If you own a business or are involved in the 'field' of business in any way, you are surely aware of the way the insurance industry helps businesses in mitigating risk. Insurance acts as a safety net, shielding the policyholder from a variety of potential risks. There are many insurance policies offered based on the customers' unique demands and requirements. Here we will be discussing about the product liability insurance and how it is different than general liability insurance

Let’s start with the very basics then!

What is Product Liability Insurance?

Product liability insurance protects your business from claims or lawsuits resulting from bodily harm or property damage caused by defective items manufactured, distributed, or sold by your business. Product liability insurance is comparable to general liability insurance in several aspects. A general liability insurance policy normally includes some product liability coverage. However, businesses confronting higher risks may need to increase their limits or obtain additional coverage. Product liability insurance can be thought of as a unique type of insurance developed exclusively for enterprises that make and sell products.

The product can be almost any form of goods sold to customers or businesses, ranging from food and clothing to specialized items like machines and medications. Food served in a restaurant, for example, can make someone ill. A little toy that is not properly labelled could pose a choking threat. A computer bought online may overheat and cause harm to the user. A mower repaired at a shop recently may malfunction and hurt the user.

The product may cause physical harm or damage as a result of the following:

  • Flaws in the design.
  • Instructions, labels, and warnings are not adequate.
  • Defects in the product.

Anyone who comes into contact with your product, including the buyer, users, or even a bystander, may be considered an injured third party.

A good product liability insurance policy should cover a wide range of expenses involved with product-related claims, such as the cost of disposing of defective products, the cost of replacing defective products, business disruption and fees potentially owed to wholesalers or retailers. It should also cover the expense of public relations initiatives targeted at repairing the reputational damage arising from product-related allegations.

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What is general liability insurance?

General liability insurance, on the other hand, is a type of insurance that provides protection for a business against a wide range of claims, including those related to bodily injury, property damage, personal injury (such as defamation or false advertising), and other types of harm. It is designed to protect businesses from the financial costs associated with defending against these types of claims and any resulting settlements or judgments.

Example - Here is an example of a general liability insurance claim:

Imagine that a customer visits a restaurant and slips on a wet floor, suffering a serious injury as a result. The customer decides to sue the restaurant for damages, alleging that the restaurant was negligent in maintaining a safe environment. If the restaurant has general liability insurance, the insurance policy will cover the costs of defending against the lawsuit, including legal fees and any settlement or judgment that may be awarded.

Other examples of situations where a business might make a general liability insurance claim include:

  • A client alleges that a contractor damaged their property during a renovation project
  • A customer claims that a product caused them to suffer an injury or illness
  • A business is accused of false advertising or defamation
  • A visitor to a store or other public location is injured due to a hazardous condition on the premises

In each of these cases, general liability insurance would provide financial protection for the business against the costs of defending against the claim and any settlements or judgments that may result.

How does product liability insurance differ from general liability insurance?

Product liability insurance caters specifically to claims relating to the use of items sold, manufactured, or distributed by your company. A general liability policy, on the other hand, will cover claims relating to your company's overall operations. For example, if a client or partner visits your business premises and injures himself, general liability coverage would cover this.

Another key component of product liability insurance is that you are not protected in claims relating to your product that does not work at all. Product liability insurance addresses claims in which a flaw or bad design in your product causes bodily harm or property damage to another third party. Such claims can be complex at times. This is because a fault might emerge at any phase of your product's development, from design to manufacture and distribution.

What does product liability insurance cover?

A typical product liability insurance covers claims arising from-

  • Design flaws- claims linked to the product issues prevalent even before it was made.
  • Manufacturing flaws- Claims relating to faults that happened during the product's creation or assembly.
  • Warning or use flaws - claims that the seller did not provide appropriate labels or warnings about hazards and proper use.
  • Strict liability - claims based on the omission of negligence but where damage or injury arose from appropriate use.

A good product liability insurance policy will cover you in the following scenarios –

  • Property damage

Let us assume, a remote control sold by your company breaks down and its battery explodes, destroying the customer's carpet. In such a scenario, your product liability policy will cover legal fees and settlements.

  • Injury

Let us assume a forklift manufactured by your company collapses and injures a worker. Your policy will cover legal fees as well as any claim settlements.

  • Wrongful death

Let us again assume a forklift sold by your company malfunctions, leading to a fatal accident. In this instance, your product liability insurance would cover not only legal fees but also burial expenses and other expenditures linked to the death caused by your defective product.

  • Illness

Let us assume your grocery store sold outdated cheese, causing a customer to feel unwell after eating it. Product liability insurance will protect you against such claims.

What does product liability insurance not cover?

A typical product liability insurance does not cover the claims arising from-

  • Third-party accidents

If a client or partner is injured on your premises, it is covered by general liability insurance coverage, not by product liability insurance.

  • Employee injuries

If a product flaw leads to an employee injury, your product liability insurance will not cover the expenses of the injury. This is why companies purchase workers' compensation insurance, which covers all costs associated with employee injuries and recovery.

