If you own a business that creates, manufactures, distributes or sells products, your company could be liable if the product causes harm to others. For example, your business could face a lawsuit if it sells a tool that has a defect and injures a customer.
Your business could be liable for any damage caused by the product—even if the customer uses a product incorrectly. The potentially high cost of lawsuits makes product liability insurance a vital component of a small business insurance policy.
What Is Product Liability Insurance?
Product liability insurance is a form of small business insurance for claims that a product you created, distributed, manufactured or sold doesn’t work properly and caused injury or property damage to someone else.
For example, if your company sells lotion that caused severe allergic reactions, resulting in a lawsuit, your product liability insurance would pay for medical expenses and legal costs.
Without product liability insurance, your business may have to pay out of pocket for medical expenses, property repairs, legal fees and other expenses for accidents related to product defects.
What Does Product Liability Insurance Cover?
Product liability insurance covers legal fees, medical costs and compensatory damages brought forth in third-party lawsuits. It covers problems caused by your product, such as:
- Damages to someone’s property
- Bodily injuries
- Illness
- Wrongful death
The types of defects covered by product liability insurance include:
- Design defect. There was an error in the product’s design.
- Manufacturing defect. There was a flaw in the manufacturing of the product.
- Marketing defect. The marketing of the product had an error, such as not providing the proper instructions.
- Improper warning. There isn’t enough warning on proper use of the product.
- Strict liability. A customer gets hurt by a product, even if your business isn’t found negligent.
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What Does Product Liability Insurance Not Cover?
Product liability insurance covers lawsuits for physical harm caused by a product. It’s not designed to cover problems caused by software, apps, IT and technical products.
For example, product liability insurance doesn’t cover coding mistakes and software errors that cause financial harm to your customers. You need errors and omissions insurance for technology-related problems.
Product liability also does not cover:
- Product recall costs
- Employee injuries
- Accidents involving customers, such as slip-and-fall injuries
Who Needs Product Liability Insurance?
If you sell a product, you’re a good candidate for product liability insurance—especially with the prevalence of lawsuits these days. These types of businesses often buy product liability insurance:
- Stores
- Distributors
- Manufacturers
- Online sellers on Amazon, eBay and Etsy
- Pet supply shops
- Print shops
- Restaurants
- Wholesalers
A product liability insurance policy is also suitable for a construction and contracting business because it offers financial protection if a client decides to sue over damage caused by the finished work. For example, if a contractor installs a custom cabinet but the doors are defective, product liability insurance could cover the cost of fixing the defect.
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How Much Product Liability Insurance Do I Need?
“The product liability coverage limit will vary depending on industry, location, annual revenue amount and claims history,” says Michelle Shaver, senior vice president of Chubb Small Commercial Insurance. “If products are more hazardous in nature or sold in a highly litigious geographic territory, it may be advisable to carry higher coverage limits.”
Bryan Smith, vice president of product management at The Hartford, says the amount of product liability insurance coverage should be commensurate with the expected liability exposures that a business will face.
“The type and amount of product, the volume of sales and the number of parties involved in the production and stream of commerce will all impact the insurance needs of a business,” Smith says.
How Much Does Product Liability Insurance Cost?
Product liability insurance costs an average of $1,192 a year for small businesses, according to AdvisorSmith.
When it comes to product liability insurance premiums, your industry makes a difference. For example:
- Manufacturing businesses have an average premium of $1,146 per year, with a range of $736 to $1,854.
- Wholesale businesses pay an average of $1,159 a year for general liability insurance that includes product liability insurance. Premiums range from $751 to $2,431 a year.
Other cost factors that affect the cost of product liability insurance include:
- Your business location
- Claims history
- Policy limits
Product Type Affects Insurance Cost
A key factor affecting the cost of product liability insurance is the type of product being created, manufactured or sold by your business. Products differ in the chance that they’ll cause property damage or injury to someone. Insurance rates for product liability insurance reflect this wide range of risks.
Companies selling safer products, such as office supplies and stationery, have lower premiums.
Higher-risk products include furniture, electronics and bicycles. But the highest-risk products are food and beverages and products used by children. These products will have among the highest rates for product liability insurance.
Product Liability Insurance for Sellers on Amazon
Small businesses selling on Amazon can purchase product liability coverage through a digital network called Amazon Insurance Accelerator.
Amazon requires its third-party sellers to buy product liability insurance after attaining $10,000 in sales in one month. The Amazon Insurance Accelerator will help U.S.-based small businesses get product liability insurance quotes from companies such as Chubb, Harborway, Hiscox, Liberty Mutual, Markel and Travelers.
How Much Product Liability Insurance Do I Need?
The amount of product liability insurance you need typically varies depending on industry, location, annual revenue amount and claims history, says Michelle Shaver, senior vice president of Chubb Small Commercial Insurance.
“If products are more hazardous in nature or sold in a highly litigious geographic territory, it may be advisable to carry higher coverage limits,” Shaver says.
Bryan Smith, vice president of product management at The Hartford, says the amount of product liability insurance coverage should be commensurate with the expected liability exposures that a business could face.
“The type and amount of product, the volume of sales and the number of parties involved in the production and stream of commerce will all impact the insurance needs of a business,” Smith says.
How to Get the Best Product Liability Insurance
You can purchase product liability coverage as part of a general liability insurance policy. This basic level of product liability insurance may cover companies with low product risk.
The second option is to purchase a standalone product liability insurance policy. A standalone policy would be appropriate for a company with a high risk of product liability.
“Product liability insurance is frequently offered through a general liability insurance policy. It can also be offered as a standalone policy,” says Smith at The Hartford.
“Product liability insurance helps protect a business from claims caused by an actual or alleged defective product. The product might be manufactured by the business or sold by the business and cause bodily injury or property damage to a third party,” he says.
Tips For Buying Product Liability Insurance
Here’s what to know when buying product liability insurance.
Choose the right coverage limit. “When purchasing product liability insurance, it is important to select the appropriate coverage limit as well as the suitable coverage territory—the geographic area an insurance policy will cover,” Shaver at Chubb says. “In the event of a covered claim, having the right coverage limit will determine how much the insurance company will cover and how much the small business owner will have to pay out of pocket.”
Know your coverage territory. “The policy’s coverage territory can impact whether a claim will be covered or not,” Shaver says. “If the product can be used in any location after it is made, then the small business should consider worldwide coverage.”
Location makes a difference. If a product is being manufactured or sold within a particularly litigious region, there is a greater likelihood of the company being sued, Shaver notes.
Be aware of contract requirements. “Some vendor contracts may require a small business [to] have specific coverage limits in place to cover any claims or losses for which they may be responsible,” Shaver says.
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