Quick Guide to Product Liability Insurance

There are many reasons to have product liability insurance, but the most important is that it provides protection from a company’s liabilities and damages. Products such as food, drugs, and medical devices can cause physical harm or even death if they’re not made properly or used incorrectly.

Product liability insurance is a type of insurance that protects companies against losses caused by defective products. This quick guide will show you what product liability insurance is, how it works, and why it’s important.

Product liability insurance protects a company’s finances by covering legal costs if a customer is harmed by its product. If the company is held accountable, the policy usually pays for legal fees, court judgments, and even the injured party’s medical expenditures. Premiums for product liability insurance vary, but they typically range from 15 cents to $1.50 per $100 of yearly sales income. The average small company owner pays roughly $700 per year in taxes.

Product liability coverage is included in general liability insurance, but it may not be adequate for certain small enterprises. Working with a company like Hartford is an excellent choice in this case.

What is Product Liability Insurance and How Does It Work?

Owners of businesses are responsible for injuries, illnesses, and property damage caused by the items or services they provide to customers. In most jurisdictions, every company in the supply chain may be held liable for the damage that its products or services. Retailers, designers, wholesalers, manufacturers, and distributors may all be sued for the following reasons:

• Design flaws: When a product’s basic design makes it inherently risky, such as a top-heavy automobile that frequently flips over on corners.
• Manufacturing flaws: When a weakness in the manufacturing process results in a defect in a product that causes harm or damage; an example would be a swing set with a weaker or loose chain.
• Inadequate or unclear instructions or warnings; cause harm, such as when a cleaning solution generates chemical vapors and does not include guidelines to use in a vented location.

These claims, as well as finished commercial activities that take place off-site, are covered by product liability insurance. For instance, if a carpenter completes the installation of kitchen cabinets that subsequently collapse and cause damage, product liability insurance would normally cover the costs of the repairs.

All of these risks are covered under a section of general liability called products-completed operations coverage, although a manufacturer, for example, may need a separate policy.

Tip: Product liability insurance often requires the insured to notify the insurer of any prospective claim within a particular time limit, or the claim may be rejected. Even if a small occurrence does not result in a significant lawsuit, reporting it assures that you have fulfilled your contractual obligations.

Costs of Product Liability Insurance

Product liability insurance is usually about 25 cents per $100 in sales revenue. For example, if you sell $1 million worth of goods per year, your Costs of Product Liability Insurance might be $2,500 (or 0.0025 x $1 million / $100).

Your real expenses, on the other hand, are highly dependent on your business and the goods you provide to customers. In a riskier field, such as biotech, you should anticipate spending closer to $10,000 per $1 million in sales (or 0.01 x $1 million / $100).

Costs of Product Liability Insurance Factors

The cost of product liability insurance varies substantially based on your product’s risk classification. These might vary depending on the size of your product, how it’s promoted, safety features, and distribution scale. Fireworks and weapons, for example, provide a greater danger than soft slippers and yoga mats.

Other variables that influence the cost of product liability insurance are:

• Not only are certain items riskier than others, but particular sectors are subjected to stricter regulations and more litigation than others, resulting in higher product liability premiums.
• Insurance is priced according to state insurance requirements and typical loss exposure.
• Annual income determines a company’s total liability litigation exposure and influences the amounts awarded by courts.
• Claim history: If a firm or product has a history of claims, the insurer faces a higher risk.
• Coverage limits: Policies start at $100,000 but may go up to tens of millions of dollars in coverage; larger coverage equals more risk for the insurer, which means higher rates.

The High Price of Not Having Product Liability Insurance

Business owners who need separate product liability insurance may object to the additional cost. Before you decide to forego coverage, think about how much you’d have to pay if you were to face a product liability case. According to the Insurance Information Institute’s most current statistics, the average product liability award is $1.5 million.

Working with a broker is one approach to locating inexpensive product liability insurance. CoverWallet, for example, sends you offers from several carriers via a single application. This simplifies the process of comparing coverage terms and rates. In addition, CoverWallet offers insurance experts that can assist you in evaluating and making a decision.

Details on Product Liability Insurance

Product liability insurance policies differ from one carrier to the next. To ensure that their risks are adequately protected, every company owner seeking a standalone product liability coverage should get acquainted with some of the facts outlined below.

