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If you own a business that creates, manufactures, distributes, or sells products, your business could be held liable if the product causes harm to others. For example, your company could face a lawsuit if your company sells a tool that fails and injures a customer.
Even if the customer uses a product incorrectly, your company could be held responsible for any damage caused by the product. The potentially high cost of litigation makes product liability insurance an essential part of a small business insurance policy.
What is product liability insurance?
Product liability insurance covers your business against claims that a product you sold, created, manufactured, or distributed malfunctioned and caused bodily injury or property damage to someone else’s property.
Without product liability insurance, your business may have to pay out-of-pocket for medical bills, property repairs, legal fees, and other expenses in the event of accidents related to product defects.
What does product liability insurance cover?
Product liability insurance covers legal fees, medical expenses and damages resulting from lawsuits brought by third parties. It covers issues caused by your product, such as:
- Damage to someone’s property
- Bodily injuries
- Wrongful death
The types of defects covered by product liability insurance include:
- Design flaw. There was an error in the design of the product.
- Manufacturing defect. There was a manufacturing defect in the product.
- Marketing failure. Marketing the product was in error, such as not providing proper instructions.
- Inappropriate warning. There is not enough warning about the proper use of the product.
- Strict Liability. A customer is hurt by a product, even if your company is not deemed negligent.
What does product liability insurance not cover?
Product liability insurance covers claims for bodily injury caused by a product. It is not designed to cover problems caused by software, applications, computer and technical products.
For example, product liability insurance does not cover coding errors and software errors that cause financial harm to your customers. You need errors and omissions insurance for technology-related issues.
Product liability also does not cover:
- Product recall costs
- Employee injuries
- Accidents involving customers, such as slip and fall injuries
Who needs product liability insurance?
If you’re selling a product, you’re a good candidate for product liability insurance, especially with the prevalence of lawsuits these days. These types of businesses often carry product liability insurance:
- Online sellers on Amazon, eBay and Etsy
- Pet supply stores
- Printing houses
A product liability insurance policy is also suitable for a construction and contracting business because it provides financial protection if a client decides to take legal action for damages caused by finished work. For example, if a contractor installs a custom cabinet but the doors are defective, product liability insurance could cover the cost of repairing the defect.
How much product liability insurance do I need?
“The limit of product liability coverage will vary depending on industry, location, amount of annual revenue and claims history,” said Michelle Shaver, senior vice president of Chubb Small. Commercial Insurance. “If the products are more dangerous in nature or sold in a highly contentious geographic territory, it may be advisable to have higher coverage limits.”
Bryan Smith, vice president of product management at The Hartford, says the amount of product liability insurance coverage should be commensurate with the expected liability risks a business will face.
“The type and quantity of products, the volume of sales, and the number of parties involved in production and trade flow will all impact a business’s insurance needs,” Smith says.
How much does product liability insurance cost?
The average cost of product liability insurance is $1,192 per year for small businesses, according to AdvisorSmith.
When it comes to product liability premiums, your industry makes the difference. For instance:
- Manufacturing companies have an average premium of $1,146 per year, with a range of $736 to $1,854.
- Wholesalers paid an average premium of $1,159 for general liability insurance that included product liability insurance. Premiums range from $751 to $2,431.
Other cost factors that affect the cost of product liability insurance include:
- Location of your business
- Claims history
- Policy limits
The type of product affects the cost of insurance
The type of product created, manufactured or sold by your business is a key factor affecting the cost of product liability insurance. Products differ in their likelihood of causing property damage or personal injury. Product liability insurance rates reflect this wide range of risks.
Companies that sell safer products, such as office supplies and stationery, have lower premiums.
High-risk products include furniture, electronics, and bicycles. But the products most at risk are food and drink and products used by children. These products will have some of the highest rates for product liability insurance.
Product Liability Insurance for Sellers on Amazon
Small businesses selling on Amazon can purchase product liability coverage through a digital network called the Amazon Insurance Accelerator.
Amazon requires its third-party sellers to purchase product liability insurance after reaching $10,000 in sales in a month. Amazon Insurance Accelerator will help US-based small businesses obtain product liability insurance quotes from companies such as Chubb, Harborway, Hiscox, Liberty Mutual, Markel, and Travelers.
How to Get the Best Product Liability Insurance
You can purchase product liability insurance under a general liability insurance policy. This basic level of product liability insurance can cover companies with low product risk.
The second option is to purchase a standalone product liability insurance policy. A stand-alone policy would be appropriate for a business with a high risk of product liability.
“Product liability insurance is often offered as part of a general liability insurance policy. It can also be offered as a standalone font,” says Smith of The Hartford.
“Product liability insurance helps protect a business against claims caused by an actual or suspected defective product. The product could be manufactured by the company or sold by the company and cause bodily injury or property damage to a third party,” he says.
Tips for taking out product liability insurance
Here’s what you need to know when purchasing product liability insurance.
Choose the right coverage limit. “When purchasing product liability insurance, it is important to select the appropriate coverage limit as well as the appropriate coverage territory – the geographic area covered by an insurance policy,” Shaver says at Chubb. “In the event of a covered claim, having the right limit of coverage will determine how much the insurance company will cover and how much the small business owner will have to pay out of pocket.”
Know your coverage territory. “The territory of policy coverage can impact whether or not a claim is covered,” Shaver says. “If the product can be used anywhere after it’s made, the small business should consider global coverage.”
Location makes a difference. If a product is made or sold in a particularly contentious region, there’s a greater likelihood that the company will be sued, Shaver notes.
Be aware of contract requirements. “Some vendor contracts may require a small business [to] have specific coverage limits in place to cover any claims or losses they may be responsible for,” says Shaver.