Product Liability Insurance: Who Needs It, Cost, and Where to Buy Coverage

Some of the most public and damaging lawsuits against businesses are related to defective products. Large manufacturers, restaurants, and other companies have faced financial troubles after being sued for faulty products or recalling defective products.

If you are a manufacturer, wholesaler, designer, or retailer, product liability insurance is essential. If your company gets sued for a faulty product, having this type of small business insurance means that you won’t have to pay for the cost of defending the lawsuit out of your own pocket. And that can be critical to your business’s long-term survival.

Learn more about who needs product liability insurance, the average cost, and where to purchase coverage. We’ll also cover some best practices on keeping your costs low.

Any business that’s part of a product supply chain should purchase product liability insurance. According to Andy Gastley, an insurance agent with A.G. Roth, “Products liability coverage is needed whenever a company makes, sells, labels, or alters a product.” No matter where your company falls in the product distribution chain, it’s possible for a product liability claim to be filed against you.

Products can cause physical injury, property damage, and economic losses, all of which can give rise to product liability lawsuits. For example, a customer who eats spoiled food might need to see the doctor and incur medical costs. Faulty household products, such as paint or cleaners, can damage a customer’s house. Automobile defects can cause accidents.

You might think that you don’t need product liability coverage unless you’re a manufacturer. After all, doesn’t responsibility for product flaws rest with the maker? Not necessarily. Defects can arise during manufacture, design, and marketing. And in a product liability lawsuit, claimants can sue all businesses in the chain of distribution.^[1]

Product liability lawsuits are among the most expensive. In 2016, juries awarded $7.07 million in damages on average in product liability lawsuits, and defense costs topped $1 million.^[2] To guard your company against such high costs, it’s best to purchase product liability insurance. Often, product liability insurance already comes as part of a standard general liability insurance policy. But, depending on the type of product involved, you might have to purchase product liability coverage as a separate policy. We’ll cover your purchase options in more detail soon.

In order for a claimant to win a product liability lawsuit against a business, they first have to prove that they were harmed in some way by a product defect. That defect can be in the way the product was manufactured, designed, or sold.

Product liability insurance covers claims arising from these three types of defects:

Product liability lawsuits can allege breach of warranty, negligence, or something called strict product liability. Strict product liability means that the claimant only has to prove that the product had a defect which injured them or their property. Even if the business tried to prevent the mistake, the company’s intent doesn’t matter. Strict liability can make it very difficult for companies to prevail in a product liability lawsuit, making insurance even more critical.

All product liability insurance policies contain some exclusions. You should review your policy for specific details. In many cases, excluded claims are covered by another type of small business insurance.

Here are some examples of what’s not covered by a product liability policy:

• Slip and falls on business property: These types of injuries will be covered by your general liability insurance.
• Employee injuries: Work-related employee injuries are covered by workers compensation insurance. Most businesses are legally required to have workers compensation coverage.
• Cost of product recalls: Product liability insurance doesn’t cover the costs involved with product recalls, such as notifying customers, shipping replacements, and inventory losses. This requires separate coverage called product recall insurance.
• Lost inventory: Product liability insurance won’t cover inventory losses that you experience from product defects.
• Professional negligence: Professional liability insurance covers negligence by directors or officers of a business.

If there’s any confusion about which insurance policy covers which types of injuries, you should consult your insurance agent or business attorney. They can review your policies and set things straight.

Product liability insurance is normally included in a general liability policy, which costs around $500 to $600 per year on average. Manufacturers typically spend more because they are more likely to face liability lawsuits.

When you break out the cost of product liability coverage, you can expect to spend an average of $0.25 on insurance for every $100 in product sales.^[3] Marci Lall, an insurance specialist at FSB Group, says a host of factors can affect cost. She says, “Information such as what type of business, how many employees, annual revenue, description of products, quality control procedures, label information, and loss control procedures are some things that are taken into consideration when underrating product liability coverage.”

The main factors that will affect your premium cost are the type of product and your position within the product supply chain. The less hazardous your product and the further removed you are from manufacturing, the lower your costs are likely to be. For example, a handbags retailer is likely to have a significantly lower premium than a manufacturer of insecticides. Prices will trend higher if you import products from a different country because as a U.S.-based business, you face more exposure to legal claims. Once you buy product liability insurance, you might be able to get a discount on your premiums if your incidence of claims is pretty low for a few years.

Although specifics vary by policy, most product liability insurance starts out with $1 million of coverage per occurrence. You have to pay any required deductible, after which the insurer will cover legal costs up to $1 million. If a lawsuit is costlier than that, you’ll have to pay out of pocket.