  • Product recall costs

Product recall insurance is a distinct insurance product that covers the costs of withdrawing a defective product. This is frequently included as an endorsement of a product liability policy.

  • Technology products

Product liability insurance does not cover lawsuits involving technological products. A technology error & omissions policy is purchased by software and tech companies. This is to protect themselves from claims relating to third-party damage arising from flaws committed when developing their products.

Why do businesses need product liability insurance?

Businesses must secure themselves against the volatile liability environment prevailing these days. Even the most careful manufacturers can't prevent product flaws, failures, and human injury caused by a product. Product liability insurance provides much-needed protection to businesses from claims/lawsuits arising out of such situations.

Product liability insurance should be considered if you manufacture products. Manufacturers are more commonly held accountable in product liability claims. If your business repairs damaged products, you should explore product liability insurance. This is because there is always the possibility that the injury or damage was caused due to your company repairing or customising the product.

Many businesses involved in product manufacturing, sale, distribution, or repair will refuse to engage with others who do not have proper product liability insurance. As a result, adequate product liability insurance will almost certainly be required by your customers or partners, at some point or other.

Other reasons why you need product liability insurance include-

  • Product liability insurance may directly boost product sales. Fear may deter potential customers from purchasing your product if they come to know about product faults leading to injuries or product safety issues. When the policy covers the cost of timely and adequate PR expenses, the reputational damage resulting from such an issue may be reduced considerably. When the image of your company remains positive and customers are confident in purchasing your product, the sales revenue rises.
  • Any business relies on its product to generate a profit, and therefore can't afford product liability claims to make inroads into its profits. Product liability insurance offers the finances required to successfully resolve product-related litigation and keep the business afloat.
  • Product liability insurance is intended to protect product producers, distributors, retailers, and advertisers from claims arising from personal injury/property damage reportedly caused by their products or product advertising. Product liability insurance also covers product claims related to false advertising, express and implied warranties and service contracts.
  • Product liability insurance provides liability coverage to product producers, distributors, retailers, and advertisers. Personal injury claims related to product faults in design, manufacture, labelling, or warning are aptly covered.

How much can product liability insurance cost?

Many factors can influence the cost of product liability insurance. Drug companies and other enterprises that produce medical and pharmaceutical items are considered to be in the high-risk category. They will pay significantly more for product liability insurance. Products more prone to cause user injuries, such as firearms or motorcycles, will also have higher liability risks and, as a result, are subject to higher insurance prices.

The size of your organisation is another important factor that can influence the cost of product liability insurance. The size is figured out in terms of both personnel count and revenue. If your company is a large, well-known corporation, you will be a 'better target' for litigation than a little-known retailer. Your claim history will also be considered while calculating the cost of product liability insurance. If your business has a long history of producing high-quality items while avoiding lawsuits, your premiums will most likely be lower than a new company with little manufacturing success.

How to reduce the cost of product liability insurance?

You can do the following to reduce the premiums of your product liability insurance-

  • The most important measure is efficient risk management. The fewer claims you can afford to have, the less you will have to pay for insurance, and vice versa. Companies that manufacture, sell, and distribute items must be cautious in ensuring product quality. To ensure that their products are not defective, they must create testing processes and undertake stringent quality control measures.
  • Employee training is another important contributor in this regard. This is because the quality of labour is usually a decisive factor in the quality of your products. Also, if you are collaborating with partners who distribute, manufacture or sell your products, make sure they are reputable and adequately insured.
  • If you are a small business, you can afford to simply add a product liability endorsement to your general liability policy. This is because only larger businesses will have a genuine need to purchase an independent product liability policy to meet highly specific coverage needs.
  • Because it is typically purchased in conjunction with a general liability policy, another sensible method to save money on insurance is to bundle the general liability insurance and purchase it as part of a Business Owners’ Policy (BOP).

How can you evaluate the best product liability insurance quote?

As you may have experienced, each insurance quotation happens to be slightly different. However, you can analyse different insurance quotes by reviewing the following areas. Based on this, you can make an informed decision to select the none that suits your unique needs the best-

  • Price- This is perhaps the most important evaluation criterion. Quotes that are marginally above budget may still be acceptable. But, those significantly over your budget may need to be put aside.
  • Coverage limits- The coverage limits may differ between quotes. However, if you submitted the same information to different providers during the quote process, they should be somewhat similar. A higher coverage limit is generally preferable unless the cost is outrageously expensive.
  • Deductibles- A deductible is the amount of money that the policyholder must pay before the insurance policy begins to pay claims. The deductible is subtracted from the amount your policy pays towards a claim. In general, the higher the deductible, the lower the premium for insurance coverage. As a result, increasing the deductible on your product liability insurance policy is one option to save money. When comparing policies, inquire about the deductible options. However, do keep in mind that you would be responsible for the deductible in the event of a loss. Therefore, make sure you are comfortable with the amount.

The footnote:

We hope the discussion above will help you understand what product liability insurance is, why you need one and what it covers and excludes. We have also discussed other important matters related to product liability insurance.