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Product Liability Insurance

Product Liability Insurance

No business owner ever knows when a product may fail. However, a good businessperson understands that product failures, recalls, and defects happen, and takes the necessary preventive measures, like investing in Product Liability Insurance.

What is Product Liability Insurance?

Product Liability Insurance is a form of general liability insurance meant to protect your business from financial and legal consequences as a result of bodily injury or property damage due to the use of your business’s sold goods or products. Product Liability Insurance covers the legal and court costs of defending any claims of bodily injury, property damage, or financial losses caused by your product.

Get a quote on Product Liability Insurance

Product Liability Insurance is a way of protecting your business from financial loss due to legal and court costs brought on by a potential suit by one of your customers. Say a customer alleged that a baby romper you sold her caused her child to choke. You could be looking at a serious legal charge against you and your business, one that may end up sapping all the money and resources out of your business.

Situations that are typically covered by Product Liability Insurance may include:

These are some of the instances where Product Liability Insurance may be able to protect you and your business from shelling out thousands, if not millions, of dollars in litigation, arbitration, or legal costs.

What are the types of claims Product Liability Insurance can protect against?

There are different types of claims that a dissatisfied customer may claim against your company. Some of the more common claims include:

1. Design Defect

A design defect claim alleges that a product was unsafe or dangerous from the conception of its design. This differs from a production or manufacturing flaw in that the cause for harm was not born out of faulty craftsmanship or production, but the product’s inherent design was dangerous in and of itself.

For example, a customer purchases a children’s book that contains some beads on one of the pages. Due to the small size of the beads, the customer’s child chokes on the bead. Although a claim could be made for production or manufacturing flaw, the customer could also claim that the children’s book was inherently dangerous from its design. I.e., a children’s toy should not contain any small material that a child could choke on.

2. Production or Manufacturing Flaw

As its name implies, this type of claim alleges a flaw in the production or manufacturing of merchandise that created a dangerous or unsafe product. Production or manufacturing flaws are any mistakes that occur during the production of the product that creates a potential cause for bodily injury, property damage, or consequential economic loss.

For example, a customer who had purchased a pair of shoes from your business recently slipped and hurt herself due to the heel not being securely fastened to the sole of the shoe. She incurs medical costs because of her injury and has sued you for producing a shoe that was unsafe for normal wear.

Without Product Liability Insurance, your business would be solely responsible for fronting all the legal and court costs to fight this claim. Furthermore, if the customer were to win the case, depending on the outcome of the claim, your business might also be liable for the customer’s legal costs and medical costs.

3. Misleading/Defective Warnings or Instructions (Marketing Defect)

A customer may seek action against your company for not supplying the necessary warnings regarding dangerous aspects of your product. The claim here is that a company did not adequately and appropriately notify the consumer of all the potential obvious risks and harm that the product may cause.

For example, your business sells homemade natural cosmetics. A customer purchases one of your ointments that contains many harsh ingredients that should not be applied to sensitive areas of the face. She puts the ointment on her eyelids and suffers severe chemical scarring. Because your company did not warn the customer or properly instruct her, a claim may be made against you for defective or misleading warnings or instructions.

4. Strict Liability

Lastly, strict liability is perhaps a business owner’s biggest source of anxiety in relation to his products because it is the most variable and hardest to anticipate or control. Strict liability allows for a customer to hold a company responsible if they can prove a number of reasonable claims, even if it was not the company’s direct intention to harm the customer or impart any injury or damage. In such a case, the company must bear the responsibility of a defective product, despite the company’s negligence or intent to harm.

In order for a customer to prove strict liability, he must prove all of the following:

How much does Product Liability Insurance cost?

AdvisorSmith found that the average cost of Product Liability Insurance for small businesses was $1,192 per year. This cost survey included small businesses in the manufacturing, retail, and wholesale industries with revenue under $1 million, for general liability coverage of $1 million per occurrence / $2 million per year.

Pricing does, however, vary depending on a number of factors, including:

Compare Product Liability Insurance Quotes

There are a variety of insurers and brokers in the market, and it may be difficult sorting through all of the options. AdvisorSmith analyzed a variety of product liability policies and determined the best product liability insurance companies for small businesses. To determine the best product liability insurers, AdvisorSmith considered a number of factors, including financial strength ratings from AM Best and Standard & Poor’s, customer satisfaction data from several J.D. Power studies, complaint ratings from the National Association of Insurance Commissioners, available features and options, and availability of information and ease of use of the insurers’ websites.

» Read our full review of the best product liability insurance companies.

