Last Updated on September 1, 2020

The average cost of a product liability case in the US is just over 5 million dollars.

For most small business owners, a claim like this (without proper insurance) is catastrophic. At that point, you might as well start packing up and fixing to close your doors for good. Which… isn’t something any business owner wants to hear or do. 

So, if your business sells physical products, product liability insurance isn’t something you can afford to go without, unless you don’t mind the potential of having to pay several million dollars out of your pocket, of course. 

But with countless types of business insurance out there, it’s hard to tell them apart. So, if you’re not sure what product liability insurance covers, who needs it, how it works, or what product liability insurance covers, you’re in the right place. 

Let’s get started!

An Introduction to Product Liability Insurance

Product liability insurance protects your business if one of your products causes property damage or bodily injury. Let’s walk through a quick example. 

Pretend your business manufactures water bottles for athletes. As your business scales, you’re no longer able to check every bottle before they hit the shelves physically. What happens if a small mechanism inside the lid breaks and someone chokes on it while running?

You and your business may be liable for any medical bills as a result of this incident. You’ll also have to pay big bucks to build a defense team and legal case. These financial burdens can add up quickly. 

Product liability insurance helps cover these costs, so you aren’t stuck paying them out of your pocket.

What’s the Difference Between Product Liability Insurance and General Liability Insurance?

With so many different types of business insurance, it’s easy to get confused. In a nutshell, product liability insurance is a type of general liability insurance that specifically covers accidents, injury, or property damage resulting from a product you sell.

Lower-risk industries may find that general liability insurance is enough because it typically includes general liability coverage for product-related problems. But, mass-producers and higher-risk industries need more coverage than what a general liability policy offers.

So, that’s where product liability insurance comes in.

How Does Product Liability Insurance Protect a Business?

If someone files a product liability lawsuit against your business, product liability insurance helps cover legal, medical, and other financial costs resulting from the claim. These are frequently the most expensive claims for businesses to defend.

Most business owners don’t feel comfortable leaving things like this to chance.

Humans are curious creatures, and you never know what they’re going to do with your products (or packaging) after leaving your hands. So, product liability insurance helps reduce your risk of filing bankruptcy or going out of business if someone files one of these claims against you.

Who Needs Product Liability Insurance?

You should carefully consider purchasing product liability insurance if you sell physical products of any kind. Regardless of your target market, humans are unpredictable, and you shouldn’t rely on the public to use your products as you intended. 

Consumers can file claims against you even if you have no intention of hurting someone (or their property). That said, product liability insurance is especially important if you sell high-risk products such as:

  • Baby products (i.e., clothes, toys, diapers, wipes, furniture)
  • Anything people eat (i.e., supplements, food, candy, vitamins)
  • Products that contact people’s skin (i.e., clothes, fragrances, makeup, face wash, lotion)
  • Pet-related products (pets can be as unpredictable as humans)
  • Things that need electricity (i.e., appliances, electronics, gadgets, lighting)
  • Anything that operates close to the face (i.e., hair styling products)
  • Machinery (i.e., vehicles or farm equipment)
  • Medical products or medicine
  • Construction materials

What Does Product Liability Insurance Cover?

Detailed liability coverage varies based on the plan and insurance provider you go with, but some common types of cases are covered under product liability insurance. 

There are four different types of product liability claims, including:

  • Product defects — If there is a design defect rendering your product is harmful or dangerous from day one, resulting in a product recall or lawsuit from personal injury
  • Marketing defect — covers businesses if the warning labels or instructions are ineffective or inadequate
  • Manufacturing defect — a manufacturing issue resulted in a dangerous or faulty product
  • Strict liability — a catchall for any other product issues you’re responsible for

In strict liability cases, consumers have to prove: 1) your product is defective and dangerous 2) it hurt someone or their property while it was being used as intended, and 3) no significant changes were made to the product prior to the incident (i.e., they broke it). 

So, product liability insurance can help cover and protect your business from financial losses, punitive damages, medical costs, and legal fees if any of the above claims are filed against you.  

What Doesn’t Product Liability Insurance Cover?

Understanding what it doesn’t cover is just as important as knowing what it does cover. This can help give you a clear picture of the other types of insurance you may need for your business. 

So, product liability insurance doesn’t cover things like:

  • Official product recalls (product recall insurance is available)
  • Negligence or oversight (see professional liability insurance)
  • Consumers intentionally hurting themselves
  • Damages or injuries that occur at your place of business
  • Employee injuries or damage to your property
  • Accidents during shipping or transit
  • Criminal/Fraudulent acts

Is Product Liability Insurance Required?

Product liability insurance isn’t required by law, but other businesses may refuse to do business with you if you don’t have it. Plus, many massive and successful manufacturers have faced financial hardships as a result of these types of cases. 

With that being said, you should carefully consider product liability insurance if you sell physical products. 

How Much Does Product Liability Insurance Cost?

In low-risk industries, the average cost of product liability insurance is $0.25 per $100 in revenue. So, if you sell $1,000,000 of product every year, you can expect to pay around $2,500 for product liability insurance. 

Medium and high-risk industries should expect to pay anywhere from 5 – 10x more per year because of your products’ elevated risk.

How Is it Calculated?

It shouldn’t be surprising that specific industries experience more claims than others. The cost of product liability insurance varies based on factors like:

  • Your industry
  • Business location
  • Claims history
  • Insurance coverage limits
  • Annual revenue
  • Your quality assurance process

Is There a Difference Between Product Liability Insurance and Business Liability Insurance?

Business liability insurance, which is also known as general liability insurance can protect a business from general claims and legal costs resulting from bodily injury and property damage.  In most cases, product liability claims won’t be covered under business liability insurance and because of that, product liability insurance will also be needed.

How Do I Get Product Liability Insurance?

Whether you’re a retailer, re-seller, e-commerce store, or small local business, you should carefully consider getting product liability insurance. And now that you know what it is, you’re probably wondering where to get it. 

In addition to getting a quote from your local insurance agent, you may also want to try an insurance policy comparison tool like CoverWallet, which provides a side-by-side view of the top insurers, liability coverage options, and pricing for your location and industry. And the best part? It’s free to check.