Typical Exclusions

Product liability has several exclusions that create reasons for carriers to deny claims or choose not to renew your policy. Five typical exclusions specific to product liability insurance include:

• Manufacturers and distributors must maintain quality control requirements to guarantee that goods are safe for customers, according to product liability insurance companies.
• Failure to notify new production processes, products, materials, or ingredients might result in your policy being invalidated.
• Efficacy exclusion: If your product fails to serve its primary purpose, your insurer may refuse your claim.
• Many carriers do not cover particular materials or ingredients, therefore if you sell or manufacture a product that includes a prohibited material or ingredient, your policy will not cover it.
• Product recalls: Most product liability insurance does not cover the expenses of removing, inspecting, repairing, replacing, or losing the use of an insured’s product if it is recalled.

When you add items or modify manufacturing processes, materials, or designs on existing products, you should always consult with your carrier. If you are faced with a product liability lawsuit, doing so can save you a lot of time and money.

Product Liability Insurance Claims-made vs. Occurrence

Product liability insurance may be purchased on an event or claims-made basis. Claims-made policies only payout if the triggering event and the filing of the claim occur while the policy is in effect. Prior actions coverage is included in most claims-made policies for triggering events that occur before the policy begins. Even if you hear about events that cause damage before you purchase your insurance, you will be refused compensation if you don’t have this coverage.

An occurrence policy, on the other hand, covers any covered claim as long as the triggering event happens within the policy’s term. As a consequence, occurrence plans are often more costly than claims-made policies, as the insurer is required to pay claims even after the policy has expired.

Product Liability Insurance vs. Product Recall

Recalls are frequently excluded from product liability coverage and need product recall insurance, as previously stated. A product recall insurance usually protects a company’s financial losses in the event of a recall, such as:

• Payments for reimbursement
• Costs of shipping
• Product evaluation
• Notification to customers
• Overtime pay for employees

Product recall coverage should be considered in addition to product liability insurance for companies operating in industries where product recalls potentially affect millions of people, such as safety equipment, electronics, or food items.

Retail Product Liability Vendor Coverage Rider

Instead of purchasing a separate product liability insurance, merchants could inquire about vendor coverage from the distributors or manufacturers of the items they sell. Vendor coverage is an addition to a manufacturer’s or distributor’s insurance that provides coverage to retail sellers farther down the supply chain. If a retailer wishes to use this rider, they should ask for a certificate of insurance (COI) as verification that the other company owner is covered by product liability insurance. It is not available from all sources.

Product Liability Insurance Providers

Many shops, for example, should seek to top insurance providers that provide comprehensive general liability and company owner’s policies for small business owners with little product liability risk (BOPs). Manufacturers and designers, on the other hand, may need to engage with surplus lines brokers to get a separate product liability insurance, particularly if the items they deal with are dangerous, such as weapons and consumable goods.

Hartford

Hartford is a good fit for small business owners whose risks can be covered sufficiently with the products-completed operations coverage found in a business owner’s policy (BOP). Hartford can be written on a claims-made basis with prior acts endorsements to cover incidents occurring before the policy’s start date while still being some of the most competitively priced BOPs on the market. Its minimum annual premium is $250, or slightly more than $20 per month.

CoverWallet

CoverWallet, as an online insurance broker, works with top-rated carriers and is an excellent choice for new companies with no prior product liability exposure. These plans are often more costly, and CoverWallet can compare prices from many leading providers to discover the best deal for new businesses that haven’t yet established a track record of product sales. Furthermore, the organization provides a user-friendly application that streamlines and simplifies the whole insurance purchase procedure.

Canopy of Insurance

Canopy of Insurance is a specialty insurance provider that can place difficult-to-insure businesses, particularly cannabis industry companies that have significant exposure from the sale or manufacturing or hemp-based and cannabidiol (CBD) items, including ingestible and topical products. Business owners can add product liability riders to policies or purchase standalone policies on a claims-made or occurrence basis.

AIG

AIG is an excellent option for companies dealing with high-risk items, such as child safety devices, lithium-ion batteries, car components, or vitamin supplements. Product liability and contaminated product insurance, as well as a product recall policy, are available from the corporation, which may cover your company’s obligation to third parties.

Nationwide

Nationwide is a good fit for vendors, concessionaires, and exhibitors who aren’t involved in manufacturing the products it sells. These often have some protection through the product liability insurance found higher up in the supply chain but still need to cover themselves from being attached to lawsuits. Nationwide works with specialty carrier K&K Insurance to bring vendors short-term general liability with product liability coverage that doesn’t limit the number of events you can attend.

Conclusion

If your company makes, distributes, sells, or fixes items, product liability insurance provides crucial liability protection. Product liability insurance protects you against claims and litigation that may result in multimillion-dollar payouts. Protect your company against the costs of fighting claims if a product fails or has a defect in the design.

One product liability claim can bankrupt a company that isn’t prepared with product liability insurance.