Product liability isn’t just for companies that manufacture products. Any company that sells, distributes or designs products would also do well to enroll in business liability insurance. Without this protection, applicable companies risk everything.
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Why it’s worth it
Product liability insurance covers bodily injury and property damage resulting from the manufacturing, sale, handling, distribution or disposition of a product.
“This coverage includes warranties and representations as well as coverage for the failure to provide warnings and instructions. It covers insureds, regardless of whether they are the manufacturer, a distributor or retailer,” said Michael Huddleston, attorney at Munsch Hardt. “Typically, there is no coverage for those who handle or sell the insured’s product as additional insureds. A vendor’s endorsement can be purchased to provide such coverage. But there is coverage if the insured owes contractual or common law indemnity to a third party.”
Product liability attorney Jason Turchin agreed that any business dealing with consumer goods should have this protection in place.
“Many state laws hold all parties in the chain of commerce responsible, from the company that designed and produced the product to the distributor to the store that sold the product bought by the end consumer,” said Turchin. “Even one of the largest automotive product manufacturers, Takata, could not stay in business following the massive recall of their airbags after hundreds of vehicle occupants were injured and killed by defective airbags.”
Tim Gallagher, senior vice president of commercial lines for Marsh & McLennan Agency, LLC, also advised caution. “Some of your customers may require proof of liability insurance, and they may choose not to work with you if you don’t have it.”
Watch out for loopholes
Be forewarned, however: Product liability insurance doesn’t cover everything imaginable.
“Without defense costs included in your policy, you are liable for legal expenses. Even a weak or meritless claim against you can generate legal fees up to six figures and beyond,” Gallagher said.
Many state laws hold all parties in the chain of commerce responsible.
Jason Turchin, product liability attorney
Product liability coverage also doesn’t apply to transportation of the product or to damage to inventory an insured keeps on hand at their location, such as where they are assembling parts made by others with their own product, according to Huddleston.
“And coverage is not provided for injury to your product itself that is caused by a defect,” Huddleston said. “So, if the insured manufactures tires, the cost of replacing a defective tire that destroys itself is not covered, but if a consumer is injured when the tire fails or destroys other property, coverage would be available.”
“Product liability insurance also wouldn’t cover any costs involved with a product recall,” cautioned Kristian von Rickenbach, CMO and co-founder of Helix Sleep, a mattress maker. “For that, you need separate product recall insurance, which covers things like the expense of repairing a product defect as well as public relations and damage control costs.”
Product liability insurance cost
Contrary to what you might expect, product liability insurance premiums aren’t prohibitively expensive for small businesses.
“They can start at a few thousand dollars a year. The premium is based on the amount of potential claims, which is based on the size and nature of your business,” said Gallagher, who recommended a coverage minimum of $1 million. “You may need $5 million or more, depending on the types of products you deal with.”
Product liability coverage is often included in a commercial general liability (CGL) policy, but not always; you may need a separate product liability insurance policy or a more inclusive CGL policy to be properly protected. Your insurance agent can guide you toward the best solution for your business needs.
Many small businesses would also be surprised to learn that they may already be covered in part or full under a partner’s or affiliate’s policy.
“If you’re a retailer, for example, check to see if the manufacturers or distributors of the products you sell have named you as an additional insured under that third party’s liability insurance policy. If they haven’t, require that they do so,” Turchin said. “And obtain a copy of that policy’s declaration page to keep with your records in the event a claim is made.”
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