In a perfect world, your company builds a perfect product that functions perfectly and fulfills your customers’ expectations to the tiniest detail. It goes without saying that the product is also safe to use and that you included all the necessary instructions and safety precautions.
But we don’t live in a perfect world. Things can and often do go wrong. For example, you forget to list all potential side effects of your new food supplement, and a customer experiences a strong reaction to it. Or, a chair your company built has a defect that causes the user to fall and injure themselves. Situations like this are not only tragic and embarrassing, but they can also be financially draining for your business.
The injured person can and probably will file a claim against your company, and settlements or court-awarded damages can be pretty expensive. In fact, the enormous cost associated with product-related lawsuits means that very few businesses will be able to cover the cost of a product liability lawsuit on their own. This is why it’s a good idea to consider transferring your product risk to an insurer through a product liability insurance policy. This coverage protects your business from claims of bodily injury or property damage caused by product defects or malfunctions.
A robust product liability policy would also cover all your legal costs in case of a claim against your business. It would also pay for the product recall and replacement expenses, anything you might own to companies in your supply chain, and hire PR experts that would help remedy your reputation damaged by the product-related claim.
Why Do You Need Product Liability Insurance?
Product liability insurance is designed to protect you from the consequences of a potential product malfunction claim against your company. It’s important to keep in mind that people often decide to sue everyone in the supply chain in such a case, so it doesn’t matter if you manufacture the product, package it, or just sell it in your store.
You can be sued for any kind of injury the defective product causes to a buyer, user, even a bystander. Product defects that lead to a claim usually fall into three categories: manufacturing, design, and marketing defects.
Manufacturing and design defects are usually the consequences of mistakes in production. They can manifest right away or surface later in the product’s lifespan. Whenever they appear, if they cause any injuries, they give cause for a product liability lawsuit.
You could also be held liable if you fail to provide detailed and accurate instructions or warnings for your product, and that somehow leads to a user’s injury. That is an example of a marketing defect.
Your product can also cause people financial damage. If their injuries require medical attention, or they need to repair the damage your product caused to their home, that adds up to the cost you’d need to cover in case of a lawsuit against your company.
If the alleged product defect causes property damage, that can be ground for a lawsuit against you as well.
What Affects the Cost of Your Policy?
Insurers typically tailor insurance policies based on your company’s unique needs. According to AdvisorSmith’s research, the average cost of a product liability insurance policy for small businesses in the US is $1,192 per year. It is important to note that the study included companies with $1 million in revenue and ten employees.
If your company doesn’t fall into that range, your premium will likely be different than the average for small businesses. Many factors influence your product liability insurance cost, and they are all related to your business characteristics. Let’s break down the main factors that influence the cost of your policy:
Line of Business and Product Type
Suppose that you run a toys manufacturing business. Your product is highly risky not only because of a possible injury due to a faulty designed toy but also because of the small parts that might not be clearly labeled as a choking hazard. The risk is even more significant when you know that the users of your products are usually children.
On the other hand, if you are in the clothes manufacturing industry, the risk of a severe injury to your customers is relatively small, so you should expect to pay less for your product liability policy than someone in the business of producing gardening equipment.
In a nutshell, the type of product you manufacture or sell directly influences the price of your insurance policy. If your product is safe and cannot inflict severe injuries to users or damage to their property, your risk level is lower, and therefore, your premium will be lower, too.
Companies that produce hazardous materials, high-risk tools, or similar products usually obtain their coverage from surplus or excess insurance companies since they typically require larger premiums.
The cost of your policy will depend on the amount of liability coverage you want to get. If your product falls into the riskier category, it might be a good idea to get more coverage. Product malfunction lawsuits can be very costly, especially if the injuries inflicted to one or multiple users were extensive.
To explain the matter simply: the more coverage you get, the higher the premium you will need to pay. If you are unsure what the limit of your product liability insurance policy should be, consult your insurer, who can advise you on the recommended policy limit for the amount of risk your company faces.
Your revenue affects your company’s overall liability exposure. Companies that have higher revenue risk losing more when a claim is made against them. Whether the lawsuit gets resolved out of the courtroom or you have to pay the damages awarded in court, the amounts will be linked with the amount of money your business makes.
The same goes for your product liability insurance. Bigger companies that earn more money will pay more for the policy premium than a small company with 20 people on the payroll.
Your claims history is also a clear indicator of the amount of risk associated with your business. A history of claims against you will significantly increase your insurance premium. You transfer your risk to the insurer when you purchase an insurance policy with them, and they want to ensure your premium is adequate.
Where You Are in the Supply Chain
Even though the possibility that a product malfunction lawsuit could include your company is extensive wherever you are in the supply chain, there are marked differences if you produce the product or only sell it. Manufacturers stand to lose substantially more if they get sued than the company selling their product.
The rates are higher for manufacturers because they are held liable for faulty designs and product malfunctions. In contrast, sellers are responsible for sales-related damages or failure to give proper additional instructions regarding usage or warranty.
How to Buy Your Product Liability Insurance Policy
Depending on the size of your business and the amount of insurance you need, there are a few ways you can obtain your product liability policy:
- As an endorsement to your general liability insurance: A general liability insurance policy already includes product coverage to a certain extent. However, if you want to ensure you are properly covered, you should add an endorsement to your policy that extends to cover all your product-related risks. This option is suitable for those companies that don’t produce high-risk products, but their general liability doesn’t cover all their exposures.
- Bundled in a BOP as GL endorsement: If your general liability policy is bundled in a BOP (Business Owners Policy), and you need additional coverage, make sure to add the adequate endorsement to your BOP.
- Standalone policy: Buying product liability insurance as a standalone policy is the best option for companies that manufacture products that carry certain risks of causing serious injury or property damage. Companies with substantial annual revenue should also consider purchasing their liability coverage this way because they risk losing a lot of money if they get sued.
How to Reduce Your Product Liability Insurance Cost
Apart from bundling your general liability into a BOP, there are a few more ways to save money on your product liability insurance policy. Most of these tips focus on prevention and things you can improve to reduce the possibility of a product-related claim. Here’s how you can save money on your product liability insurance, especially if you are a manufacturer:
- Introduce regular quality controls to ensure you catch any defects or faults in design early in the production process.
- Ensure that all your employees receive proper training on how to install and maintain the equipment so that it wouldn’t corrupt the product.
- Include warning labels and detailed instructions for your product and make sure to cover all usage aspects.
- Purchase and implement suitable inventory tracking software and keep meticulous records to help with potential product recalls.
- Only work with trusted and verified partners in the supply chain.
- Keep your financial records up to date to keep track of your annual revenue that affects your premium.
The Potential Cost of Not Being Insured
Any business that faces the risk of a product-related lawsuit should obtain product liability coverage, no matter how small that risk may seem. It only takes one bad product to cause enormous financial damage to your business.
Companies with high-risk products or that are particularly exposed to claims should consider purchasing a standalone product liability policy. They should take their risk very seriously and purchase adequate coverage, given that they can lose a lot of money in lawsuits if found liable for a personal injury caused by one of their products.
According to a report by the Insurance Information Institute, the average jury award in case of a personal injury caused by a defective product was a staggering $7.4 million in 2019. If you count in the legal and defense costs, that number becomes significantly higher, and it’s simply not worth the risk to go unprotected.
If you still haven’t purchased your product liability policy, or you think you might be underinsured, now may be the right time to talk to one of our advisors or sign up to Embroker’s digital platform and get your product liability insurance quote.