Guide to Product Liability Insurance for Small Businesses

Picture this: you’ve got a booming business, selling your excellent products left and right. But then, out of the blue, someone claims that your product caused them harm. Yikes! That’s where product liability insurance swoops in to save the day. 

The bottom line? Product liability insurance is your safety net in a world where mistakes happen. This type of insurance policy protects your business if things go awry.

What is Product Liability Insurance?

So, what exactly does product liability insurance do? Well, imagine someone says your product made them break out in hives or caused damage to their property. Product liability insurance steps up to cover you in these unforeseen situations.

It could be anything from design flaws in your product to defects that slipped through the cracks or even inadequate warnings and instructions. That tasty dish served up at your famous restaurant might contain an allergen, a seemingly harmless toy could pose a choking hazard if not properly labeled, or that sleek new computer you ordered online might decide to turn into a mini furnace. Anything that could potentially cause harm or damage is fair game.

Does Your Business Need Product Liability Insurance?

Does your business dabble in any of the following product-related activities? If so, it may be time to contact a local insurance expert.

1. Manufacturing: If you’re in the business of making stuff, whether it’s artisanal candles or cutting-edge gadgets, product liability insurance is a must-have.

2. Distributing: If you’re the middleman getting goods from point A to point B, you should probably have some insurance backing you up.

3. Wholesaling: Selling products in bulk? You guessed it—product liability insurance is a smart move to keep your bottom line protected.

4. Importing: Are you bringing in goods from overseas? Remember to pack some product liability insurance into your commercial insurance policy.

5. Retailing: Whether running a cozy boutique or an online empire, selling products directly to consumers means you’re in the spotlight. You’d better have some insurance to shield you from potential mishaps.

6. Installing: Product liability insurance is a must if your business involves installing any products in people’s homes or businesses, anything from kitchen appliances to fancy security systems.

7. Repairing/Modifying: Fixing broken gadgets or tweaking products to fit your customers’ needs? Yep, you guessed it—insurance time!

Product liability insurance may not be legally required, but an extra layer of protection can save you from serious headaches. If you’re dealing with products in any way, product liability insurance is like having a trusty sidekick ready to swoop in and save the day if things get messy.

How Much Does Product Liability Insurance Cost?

According to AdvisorSmith, on average, small businesses in industries like manufacturing, retail, and wholesale, making less than $1 million in revenue, can expect to pay around $1,200 per year for product liability insurance.

However, these costs vary because product liability insurance isn’t a one-size-fits-all approach. The cost of product liability insurance depends on factors such as:

1. Type of Product: Selling fluffy pillows is a whole different ball game than peddling power tools. Riskier products, like anything you ingest (hello, food items!), tend to increase insurance rates.

2. Sales: The more sales you make, the more likely you’ll pay for insurance premiums. Basically, more products sold may equate to a higher risk of defects and thus higher insurance costs.

3. Position in the Supply Chain: Are you creating a product, or are you the middleman moving goods from point A to point B? Your position in the supply chain can impact your insurance rates.

4. Coverage Limits: How much coverage is enough? Basically, more coverage equals higher premiums. But remember, it’s always better to be overinsured than underinsured!

5. Extra expenses: This coverage reimburses reasonable expenses beyond your fixed costs that help keep your business operating.

6. Claims History: Previous claims can increase your insurance rates.

What Does Product Liability Insurance Cover?

So, what exactly does product liability insurance cover? Well, this insurance has your back when it comes to injuries or property damage caused by your products. From legal fees to settlements and medical bills, it’s there to help you weather the storm when the unexpected strikes.

Here’s what it typically covers:

1. Legal Fees: Legal fees can add up fast, but product liability insurance helps foot the bill for legal representation, so you can focus on running your business instead of stressing about courtrooms.

2. Medical Costs: Medical expenses can pile up if someone gets injured or falls ill due to your product. Luckily, product liability insurance can help cover those hefty medical bills.

3. Compensatory Damages: If your product causes harm, compensatory damages can apply. These can include compensation for pain and suffering, lost wages, and other losses suffered by the injured party.

What types of problems does product liability insurance typically cover?

• Design Defects: Product liability insurance covers you if your product has a design flaw that causes harm.

• Manufacturing Defects: Sometimes, even the best-laid plans go awry. If a glitch in the manufacturing process leads to defects in your product, you’re covered.

• Marketing Defects: Did someone fail to provide proper instructions or warnings? Whether it’s a labeling mishap or inadequate instructions, product liability insurance can help mitigate the fallout.

• Improper Warnings: Have you ever bought something and wished you had a heads-up about potential risks? If your product lacks proper warnings about its safe use, product liability insurance covers you.

• Strict Liability: Accidents can still happen even if you’ve done everything by the book. That’s where strict liability comes in—if a customer gets hurt by your product, even without proving negligence, product liability insurance can provide a safety net.

What Product Liability Insurance Does Not Cover

While product liability insurance is like a specialized tool designed specifically for products when things go awry, it doesn’t cover every risk.

