Is Product Liability Insurance a Good Thing to Have?

Product Liability Insurance
8
min read
July 26, 2022

If you are a business owner who designs, manufactures, wholesales, or sells products, it’s in your best interest to consider product liability coverage.

If you already have general liability insurance, great—you’re halfway there. But a general liability insurance policy isn’t enough; you need product liability insurance to cover legal or medical costs if your product causes injuries or property damage and you are found to be at fault.

Let’s take a deeper dive into what product liability insurance is and why you need it.

What Insurance Do I Need for Selling Products?

Let’s start with the basics: liability coverage refers to any insurance you have that takes on the possible risks that could be associated with your business if you are found to be at fault. This insurance coverage could pay for legal fees if you are sued or settle out of court. It could also cover medical costs if someone is injured because of your business.

So, for example, let’s imagine that a person slips and falls on the sidewalk in front of your restaurant, and it’s determined that you didn’t do an adequate job of removing snow, thus causing the fall. Your general liability coverage, minus any deductibles, would pay for the person’s injuries and any legal action they take, up to the limits of your policy.

So far, so good, right? But what happens if your business sells children’s toys and a child chokes on a small part of a model house you made, causing a throat injury? In this case, you need liability insurance that is specifically geared toward your products. Your product liability insurance would take on the costs of this accident.

“Product” here is a broad term that could cover just about any good that is sold to consumers or to other businesses, from clothing to food to medical supplies. It includes raw materials and manufactured goods, and it applies to both the buyer of the good, the users of the good, or even bystanders who happen to be injured by your product.

You might think this kind of risk is rare, but according to the U.S. Consumer Product Safety Commission, in the U.S., there were roughly 240,000 injuries treated at hospitals in 2016—for toy-related incidents alone. Although the risks vary from product to product, just about anything you make or sell may be involved in an accident that could have serious repercussions on your business—which is why product liability insurance is a must.

What Does Product Liability Insurance Cover?

There are several types of defects that most product liability insurance covers:

What Does Product Liability Insurance Not Cover?

The parameters of product liability insurance are important to understand—and so are the limits to that coverage. There are a few things that aren’t generally covered under basic product liability. They include:

What Is the Cost of Product Liability Insurance?

The amount you pay in insurance premiums varies greatly depending on factors such as your policy limits, any exclusions, and the type of business you own. Underwriting for each policy is unique to the business covered, so to receive accurate product liability insurance quotes, you’ll want to talk to your insurance agent or broker to determine the details of your coverage.

That being said, the average cost for a small business owner to purchase this type of insurance policy is $1,192, according to research done by AdvisorSmith. This averages out to $99 a month—which can save you millions if you are faced with a lawsuit or high medical costs.

One of the biggest factors influencing the rate you’ll pay for product liability insurance is the type of product you create or sell. If your defective product, for example, is a ladder, it’s likely that injuries would be more expensive and have a higher risk than if you are a manufacturer of paper products. Other high-risk products may include items made for children, bicycles, and food and beverage products.

Who Needs Product Liability Insurance?

If you’ve read this far, you know that anyone who makes a product they sell through their business needs product liability insurance to protect them from the risks of a product liability lawsuit. 

But there are other business people who may need it as well to protect them from financial loss. In addition to those who create a product, many others may touch that product before it’s in a consumer’s home at any point in the supply chain—and those people may need product liability insurance. Some people that should consider purchasing product insurance include:

If you sell your goods on Amazon, you should be aware that the company requires third-party sellers to have product liability insurance if they make more than $10,000 in sales in a single month. To help you with this, Amazon has a program called the Amazon Insurance Accelerator, which gives sellers access to a network of curated insurers collected by the company who are skilled at working with online retailers.

How Much Product Liability Coverage Do I Need?

Not sure how much product liability coverage you need? Ask your insurance broker or agent. They are in the business of risk management, and their underwriters will ensure that they are balancing your need for coverage with their own desire to protect themselves from expensive claims. 

A common policy limit for small businesses, for example, is $1 million/$2 million, which means your upper limit for claims is $1 million for a single occurrence and $2 million for aggregated instances.

Your insurer will take multiple factors into account when determining your premium rate, including:

Your broker can work with your business insurance company to determine the best choices when purchasing a policy. 

How Do I Purchase Product Liability Insurance?

The insurance industry offers several options for businesses wishing to purchase product liability coverage. Many major insurers can write a stand-alone policy that should offer adequate coverage. For businesses involved with high-risk products, this may be the best option, as you can tailor the policy to your specific needs.

For smaller companies and those with fewer risk possibilities, you might consider bundling your product liability insurance in a business owners policy or a BOP. That’s a great option for small business owners since you pay one premium for several types of policies—and deal with one insurer and one agent for all of them. BOP policies are highly customizable, so you can create one that is particular to your own business and offers enough protection—but no more than you need.

Finally, in many cases, you can purchase product liability coverage as an endorsement on your general liability policy. An endorsement is an add-on that becomes part of your basic policy but gives it additional functionality, such as protection from equipment breakdown or an extended reporting add-on that allows you to file claims after the expiration date of your policy.

Product Liability Insurance Protects You from a Catastrophic Loss

In 2020, according to the Insurance Information Institute, the average amount that was paid out after jury trials related to product liability was $7,058,106. That’s a lot of money for any business—and more than enough to close a small business.

Is product liability insurance the right choice for you? As a business owner, the risk of facing catastrophic losses from a product-related issue is always there—and so, at the very least, it’s worth a call to your agent or broker to discuss. 

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