Product Liability Insurance: What It Covers & Who Needs It

Thang Truong
Thang Truong
Updated on:

If your business sells things to customers, you could be at risk if a defect in a product causes an injury or damage to someone or their property. For example: 

  • A customer buys a power tool made by your business. A flaw in the tool causes an injury to the person who purchased it. 
  • Your company produces children’s apparel. It makes a piece of clothing that fits improperly which causes a child to suffocate.
  • You own a food service business. A baker working for you makes pastries with an ingredient that triggers a customer’s allergic reaction.

In all these scenarios, the impacted parties feel that your business is responsible and decide to sue you.

If you don’t have product liability insurance, you will have to pay for the costs related to a lawsuit and its outcome out of pocket. Most businesses don’t have the cash resources to cover product liability lawsuits and they often put companies out of business.

If you do have product liability insurance, whether as part of your general liability insurance coverage or as a standalone policy, it could help cover:

  • The customer’s medical expenses related to their injury
  • Legal fees and other costs to defend your business
  • Settlements or judgments made against your operation.

Having product liability insurance could help you sleep better at night knowing you’re doing everything possible to protect yourself, the employees who depend on you and your operation.

Product liability insurance: Definition

Product liability insurance is a type of coverage that helps protect businesses from claims that a product made or sold by it caused bodily injury or damage to someone else’s property. An insurance company may offer this coverage as a stand alone policy, but it’s more commonly a component of a broader Business Owner’s Policy (BOP) or an inclusion in the general liability policy.

If your business doesn’t have product liability insurance, you could be forced to pay out of pocket for costly claims related to product defects and issues.

If you sell products to customers directly — or if you have a supply chain — having product liability insurance is probably a smart move. This is true if you’re a manufacturer, retailer, wholesaler or run a distribution business. Production issues can lead to defects, even at the most careful operations. 

Think about it: Are you 100 percent certain that everything you sell, distribute ,or make will always work perfectly? 

The answer for most organizations: Probably not.

Product liability insurance isn’t a guarantee or warranty. It protects businesses from the fallout that could occur if a product causes injury or other damage to third parties.

Product liability insurance: Coverage

If you add product liability coverage to a general liability insurance policy or purchase it direct, it will typically cover claims related to:

  • Design flaws that occurred before the product was produced
  • Defects that happen when the product is manufactured
  • Strict liability, which means a customer is injured by a manufacturers’ product, even if the business owner isn’t held negligent
  • Improper warning, which happens if a business owner, wholesaler or salesperson doesn’t give the customer enough information about how to use a product properly and they’re injured while using it.

Some well-known examples of product liability lawsuits include:

An experienced business insurance expert can help you figure out whether securing product liability insurance could be a smart move for you.

Product liability insurance vs. product recall: how are they different? 

Product liability insurance isn’t the same as product recall insurance. Product recall insurance covers expenses related to the need to recall a product you manufacture or sell so you can repair a defect or replace it with one that does not have the defect.

Examples of product recalls include:

If you’re concerned about paying the costs related to recalls, you may want to purchase an endorsement for your Business Owners Policy or a standalone product recall policy to cover them.

Who Needs Product Liability Insurance? 

Not all companies will require product liability insurance. However, if you sell products to customers or make products that a client of yours sells to customers, this insurance is vital.

Manufacturers, production plants, designers, and retailers can all benefit from the protection of product liability insurance. Basically, if you are at any point in the production and sales process for a product, your company could potentially face a lawsuit.

Almost any kind of industry is at risk of a claim for faulty products, but some face high settlements and fees. This is due to the potential harm that products made by companies in these industries may cause or the number of potential victims of a faulty product. The industries can include:

  • Food Manufacturing & Retail
  • Baby Products
  • Cosmetics
  • Medical Equipment, Products, & Medication
  • Automotive

Other industries that you might be surprised to find need product liability insurance can include:

  • Website Design
  • Software Development
  • Product Design
  • Raw Materials & Mining
  • Equipment Supply

Product liability insurance cost

On average, a standalone product liability insurance policy costs small businesses $90-120 a month. The small businesses are those having less than 10 employees and $1,000,000 in annual revenue and they are not operating in a high-risk industries and categories. High-risk industries and categories include food and beverage manufacturers, baby products, products with metal or processed chemicals.

How much product liability coverage you should buy depends on many different factors including:

  • Your industry
  • The types and number of products you make or sell
  • Sales volume
  • The location of your business and local liability laws
  • The claims history of the individual product, product line or items sold
  • Policy limits and level of coverage.

As a rule of thumb, the more production output or amount of sales, the greater the likelihood and risk that a product could have some type of defect or safety issue related to it. This will have an impact on the amount of product liability coverage you need. As a business grows, it’s product-related risks increase, which means it’s a smart idea to review your product liability coverage regularly.

An experienced business insurance professional can advise you on the coverage you need and get you a quote. It’s also a smart idea to get quotes from multiple providers because the way different providers view risks of your business can vary.

In the end: Only you, working with your insurance agent, can decide whether you need product liability insurance. But, really ask yourself, can you actually afford to be without it?

>>MORE: How Much does Product Liability Insurance Cost?

Product liability insurance quotes: How to get and compare them? 

Typically, small business owners add a product liability insurance endorsement to an existing Business Owners Policy or its general liability insurance policy, if the BOP or general liability insurance policy doesn’t include product liability coverage.

If you are not happy with the quote for the endorsement you get from your existing provider, you will need to go through the rather complex process of completely reinsuring your business. When looking for a new BOP or general liability insurance policy, you need to inquire the insurance company if they offer endorsement for product liability coverage. If they don’t, you either need to look elsewhere or are ok to buy a standalone product liability policy.

If you decide to buy a standalone product liability policy, you should try to get quotes from a few companies or a digital broker like CoverWallet so that you can compare several quotes to select the cheapest one for your company.

>>MORE: The 6 Best Product Liability Insurance Companies for 2021

Product Liability vs. General Liability Insurance: How are they different?

It can be harder to tell the difference between product liability and general liability insurance. Generally, the latter is designed to cover bodily injury and property damage that result from:

  • Accidents that occur on your property 
  • Accidents that occur during business operations
  • Advertising injury claims against your business
  • Property damage that results from your staff or equipment

As you can see general liability coverage is meant to cover accidents that can happen during normal business operations. Yes, your forklift may be a product that your business owns, but the cracks it causes in your customer’s concrete driveway aren’t covered by product liability. They would be covered by general liability insurance.

>>MORE: The 10 Best General Liability Insurance Companies for 2021

Product Liability vs. Professional Liability Insurance: How are they different?  

Product liability insurance is also different from professional liability insurance, though both coverages do apply to something your customers purchase. Professional liability insurance covers the costs associated with business mistakes and negligence. For instance, it can cover the costs of defense if an accountant is accused of not keeping their clients accounts in good order. It can also cover accusations of:

  • Omission of important information
  • Poor legal representation and advice
  • Giving poor advice

Do you need product liability insurance if you sell your products on Amazon?

Yes, if your monthly sales revenue from Amazon platform reaches $10,000, you are required to have product liability insurance policy. Otherwise, you can be kicked out of the Amazon platform. You can buy your product liability insurance policy from Amazon Insurance Accelerator program. Learn more about Amazon Seller Insurance: How It Works and Best Providers

Thang Truong
Thang Truong

Thang Truong covers small business insurance and small business success at BravoPolicy. He is a licensed P&C insurance agent. Previously, he held product leadership positions at, Capital One, NerdWallet, and Mulberry Technology. He holds a MBA degree from UC Berkeley - Haas School of Business.

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