Product Liability Insurance

Product Liability Insurance

Product Liability Insurance

Product liability insurance is a good idea for any business that manufactures or sells a product that if it failed would result in injury or financial loss.

What is Product Liability Insurance?

Product liability insurance covers financial liability due to physical harm caused by a product failure. For example, if your product hurts someone or damages their property, the liability coverage will help you pay for attorneys, a judgement, or a settlement.

What is the Difference Between General Liability Insurance and Product Liability Insurance?

That’s a good question.

General liability insurance applies to where you do business and how you do business. For example, general liability would apply to claims related to operations, premises, and completed operations. Product liability includes the products you make or distribute.

If you make, build, or distribute products, product liability insurance should be part of your insurance coverage, in addition to general liability insurance.

What Does Product Liability Insurance Cover?

As a manufacturer, supplier, or even a retailer, liability insurance can protect your business from legal liability. This insurance coverage will protect your business from:

  • Lawsuits resulting from injury caused by a product
  • Property damage caused by a product
  • Illness caused by a product
  • Wrongful death caused by a product

One of the most famous product liability lawsuits involved McDonald’s. When Stella Liebeck spilled coffee on herself and suffered third-degree burns after leaving the McDonald’s drive through,  she sued the fast food restaurant based on the assertion that most restaurants serve their coffee at 140 degrees, rather than the 180 to 190 degrees McDonald’s served her. As a result, a jury awarded Libeck $2.7 million in punitive damages and $160,000 in medical expenses.

How many businesses could survive this nearly $3 million dollar award without some kind of liability protection? What’s more, it didn’t matter that McDonald’s hadn’t intended to injury anyone, they were simply trying to serve a hot cup of coffee—even if it was much hotter than it needed to be.

In many cases, fault isn’t an issue in a product liability claim. It’s the failure that caused the injury that is issue. If your business produces or sells a product and you’re not covered with product liability coverage, your business is at risk.

What Does Product Liability Insurance Not Cover?

Product liability insurance won’t cover the costs of recalling a defective product, a damaged product or an injury to one of your employees that is injured by a product you either manufacture or sell. Workers compensation insurance would cover the employee’s medical bills or any legal costs if the employee decides to sue your business.

Who Needs Product Liability Insurance?

Any business that produces or sells a product should have product liability coverage:

  • Clothing stores
  • Construction companies
  • Bakeries
  • Florists
  • Manufacturers
  • Restaurants
  • Gift Shops
  • Wholesalers
  • Retailers
  • Food stores
  • Coffee shops
  • Pet stores
  • Print and copy shops
  • Software developers
  • Website designers
  • Raw material suppliers
  • Equipment suppliers

Even if you believe your products are completely safe, the potential for something to go wrong doesn’t go away. Even if you’re not at fault, the legal costs associated with a lawsuit can add up pretty fast.

And, although most lawsuits of this kind are settled out of court (which can be expensive), jury verdicts in a product liability suit can be in the hundreds of thousands of dollars—if not more.

How Much Does Product Liability Insurance Cost?

Like most insurance, the price of this type of liability insurance can vary depending on the perceived risk of the product. For example, the risk associated with a cup of coffee might be determined differently than the ropes used by bungee jumpers (McDonald’s aside).

Insurance companies evaluate risk based on the type of product, the revenue associated with it, how it’s marketed, and what (if any) safety measures are in place.

A product considered to have a low risk could cost $.25 per each $100 in revenue while a higher-risk product could cost substantially more.

How Much Product Liability Insurance Does Your Business Need?

How much liability coverage you need largely depends on how many products you make or sell and how many are involved in your supply chain. You should generally expect that the more products involved, the greater the chance one of your products could have a defect and cause injury.

Your insurance agent will be able to help you determine the right level of coverage for your business and will help you stay on top of your product liability insurance needs as your business grows.

This article was originally written on February 5, 2021.

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Ty Kiisel

Ty Kiisel is a Main Street business advocate, author, and marketing veteran with over 30 years in the trenches writing about small business and small business financing. His mission at Nav is to make the maze of small business financing accessible by weaving personal experiences and other relevant anecdotes into a regular discussion of one of the biggest challenges facing small business owners today.

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