Do You Need Product Liability Insurance?

What is product liability insurance?

Product liability insurance provides your business with coverage against expenses that arise when a person claims a product your business sold, made or distributed caused bodily injury, unlawful death or property damage.

This type of insurance policy can provide financial assistance to cover legal fees, judgments against you, settlements, compensatory damages, punitive damages, and economic or business damages that result from the lawsuit. It will also cover the injured party’s medical costs that arise from the use of the product. [For a full list of the different types of business insurance you might need, check out our Guide to Business Insurance.]

Who needs product liability insurance?

Businesses that make, sell or distribute products need product liability insurance. Businesses and individuals involved in construction also require product liability insurance.

Manufacturers

Product liability insurance protects manufacturers against claims that one or more of their products caused property damage or personal injury. The insurance provides coverage against lawsuits resulting from design defects, manufacturing defects and related issues.

Retailers, suppliers and distributors

Product liability insurance protects retailers, suppliers, distributors and other members of the distribution chain against lawsuits for damages caused by the products they sell. Retailers can be sued even though they are not responsible for the products’ defects or issues related to the use of the products. This kind of insurance can also provide coverage for lawsuits related to marketing defects, such as a lack of warnings about product use or misuse and improperly applied labels.

It is important to note that retailers can be held liable even if they were not aware they sold a defective product. A person who is injured by a defective product, or who incurs financial losses due to the product’s use or misuse, can sue anyone involved in the product’s supply chain. The injured person can also sue a retailer that does not provide sufficient warning or that does not provide accurate instructions for using the product.

Tradespeople

Construction professionals, general contractors and installers require product liability insurance to protect them against lawsuits from personal injury or property damage that occurs after they have completed their work. For example, a homeowner could sue an HVAC professional who installs a furnace that later malfunctions and leads to a natural gas leak that injures or kills someone; the product liability insurance policy would cover the installer’s legal costs.

What does product liability insurance cover?

Product liability insurance provides coverage if your product or completed service does one or more of the following:

• Damages another person’s property
• Causes bodily injury
• Makes another person ill
• Causes a person’s wrongful death (i.e., through the use or misuse of the product, lack of safety warnings or improper instructions)

Product liability insurance does not cover services, but it does cover the results of services provided (e.g., a contractor’s work on a claimant’s property).

Here is an overview of what product liability insurance does and does not cover:

Defective products

Product liability insurance can provide coverage against lawsuits for damages caused by defective products. A defective product refers to an item that is not fit for its intended purpose. A defect may also make the product unsafe for use. There are different types of defects:

• Design defects: A design defect makes the product risky to use even if it is used properly. The person suing for liability must identify the product’s defect, show how the defect led to harm and demonstrate that they were following instructions when using the product.
• Manufacturing defects: A manufacturing defect occurs when the manufacturer does not follow a product’s design plans. This may include using incorrect parts, making mistakes during the assembly process or allowing the product to be contaminated by hazardous materials.
• Marketing defects: A marketing defect occurs when the company includes insufficient instructions and warnings or improper labels for the product that led to harm. The person suing must identify the marketing defect and demonstrate how the information led to harm.

Damages from wrongful death

With respect to a lawsuit for wrongful death, someone could sue for three types of damage:

• Economic damages: A family member of the deceased could sue for the loss of financial security (e.g., a spouse or child can sue for the loss of the spouse’s or parent’s income).
• Noneconomic damages: A surviving spouse or child could sue for pain and suffering, emotional distress, and missed future enjoyments due to the wrongful death of the spouse or parent.
• Punitive damages: A court can impose punitive damages (i.e., additional payment) if they believe the manufacturer or other party being sued was reckless in its actions or failure to act.

Exclusions

Product liability insurance typically includes reasons why insurance providers would deny your claim or choose not to renew your policy. These reasons are known as exclusions. Product liability insurance might include these common types of exclusions:

• Product recalls: Most product liability insurance policies do not cover costs related to inspecting, withdrawing, repairing, replacing or losing the use of the product if it is recalled.
• Quality control exclusion: Insurance companies typically require manufacturers and distributors to maintain quality control standards for their products to ensure they are safe for people who buy or use those products.
• Reporting exclusion: If you fail to report a new manufacturing method, product, material or ingredient, your product liability insurance will not cover your product.
• Efficacy exclusion: If your product does not perform its main function, your product liability insurance will not cover the claim.
• Material exclusions: Many policies do not cover certain ingredients or materials. If you manufacture or sell a product that contains one of these ingredients or materials, the product liability insurance policy will not cover the claim.

Product liability insurance vs. general liability insurance

Product liability insurance and general liability insurance are typically purchased together, but these policies are not the same.

Product liability insurance provides coverage against damages that are related to the products you make, distribute or sell, as well as completed services.

General liability policies, by contrast, provide coverage against a wide range of claims that can arise when a third party is injured or property is accidentally damaged on your premises (e.g., a customer trips on the carpet in your store and drops their smartphone or breaks their ankle). It covers damages that an employee causes on the premises of the third party. General liability insurance also provides coverage against lawsuits for claims that you copied a competitor’s logo or damaged their reputation.

How much does product liability insurance cost?

Product liability insurance is typically part of your general liability insurance premiums, so the cost will often be included. The price of the insurance depends on factors related to the risks associated with your profession and your policy limits. Manufacturers typically pay higher rates for product liability insurance because there are higher risks involved.

Generally speaking, product liability insurance costs about 25 cents per $100 in sales revenue. For example, if your business sells $5 million worth of goods per year, your product liability insurance costs would be calculated like this: 0.25 x $5 million ÷ $100 = $12,500. [Read this article on how to save money on business insurance.]

Factors that affect cost

These factors may affect the cost of your product liability insurance:

• Coverage limits: Higher coverage limits expose the insurance company to potentially higher-cost lawsuits, so the costs of the insurance premiums also increase.
• Industries: Some industries (e.g., pharmaceuticals, heavy machinery) face higher standards and incur more lawsuits than other industries, which means that businesses in those industries pay higher product liability insurance premiums.
• Location: Insurance providers price product liability insurance according to state insurance regulations and typical loss exposures in those states.
• Revenue: A business’s revenue typically determines the overall liability lawsuit exposure that it can face, which will affect how much the courts award in lawsuits.
• Claim history: Businesses or products that have a claim history have a higher risk of potential lawsuits for the insurance provider, which will increase the costs of the insurance.

How to choose product liability insurance

When choosing insurance coverage, select the limits for property damage and bodily injury separately.

• For property damage, choose the options that represent the maximum your insurance company will pay per accident to repair damages.
• For bodily injury, choose the maximum that your insurance company will pay per person, as well as the maximum your insurance company will pay in total per accident.

Your premiums are typically determined by the types of products you manufacture or sell, your expected sales volume and the role of your business. It is important to accurately assess your products (as well as your total expected sales) to make sure you pay for and receive the correct level of insurance coverage. Review your existing business insurance policies to avoid overlapping or unnecessary coverage.