liability insurance, which covers the costs of a lawsuit due to negligence.

Extra Policies to Combine with Product Liability Insurance

Note that not all the insurers offer the same coverages in a single premium. Sometimes, you’ll need to consider additional plans to get enough coverage for your business needs.

Some of the most common optional coverages that can give you a complete liability policy are:

Commercial General Liability Coverage

General liability insurance is vital for protecting small businesses from third-party liability claims for property damage, bodily injury, medical costs and legal expenses.

The most common general liability claims include slip and fall accidents on your worksite, and such a policy is included in most small business insurance plans, such as BOP (Business Owner’s Policy).

Professional Liability Insurance

Professional liability insurance, known as errors & omissions (E&O) insurance, aims at protecting small business owners from liability claims for their mistakes and negligence.

The most significant difference between product liability and E&O lies in the fact that E&O covers legal and defense costs when a client sues you for damage caused by mistakes in your services, such as giving inaccurate and bad advice.

Product Recall Insurance

Product recalls happen all the time. The reason for that lies in product contamination, design flaws, and tampering, and it represents a huge financial loss for a company.

When you’re covered with product recall insurance, all the costs of recall due to contamination, tampering, or any other inconvenience that would affect your company performance, will be reimbursed by your insurer.

There are two main types of product recall insurance:

• Voluntary: Many companies choose this type because they don’t need to wait for the government to announce a mandatory recall. That said, they can avoid all the adverse effects that usually happen when the government steps in.
• Involuntary: Involuntary recall means that the company is admitting its error. Therefore, it must take the risk of being negatively seen by the public, which will accuse them of negligence and hiding the truth.

Apart from these essentials, product recall policy may cover for the following situations:

• Malicious tampering: This usually occurs when dissatisfied employees, who have access to a product before it’s released to the market, damage it and cause severe harm to the company’s reputation and sales.
• The flaw in marketing: When your company needs to recall a product because of misleading marketing strategies, aimed at pushing the sale of a product, the policy will cover for the loss of the profit.
• Government recall: This falls under the category of involuntary recall, which means that the government steps in and orders the mandatory recall of the product because it’s considered unsafe for consumers.

By purchasing some of the mentioned policies, you make sure your business is entirely protected from bankruptcy and high costs that could affect the company’s existence on the market.

Talk to your insurer and consider all the available options.

How Much Does Product Liability Insurance Cost?

Product liability insurance costs about $500 to $600 a year. However, the price is not fixed, and not all the business owners will pay for the annual premium the same.

The total price will depend on many factors, such as risk categorization of your product, its size and how it’s marketed. Namely, companies aimed at selling fireworks or electronics will probably pay more for the premium than the company that produces and sells bedsheets.

Other factors are:

• Business type: As mentioned, a business type has a significant impact on the final policy price. The insurance for products that are considered risky will be more expensive than the one needed for less dangerous stuff.
• Location: Like many other insurance types, the price of this one also depends on the geographic location of the company. Every state has its own insurance regulations that determine the price, and other factors that impact it are loss exposure and wildfire exposure.
• Annual company revenue: Larger companies usually have higher annual revenues than small businesses, which is why their insurance policy will be pricier. Namely, the yearly income defines the company’s overall risk exposure when it’s sued for product liability.
• Claim history: If a company’s history is rich in claims, it’s considered risky. Accordingly, its premium rates will be quite higher.
• Limits: Product liability policies start with about $100.000 limits, but that amount can be extended to even tens of millions of dollars. The companies that need higher limits will have to pay more for the annual premium.

Other factors that could play a significant role in defining the total price of the policy are the number of products, shipping costs, recall costs, legal fees, refunds, third-party indemnity, and need for professional crisis consultant.

3 Useful Tips on Purchasing Product Liability Insurance

Think about the following recommendations when buying product liability coverage:

1.      Report All the Claims

When companies try to hide claims, insurers usually exclude their claim coverage. That can have a negative impact on business, which is why it’s essential to report even the smallest claims that fall under the deductible limit.

That will help you preserve your product insurance and maintain the legal requirements set in policies.

2.      Choose the Right Limit

If you’re not sure whether the limit you’ve chosen is right, make sure to consult an expert who’d advise you about the amount of coverage that suits your business needs.

Namely, underinsuring can leave the business owner exposed even after the insurers paid for the costs, while overinsuring can make the business owners pay higher premiums that they don’t need.

3.      Find an Insurer that Issues the Certificates for Premiums Quickly

Having a certificate of insurance means that you have a proof that you’re covered with product liability plan.

They are usually shown throughout the supply chain and used when the products are manufactured, transported, stored and sold at a retailer store.