Product Liability Insurance protects your business from liability caused by your business’s products or goods.
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Typically, as demand for a business’s product increases, the ability to quality-assure every single product that you sell to your customer decreases along with it.
For example, while you may be able to inspect every single piece of clothing when you were first starting out your baby attire business, as your business grows and you begin to outsource manufacturing and production, you will inevitably run into the inability to assure every single item yourself. In this example, perhaps a button on one of your thousands of items was not secured properly, thereby posing a choking hazard to children.
Of course, you can conduct quality assurance; however, there is no way to truly guarantee that every single product coming off the assembly line will be error-free, especially as you try to scale your business. Luckily, this is where Product Liability Insurance comes in.
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.
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.
Do I Need Product Liability Insurance?
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 harm to a customer or their property. 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. When you put your products in the hands of your customers, you never know what may happen. Product Liability Insurance gives you the 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:
- Restaurants, bakeries, cafes, food distributors
- Clothing/apparel sellers
- Children Stores: Toys, Clothing, Accessories, Gear
- Pet stores
- Businesses that sell appliances
- Beauty/fragrance sellers
- Home Improvement Suppliers
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:
- 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.
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:
- 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
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.
- 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 vs 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.
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!