What is Product Liability Insurance?
Product liability insurance is a type of business insurance that will protect a business from claims brought against them which may be related to the manufacture, sale, or use of goods by the general public that causes personal injury or property damage. Faulty products include food, medicines, and many other types of products.
Does my Business Need Product Liability Insurance?
Claims for product liability suits aren’t only brought against the manufacturer but also against businesses that sell products, store them as inventory, handle or label them, and even those companies that transport products. Product liability lawsuits can bring massive claims accompanied by large judgments against manufacturers.
According to Jury Verdict Research data from Thomson Reuters, in 2017 (latest data available) the median award in personal injury cases was $125,000, which is up from $100,000 in 2016. The average award in 2017 was $1,847,438 compared with $1,356,325 in 2016.
In any product liability lawsuit or class action lawsuit, the damages awarded can include medical expenses, legal fees, compensatory damages, and more. A product liability claim can put a company out of business. If your business manufactures, sells, or even transports goods that may be consumed or used by the general public, take a hard look at product liability insurance coverage. The bottom line question most small businesses face is this: Can I afford not to have insurance for product liability?
Who Needs Product Liability Insurance?
Most states follow the “stream of commerce” model of liability. This means that if your company participated in placing the product into the “stream of commerce,” it can be held liable for damages to the end-user. That begs the question: who needs product liability insurance? Here are a few examples:
- Manufacturers of products, food, vending machines, etc.
- Retail stores (clothing, toys, accessories, paint store, etc.)
- Restaurants, cafes, grocery stores, etc.
- Pet stores that sell food, cages, and accessories
- Appliance sales/home improvement stores
- Any business that wholesales goods/products
- Delivery services (food trucks, truckers, commercial vans, etc.)
What Does Product Liability Insurance Cover?
Product liability insurance protects your business against claims resulting in bodily injury or property damage that may be caused by a product defect, design defect, faulty product, or defective product. Product liability coverage will pay for legal expenses to defend your business and any legal judgments against your company up to the coverage limits of your policy. Even if your business is found negligent, product liability coverage should still provide coverage unless the negligence is a specific type spelled out as an exclusion in your policy (such as willful wrongdoing).
NOTE: If you aren't found negligent but injury or damage resulted from using your product, "Strict Liability" can allow someone to sue you and be compensated.
What is Excluded from a Product Liability Insurance Policy
An insurance company that provides product liability insurance typically excludes lawsuits or losses related to:
- Quality and Performance Issues
- Intent or deliberate wrongdoing
- Cost of product recalls
- Third-Party Liability
- Redesign Costs
Is Product Liability Covered Under My General Liability Insurance Policy?
General liability insurance usually covers third-party bodily injury, third-party property damage, and accusations of advertising injury. Some insurance companies offer product liability insurance under the ‘products and completed operations’ clause of your general liability policy. This is typically sufficient if you are in a low-risk or non-hazardous industry. However, if you sell pharmaceuticals, food, toys, insecticides, etc. the coverage under general liability may not be sufficient. In some cases, insurance companies won’t include it in your general liability policy if your business is deemed high risk and it must be purchased as a separate coverage.
The Three Types of Product Liability Claims
The three main types of product liability claims covered under these policies include:
- Design Defects: This type of claim proposes that the design of the product is unsafe. Most people think of recalls on car seats or strollers.
- Manufacturing Defects: Here, some part of the production resulted in creating an unsafe defect in the product. For example, if a product labeled as “nut-free” or “no nuts” was exposed to tree nuts in manufacturing it can result in a lawsuit when customers have allergic reactions.
- Improper Instructions: The third type of claim is based on defective warnings or directions. In this case, the product is not properly labeled or a detailed and bold warning for the user to understand the risks involved. The McDonald’s coffee case is a prime example of this type of claim (detailed below).
Claim scenario circumstances vary, we always recommend speaking to an experienced agent to determine the potential risks you face and the coverage you need.
Examples of the Necessity of Product Liability Insurance
As a business owner, it's important to understand how the potential liability could affect the business as a result of a claim and the types of potential claims faced by a business.
Example #1: Remember the McDonald’s spilled coffee lawsuit? At the time, McDonald’s required that their coffee be stored and sold at temperatures at 180–190 °F (82–88 °C). A woman ordered coffee and when she went to remove the lid, she spilled the coffee on her legs, thighs, and pelvic region—causing 3rd-degree burns. McDonald’s was sued for product liability because the coffee was “defective” AKA too hot for safe consumption nor was the warning label on the cup deemed large enough to be effective. It was also found that other restaurants that sold coffee had temperatures at least 20°F (11°C) lower (much safer). McDonald's insurance company stepped in to reimburse the burned woman’s medical expenses, lost wages, and the incurred settlement cost.
Example #2: If someone purchases a car seat from your business and it’s found that the design had a product defect and didn’t properly protect their child in an accident, they can sue you and the manufacturer for faulty design. They can be awarded damages for injury/medical costs, legal defense costs and fees, and compensatory awards for pain and suffering. If the child were seriously injured—or worst case scenario passes away—you could lose your business. If you have product liability insurance, your insurance company can help cover costs that you wouldn’t otherwise be able to afford.
Example #3: Let’s say a customer buys a product from your shop—a disposable lighter. The customer uses the lighter and it malfunctions, burning your customer. Your store may be sued—along with the manufacturer—even though you had nothing to do with manufacturing it or making it unsafe, and you had no way of knowing it would malfunction. Even if you’re not responsible, you can be found liable because you were part of the supply chain—which is why you need product liability insurance to protect your business.
Is Product Liability Insurance the Same as Product Recall Insurance?
Product liability insurance covers the costs of lawsuits and/or damages brought against you if a product is recalled due to contamination, claims of bodily harm, etc. However, it does not cover the recall costs when defective products need to be removed from shelves. Nor does it cover associated costs, financial losses, and recouping your company's reputation. That is where product recall coverage comes into play.
Product Liability Insurance Cost
The industry standard is a minimum of 1 million dollars in coverage but can be anywhere from $500,000 to $5,000,000. According to HowMuch.Net, the cost for product liability insurance is typically $0.25 per $100 in revenue. So a business that does $500,000 in sales a year may pay around $1,250 in annual premiums. However, there are a few different factors that influence the cost of product liability insurance:
- The size of the business
- The type of product you manufacture, ship, or sell
- The number of products that will be covered
- The claims history of your business
- The risks associated with that product
- How many employees you hire
- The insurance company you choose
If you manufacture or sell guns, your product liability premiums will likely be far higher than someone who manufactures spices because you're in a higher risk category for bodily injury and property damage.
Get a Free Product Liability Insurance Quote
At Tivly we strive to help small business owners find the right insurance solutions to protect their small businesses. To get a free quote, complete the form above or give us a call at 877-907-5267 and one of our agents will respond quickly.
Reviewed By: Sarah Reid, Licensed Agent
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