For small businesses that manufacture, install, or sell any type of product, the liability risk can be daunting, especially when you consider product recalls or liability lawsuits. If you’ve ever purchased a product that was flawed, wasn’t as described, or made you ill or caused injury, then you understand that things can easily go wrong.
It’s important to note that sometimes the most innocuous products can land your business on the wrong end of a lawsuit. For example, Blitz ran afoul of consumers when a product liability lawsuit was filed charging that the company designed gas cans that would explode when used to pour gas to start a fire. More than 30 cases were filed in 2012, costing the company an average of $4 million per case, and caused Blitz to file for bankruptcy later that year.
Then there was the Ledraplastic balancing ball. Ledraplastic was sued by Francisco Garcia of the Sacramento Kings after a balancing ball ruptured during a workout and caused him to fracture his right forearm, preventing him from playing the first four months of his first-year contract. The court awarded $4 million in lost wages and $29.6 million in damages.
These cases serve only as notable examples of how things can go wrong in any industry when the design, manufacture, and sale of a product could lead to injury or property damage. Businesses that have a comprehensive product liability policy in place are more likely to endure the actions brought against them by consumers and survive the financial devastation that can result from unfavorable judgments awarded by the courts.
Product liability insurance is designed to financially protect a company against claims or actions that can arise from the design, manufacture, or sale of products to consumers. The policy provides coverage for the manufacturer’s or seller’s liability, which may result from bodily injury or property damage sustained by a third party resulting from a defect or malfunction of the product or the lack of product warnings and explicitly clear usage instructions.
The product liability policy provides coverage for manufacturers of products and those responsible for selling it, such as distributors, wholesalers, retailers, resellers, and even the installers of the products. It's important to note that your business' general liability does not provide product liability protection, except in rare instances such as churches, law firms, and other professional service businesses.
Product liability will cover your business if claims arise out of the design, manufacture, or sale of a product that results in bodily injury or property damage. The policy also pays for your defense costs, if an action is brought against you.
For example, your customer, Aaron, purchases some paint thinner from your hardware store. Aaron then becomes ill and is hospitalized after using the product in a room without windows or other ventilation. Aaron sues your store and the manufacturer for failing to put a warning label explaining that the paint thinner should not be used in non-ventilated spaces.
Product liability insurance will vary greatly depending on the risk of each type of product. The risk is determined by the type of product, the amount of revenue derived, how it’s marketed to consumers, and what safety measures are in place. Items like fireworks or guns will have a significantly higher risk factor than clothes or bedding.
The average cost of product liability insurance for products in a low-risk category is about $0.25 per each $100 in revenue. For example, if you sell $500,000 worth of goods each year, your product liability insurance costs would be $1,250 (or 0.0025 * $500,000). Certainly, your actual costs could be substantially higher or lower depending on the type of product you design, manufacture, or sell and the annual revenue generated for your business.
Here are example costs for product liability insurance in the low-, medium-, and high-risk categories, using an annual revenue of $150,000 with a $1 million liability limit:
Simply put, your product liability insurance does not provide coverage found under any other type of policy. For example, if a customer slips and falls while on your premises, this would be covered under your general liability coverage, or if you failed to meet the terms of a contract with a customer, your coverage would be provided by a professional liability policy.
Most product liability policies also exclude coverage for intentional acts, faulty workmanship, or hazards having to do with mold, asbestos, and lead paint products.
When discussing product liability coverage for small businesses, the most popular endorsement requested is Vendors Coverage. This endorsement extends coverage under a manufacturer’s product liability policy to include coverage for specified vendors, which may sell or distribute products for the insured.
Purchasing this endorsement can eliminate the need for the vendor to purchase a separate product liability policy for those specific products manufactured by the insured. Typically, the additional cost for the endorsement is a flat rate of $100, depending on the insurance company selected.
Prices range from $0.15 to $1.5 and also vary depending on your zipcode: