What Is Product Liability Insurance And Why You Should Care

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Any business, regardless of size, needs insurance coverage. One reason is that it could be sued if one of its products harmed a person or damaged their properties. In fact, even if you didn’t manufacture the product directly, a lawsuit could still be filed against your business. It’s called a product liability claim or lawsuit.

The problem with product liability lawsuits is that they can become massive trouble for your company financially if you don’t have the right insurance for them. They involve huge sums in compensation that you probably can’t afford to pay. Product liability award, on average, is at USD$1.5 million, according to the Insurance Information Institute’s most recent data. So even if you can actually pay for it, it’d still be a significant financial loss for your business. (1)

You may ask what you can do to protect your company. As of the moment, businesses only have one option—get the right product liability insurance coverage. Read on to learn more about product liability insurance and why you should care about it.

What is product liability insurance?

This type of insurance typically covers the compensation when someone has been injured or their property has been damaged by a product that you sold or made.

Products that the insurance covers are anything that’s sold to the public or other companies. It can be clothing, household items, food, or medicine. It also covers machinery, equipment, vehicles, and even software.

With the help of a product liability insurance broker, insurance companies usually sell this type of insurance as a policy. Brokers will send business owners offers from multiple providers via a single application. Since working with a broker allows you to compare coverage terms and premiums easily, it’s one way to find good affordable product liability insurance policies.

Is product liability insurance an essential purchase? Yes, since it protects your business from third-party claims that may result from the following circumstances:

A finished product that your business has manufactured injured a customer because of a flaw in the manufacturing process. In this case, a defective manufacturing claim may be filed against your company.
A customer sustained an injury while using your product because the item wasn’t designed properly. Since the problem stemmed from the product’s actual design, the victim may file a defective or hazardous design claim against your business.
A customer experienced severe side effects or sustained an injury after using your product due to a lack of instruction or warning regarding possible risks. In such cases, a claim based on defective warning or instructions may be filed.

Most importantly, product liability insurance keeps your company from shutting down, should a lawsuit result from any of the previously mentioned circumstances. The product liability insurance coverage can help by softening the litigation’s financial blow to your business.

Many business owners skip buying product liability insurance to avoid the premiums, which can be at least USD$600 per year on average. However, when you think of potential court claims, which have increased by 300% at the beginning of the pandemic, getting covered is actually cheaper than paying out lawsuit settlements. (2) (3)

Factors affecting the cost of product liability insurance policies

We’ve mentioned that, on average, the cost of product liability insurance premiums can be around USD$600. However, you could pay less or more, depending on several factors. The following factors will affect a business’s exposure to risk and, therefore, how these affect its monthly or annual premium payment:

Business type: The industry that your business is in is one of the main factors that affect product liability insurance’s pricing. For example, if you’re making, manufacturing, or distributing food products, your monthly or annual policy premium will be generally less expensive than that of healthcare entrepreneurs that sell custom medical devices. That’s because healthcare equipment carries a higher risk of causing damage, injury, or illness. It’s also true for electrical, sharp, and heavy products that require complex repairs.
Revenue: It’s something that most business owners aren’t aware of, but revenue is another thing that insurance providers consider when pricing a policy. That’s because the amount of money a company makes from selling a product could indicate the number of people it could impact due to defective or malfunctioning goods.
Past claim history: A policy’s premium payment may also increase or decrease depending on your business’s claim history. The higher the number of claims filed against you in the past, the more the risk your products entail. Startup businesses, though, are still welcome to obtain product liability insurance to protect themselves.
Safety measures in place: Premiums may be reduced if your company follows excellent product safety measures.
Coverage amount: Of course, higher coverage means your insurer is taking on more risk. So expect a higher premium cost when choosing an insurance limit that’s around millions of dollars.

How much coverage do you need?

You’ve learned that the coverage amount or limit is one of the factors that affect the product liability insurance’s pricing. But how much coverage do you really need? It depends on your business type and size. Of course, the kinds of products or goods you sell are also an important consideration.

However, no rules or regulations have been set for the coverage amount a company should have, so it’s entirely the business owner’s choice. The most important thing here is that you don’t skimp on getting insured; else, you end up underinsured.

There are three essential factors to consider when deciding on the most suitable level of cover for your business—potential scenarios, any contractual obligations, and potential payouts. Of course, don’t hesitate to consult an expert if you’re not sure which coverage level is right for you.

Final Thoughts

You must check out the coverage’s specifics carefully when buying a product liability insurance policy. Also, don’t forget to go through policy exclusions. That way, you know what isn’t covered specifically.

The quality control level that the policy requires is also worth checking, especially if you plan to negotiate lower premiums by taking extra measures. Once you’re ready to take out a product liability insurance policy, you can either apply to an insurance company directly online or go through a broker.