What Is Product Liability Insurance?
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Product liability insurance is a type of commercial coverage that protects against financial losses resulting from defects or problems with the products a business manufactures, distributes or sells. Costing $99, on average, product liability insurance may be added to an existing general liability insurance plan or purchased as a standalone policy.
Product liability insurance is ideal for retailers, manufacturers, distribution centers and other products-oriented businesses. Keep reading to see how insurance for product liability can protect your business.
How Does Product Liability Insurance Work?
Product liability insurance protects businesses from financial losses due to liability claims involving products that the business manufactures, distributes or sells. For example, say a car manufacturer launches a new car but issues with defective seat belts lead to customers getting injured. Product liability insurance would step in and pay for those customers’ medical bills and legal costs if customers sue the company, which they most likely will.
Several types of defects that can create liability exposure for a business and can occur at various stages of the product lifecycle.
Design of a product is inherently dangerous or flawed
Medication with undisclosed and dangerous side effects
Product is made incorrectly or is damaged during the manufacturing process
Fasteners of a lid to a reusable water bottle are missing, causing water to leak whenever the bottle is tipped
Product is marketed in a way that is misleading, deceptive or fails to include necessary warnings or instructions
Shampoo was advertised to encourage hair growth but causes hair to fall out instead
Product liability insurance is usually included with a general liability plan but can be purchased as an endorsement. Additionally, you can purchase product liability as a standalone policy.
What Are the Three Types of Liability Claims?
There are three main types of liability claims that can be brought against a business or individual: strict liability, carelessness or a breach of the fitness warranty:
- Strict liability occurs when the business or individual is held entirely responsible for any damages or injuries caused by their products or actions. Strict liability claims are typically brought in cases involving defective products or hazardous activities, such as selling a supplement containing an ingredient that was proven harmful, regardless of whatever precautions the seller takes.
- Carelessness or negligence occurs when a business or individual fails to act with the level of care that a reasonable person would exercise in a similar situation. For example, a coffee shop may be sued for negligence or carelessness if a cup containing hot coffee does not warn that the contents are hot.
- Breach of the fitness warranty occurs when the business fails to fulfill a promise implied by using the product for its intended use. If a product fails to meet this standard, the seller may be held liable for any injuries or damages that result from using the product. For example, if a salesperson sells a customer a hair straightener but it does not straighten the hair, this may be considered a breach of the fitness warranty.
What Qualifies for a Product Liability Claim?
A few conditions must be met for your product liability insurance to pay out on a claim:
Defective or Dangerous Product
The product must have a defect or be inherently dangerous in some way. This may include a design defect, a manufacturing defect or a defect in the marketing of the product.
Injury or Damages
The product must have caused injury or damages to the claimant. This could include physical injury, property damage or financial losses.
The claimant must be able to show that the defect or danger in the product caused the injury or damages.
The business or individual being sued must have legal responsibility for the defect or danger in the product. This could include the manufacturer, distributor or seller of the product.
What Does Product Liability Insurance Cover?
Product liability insurance will cover your business if any of your products cause bodily injury, property damage, illness and death.
- Bodily injury: Pays for medical expenses if a customer is physically injured after using your product. Coverage may also include lost wages if the customer is unable to work due to their injuries.
- Property damage: Reimburses the customer for their losses if your product caused damages to their property, such as their personal belongings or home.
- Illness and death: Pays for medical bills or funeral expenses if your product causes someone to become sick or die from using your product.
- Legal expenses: If any of the above claims lead to a lawsuit, product liability insurance will pay for your legal expenses, including attorney's fees, court costs and settlements.
What Isn’t Covered by Product Liability Insurance?
Some common exclusions in product liability insurance policies include:
- Intentional acts: Product liability insurance does not cover damages or injuries resulting from intentional acts or criminal behavior.
- War or terrorism: Product liability insurance policies may exclude coverage for damages or injuries resulting from war or terrorism.
- Recall expenses: The cost of repairing or replacing defective products, are usually excluded from product liability policies. This is covered by product recall insurance.
- Fraud: Product liability insurance will not cover losses resulting from fraud or misrepresentation.
- Professional errors: Product liability coverage does not extend to errors made while rendering professional services, such as accounting, consulting or legal work. An errors and omissions plan would be needed, instead.
Product Liability Insurance vs. Product Recall Insurance
While product liability insurance and product recall insurance provide coverage when a product defect is involved, each type functions a little differently.
Product recall insurance pays for the cost of repairing or replacing the defective product, as well as the cost of communicating the recall to customers and other stakeholders.
Scope of coverage is another key difference between product liability insurance and product recall insurance. Product liability insurance covers a wider range of risks, including damages, legal expenses and settlement costs, while product recall insurance is specifically focused on covering the costs of recalling a defective product.
How Much Does Product Liability Cost?
The average cost of product liability insurance is $99 a month according to AdvisorSmith, though costs can vary depending on the size of your business, the types of products you sell, your claims history and more.
- Business size: Larger enterprises with a high volume of sales usually pay more because they’re statistically more likely to experience a product liability claim than a smaller business with fewer sales.
- Type of products: Some products, such as food, pharmaceuticals or medical devices, may be considered higher risk and may result in higher insurance premiums.
- Time in business: Businesses that have been running for long periods may be considered a lower risk and may enjoy cheaper rates.
- Claims history: A recent history of multiple commercial claims can increase your premiums.
- Coverage limits: Increasing your limits will also raise how much you pay for product liability insurance.
How Much Product Liability Insurance Do You Need?
You will need to assess your business’s product risk exposure to determine how much product liability coverage you need. Earlier, we discussed the type of products you sell and annual sales, which can be good indicators for determining if you’re legally vulnerable. Other factors to consider include:
- Potential financial exposure and risk tolerance: Businesses should consider the potential financial consequences of a product liability claim, including damages and legal expenses. Businesses owners will also need to consider their risk tolerance and determine the level of coverage that is comfortable for their business.
- Budget: Product liability insurance is certainly useful but you’ll also need to work within what your budget will allow.
- Product history: If you see certain products causing multiple problems for your customers, you should investigate the issue and consider increasing your product liability limits.
How To Get Product Liability Insurance
There are several steps that businesses can take to get product liability insurance:
- Determine the appropriate level of coverage: Business owners should consider their specific insurance needs, including the size and type of business, the nature of the products being produced or sold and the level of risk involved, to calculate how much product liability coverage is necessary.
- Research and compare insurers: Business owners should research and compare different insurers to find the best coverage for their needs at a reasonable price. This may involve obtaining quotes from multiple insurers and comparing the coverage and premiums offered.
- Work with an insurance agent or broker: Insurance agents and brokers can help businesses to navigate the process of obtaining product liability insurance and can provide guidance on the appropriate level of coverage and the best insurers to consider.
- Purchase the insurance policy: Once a business owner has chosen the best policy for their needs, they can purchase the policy and make any necessary payments. It is important for businesses to carefully review the policy and ensure that they understand the terms and exclusions of the coverage.
- Reassess insurance needs: As a business changes over time, so can its insurance needs. For example, if your sales more than doubled last quarter, you may want to increase your product liability limits to account for your higher liability exposure.
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