Product Liability Insurance Explained
To understand product liability insurance, you have to understand product liability.
In a nutshell, product liability is a legal concept establishing liability for product manufacturers for defects or injuries a product causes to a consumer. Product liability covers defects from:
A product’s overall design
A product’s manufacturing process
The marketing of a product, etc.
Put simply, if a company creates a dangerous product and fails to warn consumers about the defects, it could be held liable for any injuries caused by said product.
Retailers and manufacturers alike can be held liable for defective products or consumables. That’s right; if your small business simply sells products to people instead of making them, it could still be held liable if a consumer sues you for product liability. If you find yourself facing such legal challenges, it's crucial to have experienced personal injury attorneys on your side.
Therefore, product liability insurance protects small businesses from financial penalties, liabilities from lawsuits, or defective product claims.
Most liability insurance policies cover:
Court fees
Property damage and bodily injury costs
Costs for legal defense (i.e., attorneys)
Costs for out-of-court settlements
Everything Product Liability Insurance Covers
The exact coverage of your product will vary depending on your insurance provider and plan. That said, most product liability insurance plans cover three types of defects:
Manufacturing defects, which occur during the manufacturing process
Design defects that occur during the design or planning phase of product creation
Marketing defects, which cover you if a product was marketed incorrectly (i.e., not providing consumers with enough warnings about proper product operation or side effects). Note that some customers may levy liability accusations even if you market through a subsidiary or partner, like in an affiliate marketing partnership.
Combined, each of these three coverage points protects you from practically any liability accusation a customer may levy against your company. However, most standard insurance plans don’t cover product recalls. That means you might be financially on the hook for having to recall and restock or fix any products with major problems.
You could consider purchasing product recall insurance from a separate provider or discovering whether your primary insurance provider offers it as an extra package. In any case, having recall protection may also be wise if you ship many products around the world or sell stuff from multiple manufacturers.
The Benefits of Small Business Product Liability Insurance
Small business product liability insurance can provide you with two major benefits:
Peace of Mind
The first is peace of mind. When your business is protected by product liability insurance, you don’t have to panic anytime someone threatens legal action against your company. Whether you manufacture products or just ship them to customers, you can rest assured that those customers cannot sue you out of business because they accidentally injured themselves with one of your products.
Financial Security
Furthermore, small business product liability insurance offers financial security. It’s relatively affordable, so there’s no reason not to get it early. And once in place, the insurance means you don’t have to pay out-of-pocket if someone sues you for a product defect or manufacturing error.
More importantly, you can continue running your business and expanding in the future. With product liability insurance, your financials will remain stable, even if you take on a business partner, launch a new product, or start to ship products to a new market. Plus, even if your reputation is damaged, you’ll be in a position to rebuild more easily through smart marketing strategies.
Is Product Liability Insurance Expensive?
Product liability insurance prices vary heavily depending on your provider, your business’ size, and what’s included in your policy. However, most small businesses can afford product liability insurance as part of general liability insurance coverage.
On average, this type of insurance costs just under $1200 per year. Alternatively, you can think of product liability insurance as a cut of all your profits over the year. It adds up to about $.25 for every $100 of product sales for most companies.
It is a very small price to pay for the peace of mind and financial protection that product liability insurance guarantees. Odds are your accounting department can accommodate the cost easily.
Other Types of Insurance to Consider
There are multiple types of business insurance you might consider to further protect your company. These types include:
Commercial auto insurance, which is important if you use your vehicle for any work purposes
Professional liability insurance that protects you from any customers who claim that negligence (either true or not) led to financial losses for them
General liability insurance which protects your business from any accidents that occur while you do your work. It typically includes coverage for copyright infringement, property damage, physical injuries, fire damage, etc.
Commercial property insurance that protects your equipment, property, inventory, technology, and tools if they need replacement or repairs
Workers’ compensation insurance that protects your business if any employees are injured while working
Since product liability insurance is usually affordable, getting a few insurance policies from the same provider might be wise. Just like life insurance is wise for individuals, comprehensive insurance is also wise for your business. The more protected your business is, the better!
Wrap Up
Product liability insurance is something your small business should never be without. It can maximize your protection and allow you to serve your customers confidently without having to worry about a single lawsuit ruining your finances.