Product Liability Insurance is a commercial insurance policy designed to defend your business if you are sued due to the products you make, distribute, or sell. If someone claims they were injured from a product your business is created, manufactured, distributed, or sold then a product liability policy is going to cover legal expenses and other costs. These products can be virtually anything, from food and topicals to sports equipment and children's toys.
If your business does not make the product, then you still need product liability insurance. Anyone can sue over a product related issue and when that happens, all parties involved will most likely be named in the lawsuit. For example, say you sell a product and take no part in the design or manufacturing process. If a customer purchases a faulty product that you sold them, even though you had nothing to do with the defect, your business could be named in the lawsuit.
The costs associated with a product loss range from replacing defective products to lawyer fees and business disruption costs. It can also cover costs associated with public relations in order to preserve the reputation of your brand and business.
ADVISOR TIP: Product Liability is similar to General Liability Insurance (CGL), and can be included as part of a CGL policy, but is often excluded. It should be discussed with your advisor to determine if it's included or not.
Product Liability vs General Liability
A Commercial General Liability Policy typically only covers things related to the "completed operations" of your business. This would be an injury related to a customer, partner, or client coming to your office or business location (ie, they slip and fall on your floor and sue for medical bills). Product Liability insurance is going to cover a customer that is off premise who is injured by a product you designed, manufactured, grew, distributed, or sold.
Product Recall and Extra Expense
You usually have the option to add a separate insurance policy to your policy that covers the costs of recalling products. It's usually added by endorsement or "rider" and is rarely included with out specifically adding it. The limits can be as low as $25,000 per event, and up to over $10,000,000 per event.
Product recalls happy voluntarily or involuntarily. When a product is recalled voluntarily then it usually means there is no legal mandate (ie, the FDA didn't enforce it). Involuntary is obviously when the government forces a business to remove a product from the market.
Product Recall insurance will typically cover the following costs:
- Collecting defective products
- Disposing of products
- Public relations and crisis management
ADVISOR TIP: These costs can add up quick. For a small manufacturer, they can be devastating. Product Recall should be considered for any business providing consumer good, consumable products, component parts, and other businesses.
Product-related claims can occur from a plethora of situations. Depending on where your business fits into the process will indicate where your exposure is. If you are the business who makes, distributes, or sells the product, chances are that you will be involved legally if there's a lawsuit. Your product liability policy will protect your business if someone becomes sick, injured, or dies.
Some of the most common type of product related claims are:
- Manufacturing Flaws
- Design Defects
- Improper Labels
- Strict Liability
A well-written product laibility policy will cover the following situations:
- Bodily Injury: For example, you manufacturer toothpaste and a customer becomes ill. Your policy will pay for medical bills, lawyer fees, and settlements.
- Property Damage: For example, you design the electrical components of a drone and a customers drone malfunctions and hits a Ferrari. Your policy will pay for damages, lawyers fees, and settlements here too.
- Death: Say that toothpaste you sold ends up killing a customer. Product Liability will cover legal fees and settlements, but also burial costs and other expenses related to the death.
ADVISOR TIP: Each policy is going to have it's own set of coverage and exclusions relevant to your business. It's vital that you review the specific coverage with your advisor to ensure all scenarios are covered.
Like all insurance policies, a Product Liability policy only provides coverage and limits detailed on the policy. It does not cover the following:
- Employment Related Claims: If your employees get injured or sue you for discrimination, sexual harassments, or wrongful termination, a Product Liability policy will not defend you. Check out Workers Compensation and/or Employment Practices Liability.
- Product Recall Costs: You can add an extension or purchase a separate policy covering product recall costs if your product become defective and needs to be recalled.
- Cyber-related Incidents: Your Product Liability policy will not cover any events related to cyber, software, or technology. These exposures are covered under a Technology Errors & Omissions Policy or a Cyber Liability Policy.
- Professional Errors & Omissions: If you are giving professional advice to other business, a product liability policy will not cover that. This is covered by Errors & Omissions insurance.
If you are designing, manufacturing, distributing, selling or repairing a product then you should consider Product Liability Insurance. The size of your business should not dictate if you get a policy too -- a single owner business and large corporation should both have insurance.
Here are some of the most common examples of businesses that have product liability insurance:
- Consumable Product: food processors, topical/ointments, beverage companies, and cannabis & hemp.
- Component Parts: general manufacturing, electronic parts, medical devices, automotive, and aviation.
- Consumer Good: appliances, clothes, furniture, household, children's toys, sporting equipment, and outdoor goods.
ADVISOR TIP: Bottom line, if a product your business is involved with is available to the public, then you should consider purchasing a policy.
The cost of a Product Liability Insurance policy depends on various factors. Some of the most common factors that increase your product liability insurance are the following:
- Type of product: ingestible products are going to be rated higher than a t-shirt manufacturer.
- Projected annual sales: bigger the revenue means more customers which ultimately increases the chance of a loss occurring.
- Safeguards: business with little to no safeguards will pay a higher rate (if they are able to find insurance at all)
- Prior Claims: if your business has had prior claims it will have a higher rate
Policies start around $500 for a new business with a traditional product (clothing company, for example). Products that are in emerging industries such as cannabis & hemp should expect to pay $2,500 for a new business.
ADVISOR TIP: The price of your Product Liability policy will increase as your business grows and expands.
Speak to a Fullsteam Insurance Advisor today about pricing, coverage, and steps to begin quoting.
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