When you’re in the business of producing or selling goods, there are dozens of things you have to plan for in order to succeed. But have you considered what would happen to your small business if you sold a defective product that injured a customer or damaged their property?
They could file a claim stating that you are liable, even in the case of an accident.
This is why manufacturers and sellers choose to purchase product liability insurance. Product liability insurance protects a business from liability when a third-party is harmed by a faulty product.
But, what is product liability and how does it work? Most importantly, does your business need product liability insurance? By the end of this guide, you’ll know these answers and more.
What is product liability?
Businesses purchase product liability insurance to shield themselves from customers claiming that the purchased item caused any of the following situations:
- Injured a third party
- Made a third party sick
- Damaged a third party’s property
- Caused the wrongful death of a third party
A product liability claim can impact both retailers and manufacturers. And even if you don’t do anything wrong, you could still be sued for a defective consumer product.
For instance, a client eats your food product and gets food poisoning. Should this result in a trip to the hospital, they could claim that it’s your business’ fault, even if the sickness was because they didn’t refrigerate the food properly.
Types of product liability claims
There are four primary types of product liability claims that you should be aware of, including:
Strict liability – Since the 1970s, a seller or manufacturer could be sued on the basis of strict liability. In cases like this, you can be found liable without also being negligent. Instead of the liability claim and awards being based on fault, the injured plaintiff simply needs to demonstrate:
- The product injured them
- The product had a dangerous defect
- The plaintiff was injured using the product in the way it was intended to be used
- The plaintiff didn’t alter or change the product after buying it
Production flaw – This occurs when you produce a good that the injured third party claims contained a hazardous defect caused (at least partly) by its manufacturing.
For example, a man purchases a razor blade from a shaving company. Should one of the blades fall off, causing him to cut himself and require stitches, he could sue the shaving company, claiming that the razor was flawed and unsafe because of its product flaw.
Design defect – In this situation, the product has been flawed and inherently unsafe since its initial design phase. Naturally, this is often a bigger deal than an isolated production flaw, since it means that an entire line of products could be faulty and potentially dangerous. Design defects often result in total recalls to ensure product safety.
For instance, the battery for a smartphone can be improperly designed (like it was for the Samsung Galaxy Note 7). This causes many of the phones to overheat and explode. While this could cause both shock and outrage, it could also result in serious personal injury cases.
Defective instructions or warnings – Some product liability claims stem from the injured party saying that the seller didn’t:
- Provide proper instructions about how to safely use the product
- Clearly state the potential risks of using the product
For example, if a customer’s child chokes on a bite-sized toy that clearly shouldn’t be eaten, the parent could still file a claim against the seller for not providing an adequate choking hazard warning.
Product liability coverage
So, we know that product liability insurance covers third parties from:
- Property damage
But what does it not cover?
There are four primary instances that product liability won’t protect your business from. In most of these cases, they fall under the coverage of a different or specialized type of insurance. That said, you should be aware that the following circumstances won’t be automatically covered:
Damaged products – This would have to be handled by your commercial property insurance, which is usually bundled in a BOP (business owner policy).
Product recall costs – If you have a defective product, that is covered on behalf of a specialized type of liability insurance known as product recall insurance.
Employee injuries – If one of your own employees is injured by a product that was sold or manufactured by the business they work for, workers’ comp would cover their medical bills, or protect your business if the employee filed a lawsuit.
Customer accidents – If a customer simply trips, falls, or is injured at your place of business (even by something unrelated to your product), this type of protection would be included in a general liability insurance policy.
Note: Businesses that manufacture potentially hazardous products may have an increased risk of product liability, which makes it harder to obtain product liability insurance.
Safeguarding your small business
Running a business is inherently risky. Insurance is what business owners use to mitigate the consequences that can occur from those risks. If you are a vendor or manufacturer, product liability insurance is a must-have, but no matter whether or produce a product or offer a service, you likely need general liability insurance. Why? Because it protects you from third-party claims of bodily injury or property damage. Because those are the kinds of things that happen all the time, general liability tends to be the most common form of business insurance.
So, how do you get protection?
With us. Thimble is the easy new way that businesses can purchase general liability insurance for an hour, day, or month. With affordable rates and on-demand coverage, Thimble is reliable even when your schedule isn’t.
In less than 60 seconds, you can go from being exposed to having a Certificate of Insurance at hand. Simply download the Thimble app, input a few details, receive a free quote, purchase a plan, and you’ll be protected.
Protecting your business from product liability
It’s important to make the distinction that general liability and product liability insurance are two different things, but each protects a different array of risks. Even one defective product out of a million can cause your business financial hardship. And when you produce goods on a large scale, these types of problems sometimes feel inevitable.
When you have insurance, you are assured that one mistake or defect won’t have a huge impact on your business.
Our editorial content is intended for informational purposes only and is not written by a licensed insurance agent. Terms and conditions for rate and coverage may vary by class of business and state.