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.
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:
- A customer harms herself because of the faulty packaging on one of your products
- A drapery set that a customer purchased from your business was highly flammable and caught on fire, eventually damaging her entire kitchen
- A customer with a severe allergy finds trace amounts of tree nuts in your homemade gourmet muffins
- A homemade house cleaner that you sell damaged one of your customer’s entire hardwood floor
- A customer becomes sick with food poisoning after eating old shellfish at your restaurant, goes to the hospital, and incurs medical costs caused by your contaminated food products
- A customer’s pet becomes ill from ingesting some lining in a pet toy product that you sell
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.
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:
- That the product contained a defect that was dangerous to the consumer
- That the product actually caused bodily harm, damage to property, or emotional distress (that is, the product didn’t just have the potential to cause harm but that it really did)
- The injury to the consumer occurred while he was using it for its intended purposes. For example, a customer used paint-thinner for the purposes of thinning paint instead of on his person.
- No significant changes were made to the product after the customer’s purchase. For example, if a customer broke a mug and then hurt his hand on the fragmented pieces, the customer could not assert that the defect was caused by the company.
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:
- Industry. Businesses that operate in high-risk industries, like pharmaceuticals, can expect to pay more in premiums.
- Product. Businesses that develop high-risk products, like insecticides or firearms, can expect to pay more in premiums.
- Annual sales. The more product you sell, the more risk exposure your company faces, resulting in higher premiums.
- Business role in product stream. Depending on where your business sits in the overall stream of commerce, you may be at higher risk for liability. Manufacturers will generally have higher premiums than a company further down the supply chain.
- Claims history. As with most insurance policies, a history of frequent claims will inevitably increase your premiums.
- Coverage limits. The higher your coverage limits are, the more you’ll pay in premiums.
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.
|1||Chubb||5.0 / 5.0|
|2||The Hartford||4.9 / 5.0|
|3||The Hanover Insurance Group||4.7 / 5.0|
|4||RLI||4.5 / 5.0|
|5||Great American||4.5 / 5.0|
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:
- On your business premises
- As a result of products still in your physical possession
- As a result of the transportation of your product
- As a result of crime or fraud
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:
- Beauty or fragrance sellers
- Businesses that sell appliances
- Children stores, including retailers selling toys, clothing, accessories, gear
- Clothing and apparel sellers
- Food manufacturers, wholesalers, or distributors
- Home improvement suppliers
- Pet stores
- Restaurants, bakeries, cafes, or specialty food stores
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.
- A company sells canned soup and has been getting complaints about food poisoning from their “chicken noodle” variety. Four people come forward to sue the company for pain and suffering, and they win. The company is protected from the costs of the lawsuit through their Product Liability Insurance. However, the faulty chicken noodle soup continues to circulate on shelves throughout the Midwest. Product recall insurance would cover the costs to recall the soup and prevent new infections.
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.
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.
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.
AdvisorSmith spoke with the following experts to provide critical insight on product insurance for business owners.
- Associate Professor of Instruction, Risk and Insurance Management
- Temple University, Fox School of Business
- Bess and Walter Williams Professor of Law
- Wake Forest University, School of Law
- Director, Office of Risk Mgmt & Insurance Research
- University of Illinois, Gies College of Business
- Director, Insurance & Risk Management Program
- Michigan State University, Eli Broad College of Business
- Director, L. William Crotty Center for Entrepreneurial Leadership
- Fifth Third Bank Entrepreneur-in-Residence
- University of Dayton
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?
Michael: In terms of trends, there’s been a lot of discussion about social inflation—if juries feel that a manufacturer is culpable, awards are trending higher today than they have been over the last 20 years.
When you’re talking about any kind of new technology, the problem that an organization is going to have today is that if the underwriter doesn’t have good understanding of what the product is, what it does, or how it could hurt the end user, then they’re going to be less likely to offer coverage.
For example, in the case of self-driving vehicles, you can have a lot of small to medium businesses that are making component parts that go into these vehicles. For an automobile liability insurer, for example, for a small business that may be using an autonomous vehicle, where do you separate separate the driver’s negligence from the product liability?
One of the trends I’m thinking of is with Tesla, where you may see the automobile manufacturers more willing to get into the automobile liability insurance business because if they’re going to have some culpability or if they’re going to have to seek indemnification from a third party supplier—a small business auto manufacturer, auto parts manufacturer, etc.—it may be easier for the auto manufacturer just to provide the coverage and then sort it out themselves, rather than having three, four, or five different defendants included in one case.
But for small businesses, the question is, do the underwriters understand the technology? Are they going to be willing to underwrite it? And then there is this issue of social inflation, where if a case does go to court, the underwriters are concerned about the potential for nuclear verdicts.
