Your business is responsible for the products you make, sell or distribute, as well as the completed services you provide. You can be held liable and accountable for any losses or damage if one of your products is faulty and injures or kills a third party or leads to property damage. To provide some financial protection in these circumstances, product liability insurance can help to cover the legal costs of any claims filed against your business.
Product liability insurance provides your business with coverage against expenses that arise when a person claims a product your business sold, made or distributed caused bodily injury, unlawful death or property damage.
This type of insurance policy can provide financial assistance to cover legal fees, judgments against you, settlements, compensatory damages, punitive damages, and economic or business damages that result from the lawsuit. It will also cover the injured party’s medical costs that arise from the use of the product. [For a full list of the different types of business insurance you might need, check out our Guide to Business Insurance.]
Businesses that make, sell or distribute products need product liability insurance. Businesses and individuals involved in construction also require product liability insurance.
Product liability insurance protects manufacturers against claims that one or more of their products caused property damage or personal injury. The insurance provides coverage against lawsuits resulting from design defects, manufacturing defects and related issues.
Product liability insurance protects retailers, suppliers, distributors and other members of the distribution chain against lawsuits for damages caused by the products they sell. Retailers can be sued even though they are not responsible for the products’ defects or issues related to the use of the products. This kind of insurance can also provide coverage for lawsuits related to marketing defects, such as a lack of warnings about product use or misuse and improperly applied labels.
It is important to note that retailers can be held liable even if they were not aware they sold a defective product. A person who is injured by a defective product, or who incurs financial losses due to the product’s use or misuse, can sue anyone involved in the product’s supply chain. The injured person can also sue a retailer that does not provide sufficient warning or that does not provide accurate instructions for using the product.
Construction professionals, general contractors and installers require product liability insurance to protect them against lawsuits from personal injury or property damage that occurs after they have completed their work. For example, a homeowner could sue an HVAC professional who installs a furnace that later malfunctions and leads to a natural gas leak that injures or kills someone; the product liability insurance policy would cover the installer’s legal costs.
If you sold a defective product, you could be held liable even if you did not know the product was defective.
Product liability insurance provides coverage if your product or completed service does one or more of the following:
Product liability insurance does not cover services, but it does cover the results of services provided (e.g., a contractor’s work on a claimant’s property).
Here is an overview of what product liability insurance does and does not cover:
Product liability insurance can provide coverage against lawsuits for damages caused by defective products. A defective product refers to an item that is not fit for its intended purpose. A defect may also make the product unsafe for use. There are different types of defects:
With respect to a lawsuit for wrongful death, someone could sue for three types of damage:
Product liability insurance typically includes reasons why insurance providers would deny your claim or choose not to renew your policy. These reasons are known as exclusions. Product liability insurance might include these common types of exclusions:
Product liability insurance does not cover services, but it does cover the results of services.
Product liability insurance and general liability insurance are typically purchased together, but these policies are not the same.
Product liability insurance provides coverage against damages that are related to the products you make, distribute or sell, as well as completed services.
General liability policies, by contrast, provide coverage against a wide range of claims that can arise when a third party is injured or property is accidentally damaged on your premises (e.g., a customer trips on the carpet in your store and drops their smartphone or breaks their ankle). It covers damages that an employee causes on the premises of the third party. General liability insurance also provides coverage against lawsuits for claims that you copied a competitor’s logo or damaged their reputation.
Product liability insurance covers damages related to products, whereas general liability insurance covers a wide range of claims related to incidents on your premises and other damages.
Product liability insurance is typically part of your general liability insurance premiums, so the cost will often be included. The price of the insurance depends on factors related to the risks associated with your profession and your policy limits. Manufacturers typically pay higher rates for product liability insurance because there are higher risks involved.
Generally speaking, product liability insurance costs about 25 cents per $100 in sales revenue. For example, if your business sells $5 million worth of goods per year, your product liability insurance costs would be calculated like this: 0.25 x $5 million ÷ $100 = $12,500. [Read this article on how to save money on business insurance.]
These factors may affect the cost of your product liability insurance:
To get a rough estimate of what your product liability insurance might cost, use this formula: 0.25 x (annual sales revenue) ÷ $100.
When choosing insurance coverage, select the limits for property damage and bodily injury separately.
Your premiums are typically determined by the types of products you manufacture or sell, your expected sales volume and the role of your business. It is important to accurately assess your products (as well as your total expected sales) to make sure you pay for and receive the correct level of insurance coverage. Review your existing business insurance policies to avoid overlapping or unnecessary coverage.