Product Liability Insurance Guide

Product liability insurance definition


Product liability insurance is a type of liability coverage that covers claims related to product defects or problems. If your company releases or sells a product that has a defect, and that deficiency results in the injury of a customer, your business could be held liable for the incident. Product defects can leave your business vulnerable to major lawsuits— class action suits included—which can be incredibly costly. Insurance coverage for product defects protects and helps you cover the expenses related to product lawsuits and other claims regarding faulty products.


Who Needs Product Liability Insurance?


Any business where the primary source of revenue is a product or line of products should consider liability coverage as a risk management strategy. Whether you're a manufacturer, a distributor, or a retailer, your business revolves around products. Ideally, your products are built to be 100% satisfactory to your customers. In the case of a defect, though, it’s important to have a specialized commercial insurance policy in place to protect your business and your assets against the dangers of product defects.

Even companies that primarily repair products, such as smartphone or tablet repair shops, should consider this type of liability coverage. While it’s rare for a repairer to be held liable for personal injury or property damage caused by a product defect, it isn’t unheard of. Having proper insurance is always a smart precaution.

Protecting your own finances and assets isn’t the only reason to purchase a product-related liability policy for your business. Other businesses in your supply chain may have policies against working with companies that don’t have the proper liability insurance coverage. These companies protect themselves by making sure everyone in their supply chain is protected against product defect claims.


What Are Some Claims Examples for Product Liability Insurance?


Product lawsuit claims come in three basic variations: product design, product manufacturing, and improper instructions. Product Liability insurance can help you handle each of these issues.

In some cases, manufacturers, distributors, or retailers might be sued for making or selling a product that is defective in design alone. A children’s dresser that tends to topple over because of a top-heavy design, for instance, is substandard because it puts children at risk. The liability in this kind of situation lies in the design of the product alone, which was faulty from the start and didn’t properly consider the safety of users.

In other situations, the design of the product might be okay, but something went wrong in the manufacturing process rendering the product defective. For instance, let’s say something goes wrong on the assembly line for a new smartphone and the incorrect components are used in the construction of some phones. As a result, the affected phones tend to overheat and explode. Because the issue wasn’t technically design-related, it doesn’t affect all the phones. Still, the manufacturing issue is enough for a product lawsuit.

Finally, Product Liability insurance can also kick in because the manufacturer of the product failed to provide necessary instructions, cautions, or warnings to tell customers how to use their product properly. For instance, if a drug company releases a medication that can have dangerous side effects if taken in combination with another common drug or substance, the company must include a warning to that effect on the label. Failure to do so can lead to product lawsuits.

  • A popular fitness blogger and Instagram model in France died after a pressurized canister used for dispensing whipped cream exploded, hitting her in the chest. Ard’Time, the company of the whip cream dispenser the model reportedly used has been recalled because of reports that the plastic head could explode and fly off
  • A class action lawsuit filed against the mobile phone company Samsung over allegations that the battery in various Samsung devices causes them to explode and burst into flames.
  • An Austin police officer is suing Ford Motor Company and Leif Johnson Ford for more than $1 million in damages, claiming he was poisoned by carbon monoxide while driving his patrol car.

What does the Average Product Liability Insurance cost?


According to FitSmallBusiness.com, the average cost of product liability insurance equates to about 26 cents for every $100 of retail prices for your goods. As such, if your business does $1 million of retail sales in a year, you can expect to pay about $2,600 in liability coverage for those goods.

With that said, multiple factors can impact how much you spend on this type of commercial insurance coverage. Liability insurance is always a form of risk management, which means that you are going to end up paying more if your company has an unusually elevated level of risk.

Drug companies and other businesses that manufacture medically-related products tend to be in the high-risk bracket and will pay considerably more for liability coverage. Products that are more likely to result in the injury of the user — such as guns or motorbikes — will also have greater liability risks and therefore face higher insurance rates.

Other factors can affect the cost of insurance as well. Beyond your industry and the products you sell, the size of your company is a factor. If your business is a huge, well-known corporation, you are going to be a bigger target for litigation than you would be as a small mom-and-pop retailer.

As such, you will likely have to pay markedly higher insurance rates. Your claim history will also come into play. If your company has a long history of making great products and avoiding lawsuits, your rates will be lower than a company that has repeatedly been sued for faulty goods.


Product Liability Insurance - Summary


Did you know that jury awards for product lawsuits tend to be higher, on average, than for any other type of litigation? In 2014, the average personal injury award for product lawsuits was $5,276,103. In comparison, medical malpractice lawsuits saw an average jury award of $2,330,103. With such a prominent level of risk, it's vital for businesses in the product supply chain to protect themselves against potential defects and the resulting costs of litigation and settlement. Finding the best product liability insurance coverage for your business will give you this protection and help your business weather the storm of potential product issues.  

At Embroker, it’s our mission to connect businesses with the right product liability coverage for them, so start the process today.

Rather than being elusive and forcing terrible paperwork on you, our brokers make insurance quick, simple and painless — thanks to cloud-based technology and partnerships with many of the top-rated insurance carriers in the country.

P.S. Check out our blog or our Insurance Guide Section to learn even more.

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