CoverWallet’s Short Form. Photo credit: CoverWallet

If you’re on the market for product liability insurance, there are a couple different places to start. First, says A.G. Roth’s Gastley, start by asking your manufacturers if they provide vendors coverage. Gastley says, “Some manufacturers include vendors coverage which will extend product liability coverage to sellers.”

In other words, the manufacturer’s product liability policy will carry over to protect wholesalers and retailers that sell their products. Of course, if you distribute products from numerous manufacturers, you need to make sure you have vendors coverage from all of them.

The second place to check is your general liability insurance policy. Most general liability insurance policies include a product liability endorsement to protect your business against product-related claims. Businesses that manufacture riskier products, such as medical devices or pesticides, might need to buy stand alone coverage through a surplus lines insurer or specialty insurer.

As you shop around for product liability insurance, we suggest contacting the providers listed below, all of whom have an “A” or higher financial strength rating from A.M. Best. These providers can help you purchase product liability insurance, either on its own or as part of a general liability policy.

The Hartford is a good insurance company to start out with for retailers and anyone else lower down the supply chain that needs product liability coverage. The Hartford provides general liability insurance with an endorsement for product liability coverage. They also offer something called Stretch endorsements, giving you the option to bundle general and product liability insurance with other types of business insurance to save on overall premium costs.

You can fill out a form on The Hartford’s website to get an online quote. To purchase the policy or to ask questions, you need to go through a Hartford agent. This insurer gets good reviews for customer service and professional treatment of claims.

Chubb is a major insurance company in the small business space, offering many types of small business insurance. You can apply for and purchase a general liability policy (including product liability coverage) end-to-end online, making Chubb very convenient for small businesses. Chubb is also a surplus lines insurer, which means they can provide product liability insurance for hard-to-place products.

Although Chubb is a large insurance company, they take a customized approach to product liability coverage and help business owners manage product issues and claims. If someone sues you for a defective product and you file a claim, Chubb handles the whole thing in-house from intake to resolution. They even provide consulting services to help you improve product safety and lower costs associated with recalls.

CoverWallet is an insurance comparison site that helps small business owners compare rates from different insurers. CoverWallet gives you one forum where you can compare rates on and purchase general/product liability insurance, workers compensation, property insurance, and more.

You can use CoverWallet to get a quote from multiple insurers on product liability coverage. They have a questionnaire that asks you to provide detailed information about your business’s products, sales revenue, and payroll amounts. You’ll then receive a quote from CoverWallet’s team and be able to purchase coverage from the insurer who provides the best value. In about 70% of cases, you can buy coverage online, and after purchase, you can manage your policy online.

When you select product liability insurance on CoverWallet’s questionnaire, the form automatically defaults to general liability insurance. So, if you need surplus or specialty product liability coverage, you’ll likely have to go directly to an insurer like Chubb for that.

AIG, which provides product liability coverage under the name of Lexington Insurance, is another option for securing product liability insurance. They provide coverage for everyone in the supply chain—manufacturers, distributors, wholesalers, retailers, and importers. AIG specializes in cutting edge technology products. For example, they were one of the first insurers to provide product liability coverage for nanotechnology products.

This insurer has an in-house claims team for fast and efficient claims processing. In addition, AIG can set you up with discontinued product insurance, contaminated product insurance, and product recall insurance. Like Chubb, they have independent consultants to help you respond to a product issue at your company. These specialized services make AIG a good choice for businesses that make or sell high-risk products.

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Wherever you decide to purchase your product liability coverage, make sure you read and understand the fine print of your policy. You should know when your premiums are due, what types of claims are covered, the time period during which the policy is in effect, and the process for filing and resolving claims. Don’t hesitate to ask the insurer all of your questions before committing to a specific policy.

Product liability insurance is key for any business in the product supply chain. But, it’s also one more cost for your small business to keep up with. Small business owners want to balance protection against cost.

Follow these best practices to minimize costs associated with product liability insurance:

• Include adequate warning labels and instructions with products.
• Set up a quality assurance checklist to spot faulty products early in the process.
• Regularly inspect and clean equipment, and make necessary repairs.
• Implement inventory tracking systems to help in the event of a recall.
• Research manufacturers for product issues before working with them.
• Keep accurate, up-to-date records on gross sales because that will affect your premiums.

Along these with these tips, purchasing product liability insurance will help to keep your company safe and see you through several successful product launches and sales.