Product Liability Insurance: Coverage, Costs and Requirements Explained

Product liability insurance can protect your business against potential lawsuits if a product you make or sell causes harm to a customer. Ensuring you have this commercial insurance coverage can protect your business from financial burdens due to a costly lawsuit and provide you with peace of mind.

Product liability insurance covers financial losses arising from lawsuits over defects or problems with the products a business produces, distributes or sells.

Keep reading to learn more about product liability insurance, including how it works, what it covers and what to expect for premium costs.

On This Page

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  What Is Product Liability Insurance?

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  How Does Product Liability Insurance Work?

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  What Does Product Liability Insurance Cover?

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  What Doesn’t Product Liability Insurance Cover?

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  Who Needs Product Liability Insurance?

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  How Much Does Product Liability Cost?

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  Product Liability Insurance at a Glance

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  How To Get Product Liability Insurance

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  FAQs

What Is Product Liability Insurance?

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 defective seat belts injure customers. Product liability insurance could reimburse customers for their medical expenses and cover the automaker’s legal costs if it is sued by those customers.

How Does Product Liability Insurance Work?

Product liability insurance kicks in after one of your products causes harm to a customer after leaving the insured's control, prompting a lawsuit against your company. A few conditions typically need to be met for your product liability insurance to pay out on a claim:^[1]

When a product liability claim is approved, the insurer will typically pay for covered legal defense costs and may cover settlements or court-awarded damages up to your policy limits. Some product liability insurance policies also require you to pay a deductible before coverage applies.

Keep in mind that product liability insurance coverage limits may vary between policies, and some policies may have separate per-occurrence limits for each individual claim and aggregate limits for all claims filed within a year. For example, RLI offers product liability coverage limits of up to $1 million per occurrence and $2 million in aggregate, with excess liability limits of up to $10 million available.^[2]

What Does Product Liability Insurance Cover?

Product liability insurance may cover claims alleging that one of your products caused bodily injury, property damage, illness or death.

• Bodily injury: Your policy may cover medical expenses if a customer is injured while using your product. It may also include coverage for lost wages if the customer is unable to work due to injuries.
• Property damage: This portion of your policy can reimburse a customer for losses if your product damages their property, such as personal belongings or a home.
• Illness and death: If someone becomes ill or dies while using your product, your insurance may cover their medical bills or funeral expenses.
• Legal expenses: If any of the above claims lead to a lawsuit, product liability insurance will pay for your legal expenses, including attorney fees, court costs and settlements.

Types of Damage Covered by Product Liability

Typically, there are four main types of product liability claims that can be brought against a business:^[3]

• Manufacturing defect: This claim is for issues related to how a specific product was made, such as an accidental mistake on the assembly line that makes an individual toy a choking hazard for children.
• Design defect: This claim is for issues inherent in a product's design that make it dangerous, such as a commercial truck that is more likely to skid on wet roads due to insufficient tire grip.
• Marketing defect: This claim is for a failure to provide adequate instructions for use or warnings about its potential risks. For example, the absence of a safety warning on the side of a cleaning chemical that produces toxic gases when combined with other cleaning products could result in a claim.
• Breach of warranty: This claim is for a failure to meet the terms of a warranty, whether explicitly printed or merely implied by the use of a product for its intended purpose. For example, if a salesperson sells a customer a hair straightener that does not straighten their hair, this may be considered a breach of warranty.

What Doesn’t Product Liability Insurance Cover?

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.
• Recall expenses: The cost of repairing or replacing defective products is usually excluded from product liability policies and is typically covered by product recall insurance instead.^[4]
• 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. Instead, an errors and omissions insurance policy would be needed to cover these claims.

Who Needs Product Liability Insurance?

Any business that sells products to customers or clients, or is involved in the supply chain, can benefit from product liability insurance to protect its finances if a product is found defective in a lawsuit. Some industries where it can be beneficial include:

• Manufacturing
• Wholesale and distribution
• Retail stores

Small businesses may struggle to cover the costs of a product liability lawsuit, making this coverage particularly beneficial for them since they face a higher financial risk.

Product liability insurance is generally not required by law, but many manufacturers, distributors, wholesalers and retailers purchase coverage to protect against costly lawsuits.

How Much Does Product Liability Cost?

The average cost of product liability insurance can vary between insurance companies. For example, The Hartford customers pay an average of $68 per month for general liability insurance that includes product liability coverage, but another insurer may use different underwriting techniques, resulting in a different premium.^[5]

What Factors Affect the Cost of Product Liability Insurance?

Costs for product liability insurance can vary based on several factors, such as:

• 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 operating for a long time may be considered 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.

Product Liability Insurance at a Glance

Here’s a brief overview of the essential information you should know about product liability insurance:

• Product liability insurance is often included in commercial general liability or business owners policies and helps protect you from losses due to defects in products you produce, sell or distribute.
• Product liability claims must involve a defective or dangerous product at the point of sale, a product that caused injuries or damage, proof that the product caused the loss and a legal responsibility by your business to ensure the product’s safety and proper functioning.
• The four types of claims covered by product liability insurance include manufacturing defects, design defects, marketing defects and breaches of warranty.
• Product liability insurance won’t cover claims involving fraud, intentional or malicious acts, professional errors or recall expenses.
• The cost of product liability coverage can be influenced by the size of the business, the types of products they’re responsible for, claims history and coverage limits.

How To Get Product Liability Insurance

To get product liability insurance, you’ll first need to determine whether you want coverage as part of a general liability policy or as a standalone policy because some insurance companies may only offer one option or the other. Once you’ve determined your coverage goals, contact three to five insurers to get quotes. You’ll likely need to inform each insurance company about your company’s industry, size, products carried and other factors one at a time, which can make the quote-gathering process tedious.

You can help speed up the process using an insurance marketplace like SmartFinancial. After you complete a brief questionnaire, we can connect you with a licensed insurance agent to help you obtain the commercial insurance your business needs. Click here for free commercial insurance quotes today!