What is product liability insurance?
Product liability insurance is a type of insurance policy that protects your company from legal expenses and settlements involving product-related personal injury and property damage.
If a product your company designs, manufactures, markets or sells injures a user or damages their property, this insurance typically covers the resulting claims. If your company builds or sells products, this may be a company policy to consider.
Why is product liability insurance important?
While product liability insurance can protect your company from catastrophic financial losses due to a potential lawsuit, there are other reasons for opting for this type of policy. Some of these include:
- Business resilience: A sizable product-related lawsuit could devastate your organization, leading to bankruptcy, closure or other detrimental consequences. Insurance for product liability can protect your company against these.
- Increased opportunities: Some potential business partners, such as retailers and distributors, require your company to have product liability insurance before they will consider doing business with you. By taking out such a policy, you may be able to secure new contracts and partnerships.
- Sense of security: This insurance policy can provide your company and its leaders with a sense of workplace wellbeing, enabling them to focus on achieving business goals.
- Enhanced brand image: Securing product liability insurance demonstrates to consumers and the business world that your company is a responsible entity that values customer wellbeing.
What does product liability insurance cover?
Liability insurance typically covers legal fees, court expenses, medical bills and settlements associated with product-related lawsuits. These include product flaws or errors, such as:
- poor design: design defects or errors
- manufacturing mistake: faulty equipment, quality control errors or incorrect materials leading to problems
- marketing error: faulty claims or incorrect user instructions
- problematic warning labels: incorrect or insufficient warnings
- strict liability: your company is responsible for any harm its products cause, even if it isn’t found negligent
Product liability insurance usually covers these types of damages:
- bodily injuries
- wrongful death
- property damage
- food poisoning or other illness
What does product liability insurance not cover?
Before seeking a product liability insurance policy, it is important to note that they have limitations. Some of the things they usually do not cover include:
- Errors caused by technical products: They may not cover resulting damages caused by any software, apps or other IT products your business uses.
- Recall costs: They can exclude coverage for expenses related to customer notifications, nor the transportation, disposal and replacement of recalled products.
- Workplace injuries: They might not pay for any expenses related to injuries suffered by employees or customers at your workplace.
- Intentional misconduct: They may not reimburse you for any costs that result from the intentional violation of governmental regulations.
- Professional negligence: They may not apply to harm resulting from a breach of professional duty, such as failing to provide the expected standard of care.
Who needs product liability insurance?
Many businesses can benefit from securing insurance for product liability. Here are a few examples:
- Manufacturers: It can protect against defects caused by faulty design or production.
- Wholesalers and distributors: It may insure against liabilities related to the products these companies handle and sell.
- Brick-and-mortar retailers: Insurance can offer protection against any liability associated with products ranging from children’s toys and clothing to appliances and cars.
- Online retailers: It can protect e-commerce businesses from liability associated with the improper use of their products.
- Importers: It may offer protection from product-related problems when importing products from multiple entities abroad.
- Food services: It can protect your food services company against a problem with labelling, food contamination or an outbreak of food poisoning.
- Construction: It may insure against any damage that an electrician, plumber or other tradesperson’s work causes.
How much does product liability insurance cost?
According to Canadian insurance provider websites, such as Liability Cover, the average product liability insurance costs in Canada are approximately $0.25 for every $100 of retail sales. For example, if your shoe store sells $100,000 of product per annum, your typical premium would cost $250 each year.
There are, however, several factors that can affect the cost of your product liability insurance. Some of these factors include:
- Industry type: Historically, some industries have experienced higher rates of product liability lawsuits. Some of these areas are pharmaceuticals, automobiles, children’s toys, foods and beverages and consumer electronics.
- Company size: The price of this insurance often depends on business size. Big companies with substantial revenue tend to pay higher premiums. With larger and more complex systems and processes, the likelihood of liability claims is higher. Plus, a higher sales volume can mean greater losses in a lawsuit.
- Claims history: Like most insurance policies, a clean claims history can lead to a lower premium, while several recent claims can increase it.
- Coverage: Opting for a higher level of coverage or a lower deductible can result in increased product liability insurance premiums.
- Safety protocols: Does your company adhere to strict safety measures, complete rigorous product testing and conduct frequent safety audits? If so, you may enjoy lower premiums than companies that do not take these steps to mitigate risk.
Operating a business can be risky, but there are steps you can take to protect your company. Now you can make a more informed decision about using product liability insurance as one of them.