With other developing product areas like cannabis, where there is still federal prohibition, but states are moving in their own direction and there isn’t the same kind of scrutiny or testing of products as there is for standard drugs, small businesses that are trying to buy products liability coverage have to ask themselves how they address that uncertainty. How do they show the underwriter that the product is really safe? And then they’re going to have to wade through exclusions that an underwriter may put on a liability policy to avoid dosage issues or product quality issues that may arise.
I think the other trend related to products liability is product recall. I used to think of product recall as just an issue for food manufacturers or automobile manufacturers, but smaller businesses manufacture a lot of of goods and services that parents buy for their children, and there’s a significant amount of product recall in that area. So it’s not just product liability, but it’s their exposure to product recall, and product recall costs have been increasing significantly over the last several years. So you always have to think about product recall in tandem with product liability, especially if you’re a small to medium-sized business.
Lynne: A current challenge is the so-called “social inflation” related to insurance claims costs for all lines of insurance business. It’s defined as insurance costs that rise higher than economic inflation. And, when the cost of claims rise, then the cost of insurance rises because insurance is, essentially, the cost of claims.
Product liability is typically directed at manufacturers. Something to keep an eye on is product liability legal action that is extending to distributors and retailers. In July, the U.S. Consumer Product Safety Commission said it was considering a ruling to label Amazon as a distributor and, therefore, responsible for recalls on behalf of its sellers. Amazon considers itself a package-delivery service, not a distributor.
Keep in mind that there may be some coverage for product liability in a commercial general liability policy. But it is often very limited and may be insufficient to protect a business. A product liability policy works in tandem with the general liability policy.
Frank: As with all new products and technologies, there will be unexpected or larger than expected risks and exposures that emerge. For example, products with significant new technology like self-driving cars can be subject to hacks or other cyber disruption that could impact the performance of the vehicle. For legalized marijuana dealing with different legal matters state-by-state will impact the distribution system, cash management and insurance coverages. Accordingly, being able to identify and quantify the potential risks—really thinking about what could go wrong, and mitigating those risks will be key.
Q. Should small businesses be concerned about product liability risk?
Michael: First and foremost, small businesses really need to find an insurance advisor or broker that knows what they’re talking about, that understands their industry, and understands the insurance marketplace.
And then, the easy answer is yes, they should be very concerned about products liability because we’re a litigious society, because of the social inflation we talked about, and because of products risks—if there’s a design or manufacturing defect, or if the product wasn’t properly labeled, they could be held liable for any injury that the product causes either to someone’s property or to end users.
But it does get complicated because as a business owner, I think you have to sit down and flowchart where your component parts are coming from and then understand how you manage the quality of those component parts. So I would encourage the small business owner to not only work with a good broker who understands their industry and understands the coverage, but also work with a broker that can help them look at the exposure they have from their supply chain and how they enforce the component quality standards and manage the risk from your suppliers using contracts.
Lynne: Everyone who sells a product or service should be concerned about product liability. While larger businesses may seem like easier targets due to their deeper pockets, there is always a chance that something can go wrong for a small entity. If a product causes harm to a customer in any way, that person may be tempted to sue.
Frank: Absolutely, small businesses need to understand their role in the development, distribution, and service of any product. Just because they may not have developed the new product/technology, doesn’t mean they won’t have exposure from a product fail. This could include faulty installation or service, issues with representations during distribution, or just being included in an overall product liability claim.
Michael: Different companies are going to have very different products liability risk. If I’m a printer, for example, and the product is printed materials, my products liability risk is virtually nil. Now, there may be other risks that I have that a CGL policy would cover. For example, somebody comes into my printing shop and they slip on ink that was spilled—that’s a potential liability risk. But a CGL policy is going to cover almost all of your tort liability risks. By contrast, if I make children’s toys, my products liability risk may be considerably greater.
People should only insure for losses that are really going to be difficult to bear. That’s the reason for insurance. I never buy flight cancellation insurance, for example, because it’s a risk I can bear. Overall, my loss, if it occurred, is going to be less by my bearing it than paying for the administrative costs that are involved in insurance. So there are lots of things I don’t insure against because I don’t need to.
But insurance may be necessary if the potential loss is great enough. For small businesses, I think lesser magnitude losses are going to be more significant than for a larger company. So I think as a small business, it’s even more important to pay attention to risk and to get appropriate insurance.
Vince: I think it really is industry specific and product specific, depending on what your full liability is going to be. When we’re coaching entrepreneurs, we tell them there’s going to be four people that you are going to have a business relationship with that are going to be very important: your banker, accountant, lawyer, and insurance agent. And I think that with the insurance agent, your insurance will really depend on your business.
If you’re running a small restaurant, you’re probably more worried about the slip-and-fall accident or worker injury than you are about some sort of issue with the food. In that instance, general liability is usually a top-of-mind concern, and product liability is not, unless you’re in a space where you know that you have high risk.