RankCompanyAdvisorSmith Rating
1Chubb5.0 / 5.0
2The Hartford4.9 / 5.0
3The Hanover Insurance Group4.7 / 5.0
4RLI4.5 / 5.0
5Great American4.5 / 5.0

What are the exclusions of Product Liability Insurance?

It’s important to note that Product Liability Insurance is third-party insurance, meaning it covers claims brought on by third parties. This would not include anyone who is part of your business or who you employ. Third parties could include customers, vendors, or clients.

Other important exclusions to Product Liability Insurance include property damage or bodily injury that occurs:

Why is Product Liability Insurance important?

If your business sells any goods or products to the general public, it is absolutely necessary for you to consider Product Liability Insurance. There is no guarantee that any of your products will not cause injury, property damage, or even wrongful death. Even if you are certain of the quality of your products, a dissatisfied customer may very well be able to wage a long and expensive legal battle against you and your company that may deplete you of your time, money, and resources—even if you were to win the case. It is important to note that product liability cases are among the most expensive to litigate.

Product Liability Insurance makes sense to consider for any financially responsible business owner. While there are a number of steps you can take as a business to reduce your risk exposure, when you put your products in the hands of your customers, you never know what may happen. Product Liability Insurance gives you peace of mind that if anything were to occur, you would have a formidable safety net to fall back upon.

Some examples of small businesses that could use Product Liability Insurance are:

Product Liability Insurance vs. Product Recall Insurance

In the case of a product recall, Product Liability Insurance pays out the costs associated with a customer’s lawsuit against you. It does not cover any of the costs of recalling your product, i.e., removing your product from the market and rehabilitating your company’s reputation, which would be covered by product recall insurance. Product recall insurance also differs from Product Liability Insurance in that it can be activated before anyone is harmed. You do not need to be sued in order to use your product recall insurance.


Is product liability included in general liability insurance?

Product Liability Insurance is typically covered under the products and completed operations section of a standard commercial general liability policy. For businesses in low-risk industries or who are not focused on potentially hazardous products, this type of coverage should be sufficient.

However, for businesses with high-risk products, like toys, pharmaceuticals, clothing and apparel, or insecticides, obtaining a separate Product Liability Insurance policy may be ideal, if not necessary. Often times, companies dealing with higher risk products or goods will not be able to obtain coverage through a CGL policy, as the risk for standard insurers is too great. These companies generally seek out specialty insurers who can offer Product Liability Insurance policies with high limits that can cover the enormous costs of product liability claims.

What is the difference between public liability and product liability?

Public liability insurance protects your company against third-party bodily injury and property damage claims and lawsuits filed by members of the public. PLI is more common in the United Kingdom and Australia, and the protections this insurance type offers are similar to a general liability insurance policy in the U.S. However, public liability insurance typically does not include coverage for product liability and only covers third-party bodily injury and property damage that occurs on your business premises.

Final Word

As a business owner, you should always strive to provide the best quality products for your customers. Not only is it a good marketing tactic, but it ensures that your business will not fall liable for a faulty product. Still, with the advent of mass production and the demand generation that even small businesses face because of the internet, there is no possible way to guarantee every single item that you sell into the public.

That is why Product Liability Insurance is crucial for protecting your business from financial risk that you may incur due to one faulty product. Not only does Product Liability Insurance protect you in the case of a serious allegation, but it also gives you the peace of mind to innovate and produce new products, thus keeping alive the entrepreneurial spirit that brought you into your business in the first place.

Expert Commentary

AdvisorSmith spoke with the following experts to provide critical insight on product insurance for business owners.

Michael Zuckerman

  • Associate Professor of Instruction, Risk and Insurance Management
  • Temple University, Fox School of Business
Michael's Answers

Michael Green

  • Bess and Walter Williams Professor of Law
  • Wake Forest University, School of Law
Michael's Answers

Lynne McChristian

  • Director, Office of Risk Mgmt & Insurance Research
  • University of Illinois, Gies College of Business
Lynne's Answers

Frank Freund

  • Director, Insurance & Risk Management Program
  • Michigan State University, Eli Broad College of Business
Frank's Answers

Vince Lewis

  • Director, L. William Crotty Center for Entrepreneurial Leadership
  • Fifth Third Bank Entrepreneur-in-Residence
  • University of Dayton
Vince's Answers

Q. With the constantly evolving world of technology and products, where do you see the product liability insurance market trending, and what are the main insurability challenges?

Q. Should small businesses be concerned about product liability risk?

Q. How can a business effectively organize and manage product liability risks?

Q. Are there any trends you see happening in the product liability space?

Q. How should businesses think about balancing risk and affordability when it comes to product liability insurance?

Q. Can insurance provide protection against product liability? Are there risks in relying on product liability insurance?

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