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:
- Design defects: If the design for your widget features an inherent defect that causes injury or damage.
- Manufacturing defect: If the widget was improperly or poorly produced.
- Marketing defect: Also called an improper warning, this happens if you don’t give the customer adequate instructions and warnings about possible hazards.
- Strict liability: This is when your widget causes bodily injury or damage and you are not found negligent—but still are held responsible for costs. This may occur if the product is highly hazardous, such as an explosive, and causes an injury, regardless of whether the product was being used appropriately.
- Breach of warranty claims: If you have stated that the product will be capable of a certain standard or action in your warranty—and it is found to not meet that standard—you could find yourself facing a lawsuit.
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:
- Technology products: If your product is related to technology or computers, you’ll need a type of insurance called a technology errors and omissions policy. This protects you if there is a claim made against you based on any technology-based mistakes, such as an error in coding.
- Product recall costs: If, because of a defect of some kind, your company needs to recall a product, the costs associated will usually not be included in your product liability insurance coverage. For that kind of coverage, you’ll need either an endorsement to that policy or a separate stand-alone policy for product recall insurance.
- Employee injuries: If an employee is injured while working on your product, their injuries will be paid under your workers’ compensation coverage. Workers’ comp can be complex, but Hourly makes it simple to insure your team and manage your payroll effectively and efficiently.
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:
- Product designers and those who engineer products
- All types of stores, from purveyors of home goods to pet supply stores
- Individuals who sell on Amazon, Etsy, eBay, and other online venues
- Restaurants and food stores
- Those who repair broken goods, such as appliance repair professionals
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 location: If you are selling products in a state or region that is known to be litigious, you may pay more.
- Where your products are used: If you sell your products globally, you may pay more than products that are just sold from your neighborhood grocery store, for example.
- The upper limits of your coverage: A $1 million policy will cost less than one that would cover you up to $5 million.
- The product you are selling: This is directly related to how likely personal injury or property damage could be caused by your product. If you make a skin lotion that has the potential to cause an allergic reaction, for example, your premium might be higher.
- Your claims history: If you’ve filed claims in the past, that could impact your premium. For example, if you filed a claim related to product defects that caused a wrongful death or serious injury, expect your rates to increase.
- The size of your company: A mom-and-pop grocery store is less likely to be targeted for litigation than a mid-sized corporation with several hundred employees—which impacts rates.
- Your revenue: Like the size of your company, the amount of money you make a year may impact your product liability claims. Higher revenue generally means higher premiums for your product liability insurance policy.
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.