Q. How can a business effectively organize and manage product liability risks?
Michael: Make sure that you’re really presenting yourself properly to the insurance marketplace, meaning that not only do they understand your product, that the product is safe, and why it’s safe, but also that you go into some detail in terms of your loss prevention product quality program and how you would respond in the event of a product recall.
And it’s also important that they really know who the management of the organization is. Small businesses are important to our economy, and they shouldn’t feel as if they’re inconsequential so they can’t take up the underwriter’s time because they need to write a lot of insurance for a lot of small businesses to make money. You should have a meeting with those underwriters so they can meet you and ask questions and build a personal relationship.
For any manufacturer, I think you really want the underwriter to know you, know who you are, and know who the management is. Get to know your underwriters and let them get to know you. You want to know how well they’re going to handle any claims and that they’re going to be there for you. And they want to know that you’re really a good person and your company is a good company that wants to sell safe, quality products.
Lynne: Quality control is job one, and it is an essential part of an enterprise risk management strategy. Insurance providers also offer their policyholders risk assessment tools and expertise, and that is something a small business should put to their advantage.
Frank: Developing a high confidence level in the performance of the product through thorough product development and testing. Verifying that all appropriate governmental approvals and licensing are in place. Build an effective team of partners that assure high quality in all phases of the product sale/installation. And, having a robust risk management function that anticipates and quantifies potential risks and works closely with an insurance partner to obtain appropriate coverage.
Michael: While large companies have risk managers that do risk assessment and try and minimize the risk that’s inherent in their operations, small businesses likely don’t have employees who do risk assessment for them. But I would assume that there are people who will do that as independent contractors for small businesses. That would be a very good way to get a handle on both what your risk is, for the purposes of insurance, and how to minimize that risk within your business.
Some insurance companies will do this for their clients. They will come in and do an inspection, see what the operation is, and then make suggestions and give advice on how to best minimize risk. It’s in the insurance company’s interest to minimize the risks that they’re insuring against. I would recommend small businesses talk with their commercial broker about whether a company would do that sort of risk assessment for them.
Vince: Part of it is how you structure the organization. The first thing you have to do, if you’re going to try to limit your risk from a liability standpoint—it’s not just insurance—is essentially looking through your whole business process.
Let’s say you’re manufacturing a children’s toy. There’s going to be a quality process that you have to have in place to ensure that there is no product risk or that you’re limiting your product risk. It’s more than just having insurance to protect you in the event of a lawsuit or some sort of mishap. It’s really having internal quality processes and internal design processes that are robust enough that you don’t open yourself up to that liability.
If you think about today’s world, we run around and preach Lean Startup methodologies—go small batch, build, measure, learn—but there are times when you’re still trying to get to that point, but you need to make sure you’re building in a thoughtful and intentional way in order to limit that broader liability. That’s why it takes years and years to develop new pharmaceuticals, for instance.
Q. Are there any trends you see happening in the product liability space?
Michael: One important legal trend that affects product liability is the liability of product makers was expanded quite substantially from the mid-60s to the mid-70s. There were legal developments there that basically said you don’t have to show that the manufacturer engaged in some sort of wrongful conduct. If the product is defective, that’s sufficient for liability. And that idea of strict products liability swept the nation in the 60s and 70s.
Since then, there’s been a considerable coming back from that overshoot, and the law is now much less favorable to plaintiffs than it was in that period. There’s also been, from the 1990s until today, an awful lot of tort reform. And by tort reform, what I mean is that legislatures get involved—they limit the extent of liability that exists, they put caps on damages, and they affect the technical provision about joint and several liability.
There’s been hundreds of state laws enacted that, almost in all cases, reduce the potential for liability, and that’s where we are today. Part of that was a response to the late 90s, when products liability and other liability insurance premiums were going way up, and doctors and product manufacturers were complaining about 100% increases in their insurance premiums. And there was a response at that time that cut back on liability, so the landscape for producers for small businesses is a much more favorable one today than it was in the 70s and 80s.
Q. How should businesses think about balancing risk and affordability when it comes to product liability insurance?
Vince: That’s a discussion you should certainly have with your insurance agent, just in terms of cost, what liability protections there are, and what you would need based on your specific product. Unfortunately, for most entrepreneurs, we’re not thinking that way. At the start, we’re thinking of just getting to launch. We’re typically not thinking in terms of what’s my overall risk.
To me, it’s really about getting the right guidance and advice up front. It’s talking to people who are in that space, whether it’s somebody that provides product liability insurance or someone who is in the industry.
Q. Can insurance provide protection against product liability? Are there risks in relying on product liability insurance?
Vince: Insurance is there in the event something happens. The real protection is in the intentionality around your design process and ensuring that whatever you are putting into the marketplace isn’t going to cause some sort of problem down the road. I think insurance is needed, but I think it’s more about the product itself, how you design it, how you introduce it, and how you educate the consumer to use it.