These are standard exclusions you’ll likely find in your insurance policy:

1. Software Glitches and IT Woes: If your cutting-edge software hits the market but a coding hiccup leaves your customers in a digital pickle, product liability insurance won’t swoop in to save the day. If software liability is a concern for your business, you might need errors and omissions insurance—a.k.a. E&O insurance—to cover technology-related snafus.

2. Product Recall Costs: A product recall can be a business owner’s nightmare. Whether it’s a safety concern or a quality issue, recalls can be costly. Product liability insurance won’t cover recalls.

3. Employee Injuries: If an employee gets injured on the job, product liability insurance won’t be there to catch them. That’s where workers’ compensation insurance comes into play, ensuring your employees get the care and compensation they deserve.

4. Customer Accidents: If someone gets hurt at your business, product liability insurance won’t cover you. This is where general liability insurance steps in to save the day.

Product Liability Coverage Limits

When you set up your product liability insurance policy, your insurance company will typically recommend coverage limits based on your business’s needs and risk factors. Think of it like picking the right size safety net for your business—you want one that’s big enough to catch you if you fall but not so big that it weighs you down.

You’ll need to know two terms: occurrence limit and aggregate limit. The occurrence limit is the maximum amount your insurer will pay per claim. It’s like a cap on how much financial protection you get for each mishap. On the other hand, the aggregate limit is the maximum amount the insurer will pay in total for multiple claims during the policy period. It’s like the grand total of all the safety nets you have in place.

For example, let’s say your business has a policy with a $1 million per occurrence limit and a $2 million per aggregate limit. If you face a claim of $1 million or less, the insurance company will cover it minus any deductible you might have agreed upon.

But if the claim exceeds $1 million, the remaining amount becomes your responsibility. If you have multiple claims throughout the policy period, the total amount the insurer will cover is capped at $2 million. Anything beyond that comes out of your pocket.

Pro tip: if your business sells products through retailers, you’ll also need to consider their requirements when selecting coverage limits for your policy. After all, you want to ensure your insurance coverage aligns with their expectations to protect everyone. Remember, when it comes to insurance, it’s all about finding the sweet spot between adequate protection and manageable costs.

Tips for Purchasing Product Liability Insurance

Are you ready to purchase product liability insurance?

You’re off to a good start if you already have general liability insurance for your business. Often tucked away in that policy is something called product liability protection. It’s like a bonus feature that protects you if one of your products goes rogue and causes harm.

However, if your business deals with a variety of products with serious risk factors, you’ll want to increase your coverage with a standalone product liability insurance policy. It’s like adding extra armor to your business’s defense systems because you can never be too protected in the wild world of entrepreneurship.

So, how do you get your hands on product liability insurance? Follow these steps:

1. Find a Licensed Commercial Insurance Agent: Think of them as your insurance gurus, ready to navigate the murky waters of insurance policies and premiums. Whether you prefer shopping online or chatting in person, they’ve got your back.

2. Shop Around: Explore your options before committing. Get quotes from different insurers to see who offers the coverage that best meets your unique needs at a price that makes sense for your business.

3. Consider Your Needs: Maybe you’re not just looking for basic coverage—you want the whole shebang, including product recall insurance or robust risk management services. Our insurers specialize in catering to your specific needs.

4. Consider a BOP: Have you ever heard of a Business Owner’s Policy (BOP)? It’s like the Swiss Army knife of insurance policies, bundling general liability, commercial property, business interruption coverage, and product liability insurance into one neat package. And the best part? It can often be cheaper than buying individual policies piecemeal.

5. Balance Cost vs. Value: While going for the cheapest policy might be tempting, remember that you get what you pay for. A bargain-basement policy might save you a few bucks upfront, but if it doesn’t provide the coverage you need when the time comes, you could pay hefty expenses out of pocket. So, carefully weigh the coverage a policy offers against the costs. After all, protecting your business is an investment, not an expense.

We’ve peeled back the layers of product liability insurance and uncovered why it’s vital for your business. From protecting against unexpected mishaps to providing a safety net when things go awry, this insurance superhero has got your back.

Remember, in the fast-paced world of entrepreneurship, getting caught up in the excitement of building your empire is easy. But safeguarding your business with product liability insurance isn’t just a smart move—it’s a crucial one.

Need to learn more about product liability insurance?

Our agents are ready to help you out, so contact us to learn how we can customize your insurance policies to meet your needs.

*Disclaimer: We offer content for informational purposes; Co-operative Insurance Companies may not provide all the services or products listed here. Please contact your local agent to learn how we can help with your insurance needs.

Sources

Forbes. How To Get Product Liability Insurance. https://www.forbes.com/advisor/business-insurance/product-liability-insurance/

Nerd Wallet. Product Liability Insurance: What It Covers, Who Needs It. https://www.nerdwallet.com/article/small-business/product-liability-insurance

Nationwide. What is product liability insurance for small businesses? https://www.nationwide.com/lc/resources/small-business/articles/what-is-product-liability-insurance

The Hartford. Product Liability Insurance. https://www.thehartford.com/general-liability-insurance/product-liability-insurance