In 2017, a popular French Instagram model and fitness blogger died after a whipped cream dispenser exploded and hit her in the chest.
When pierced by a pin, whipped cream dispensers release gas and pressurize the cream container. In this tragic case, the nitrous oxide in the canister exploded and flew off, resulting in the French model’s death. The company that produces the whip cream dispenser decided to recall the product after the incident.
This is not the only case of a company recalling a product because of damage or injury. Even the most prominent companies have recalled their products before, usually due to contamination, manufacturing defect, or design flaw.
But a product recall can also lead to a significant financial loss, damaged professional reputations, and even a total rejection of the company’s products. That’s why businesses should always think one step ahead and get protection from more significant risks. Here’s how product liability insurance can help you protect your business.
What is Product Liability Insurance?
Let’s say your company has manufactured or sold a product with a defect and caused an injury or property damage. In this case, a third party could hold you liable for the incident.
Product liability insurance is a type of business insurance designed for businesses that manufacture and sell products. Product liability insurance transfers the risk of defects, including the costs of product lawsuits and other claims related to faulty products.
A product can be any type of good that your company sells to consumers or other businesses, from clothing, food, medicines to devices and machines.
As a result, anyone who comes in contact with your product — the buyer, the user, or even a bystander, can be the injured third party.
What Does Product Liability Insurance Cover?
Product liability insurance covers compensation claims if someone sues your company because your product caused an injury or damage on their property.
However, even if you don’t manufacture the products you sell, you could still be held responsible.
For example, if the products carry the name of your business, or if the manufacturer has gone out of business, your business will have to deal with product liability claims.
Product liability insurance also covers the claims that arise from design defects, manufacturing defects, extortion, flawed marketing, government recalls, and malicious tampering.
- Design defects happen due to poor design or insufficient product testing. They are present before making the product.
- Manufacturing defects occur during the manufacturing or assembling of the product.
- Extortion happens when someone is deliberately making the product dangerous to life.
- Businesses sometimes use flawed or misleading marketing to push the sale of the product. This might also lead to a product recall.
- Government recall occurs when the government has to step in and order the product’s recall for safety reasons.
- Malicious tampering occurs when, for example, a group of disgruntled employees causes severe damages to the company’s reputation and sales.
Whether a business decides to recall the faulty product or the government has to announce a mandatory recall, the compensation costs of a product recall can be very high. In short, product liability insurance will reimburse your business for any financial loss that you had.
What Doesn’t Product Liability Insurance Cover?
Product liability insurance doesn’t cover injuries to your employees that may have happened during the manufacturing.
Also, product liability insurance doesn’t always cover the lost inventory costs and the costs of redesign and recall-related advertising.
How Much Does Product Liability Insurance Cost?
Many factors impact the cost of product liability insurance. For example, products that are more likely to result in injuries, such as motorcycles, have greater liability risks. Therefore, they face higher insurance rates.
Furthermore, drug, medical, and pharmaceutical companies belong to the high-risk group, which means they pay considerably more for liability coverage. Besides the industry and the type of product you sell, the cost of product liability insurance also depends on:
- Size of the business
- Number of products
- Need for professional crisis consultant
- Third-party indemnity
- Other risk factors such as shipping, media costs, storage, legal fees, refunds, lost gross profit, need for lab testing, and the extent of recall costs for your business and customers.
Finally, your history of product liability claims will also influence the cost of insurance. If your business has a long history of avoiding lawsuits and making good products, your rates will likely be lower than those for a new company.
What is Product Liability Insurance for Small Businesses?
Although small businesses put in a lot of hard work to ensure they make quality products, there is still a chance their goods don’t work properly.
For example, if a food service cooks food that triggers an allergic reaction, their business would be held liable for the accident.
How much coverage a small business needs depends on how many products they sell and the number of involved production parties.
Generally, the more products a small business makes, the bigger are the chances that one of them has some type of defect. As a small business grows, this becomes a bigger concern over time.
Do I Need Product Liability Insurance?
Products that companies sell must be safe for consumers to use. However, no matter how precautious any business is, sometimes things just go wrong.
According to the United States Consumer Product Safety Commission, there were an estimated 240,000 toy-related injuries in the US in 2016. In 2018, there was an estimated annual average of 28,300 injuries in the US as a result of television, furniture, and appliance product instability.
Product liability insurance isn’t a legal requirement, but sometimes other manufacturers, suppliers, and distributors you work with will require that you have it.
Additionally, if one of your products caused injury, damage, or death, you could be held liable and sued.
If you rely heavily on the human workforce and don’t have sufficient funds to cover the costs of a recall, product liability insurance might be a good option for your business.
Also, if you don’t think that you can monitor the distribution and sales of your product, or maybe you just can’t provide tamper-proof packaging, this type of insurance would be a good “safety net” for your business.
Finally, regardless of what you sell and the size of your company, if you think that your business wouldn’t recover from a product recall, product liability insurance is something that you should definitely consider.