When a product causes injury or property damage, expensive lawsuits can follow. Product liability insurance can offer important protection for businesses involved in the manufacturing, distribution or sale of products.
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What does product liability insurance cover?
Product liability insurance provides coverage for third-party claims alleging bodily injury or property damage due to a defective product. If a lawsuit occurs, product liability insurance can help cover legal costs, settlements or awards up to the policy limit. Depending on the policy, related costs, such as public relations expenses, may be covered.
Product liability claims may involve the following:
- Product Defects. Products that do not work as they are supposed to due to poor design, subpar materials, bad construction or other flaws may end up injuring users or causing property damage.
- Contamination. This type of claim is especially common with food and beverage products, which could become contaminated with bacteria, fungi or allergens. However, other types of products may also be vulnerable to contamination.
- Labeling. Even if a product is made well, inappropriate or inadequate labeling could lead to issues. For example, a food item that is mislabeled may have undeclared allergens. Other problems could involve improper instructions or inadequate safety warnings.
Product Liability Examples
Product liability lawsuits can arise in a variety of scenarios. Here are just a few examples of how businesses could be hit with product-related lawsuits.
- You own a retail company that sells children’s toys. Some of these toys are made by local small businesses. One of your customers buys a handmade doll that you put in an area of the store with toys for toddlers. The buttons on the doll come off, and the customer’s child chokes on one of them. The customer sues your store for putting the doll in an area for young children and the maker of the doll for not including a warning.
- Your company makes both vegan and regular cookies. Due to cross-contamination during the preparation process, the vegan cookies are contaminated with egg. A customer who is allergic to eggs buys the vegan version specifically because it is supposed to be egg-free. The customer has a severe allergic reaction requiring hospital treatment and sues your company for medical expenses.
- Your company makes all-natural bath and beauty products. Several of your customers report chemical burns after using your products. An investigation finds that one of your suppliers provided materials that were contaminated with toxic chemicals. Because only one batch was contaminated, this slipped through your company’s quality control testing. Now, the impacted customers are filing a class action lawsuit against your company. The supplier does not have insurance coverage, is located in another country and goes out of business before the lawsuit starts, so you’re facing the allegations on your own.
Who needs product liability insurance?
Product liability insurance can provide important protections for manufacturing companies. Food manufacturers have especially high risks and can benefit from food product liability insurance. Other types of manufacturers, from toy makers to producers of household cleaning supplies, can also benefit from robust product liability coverage.
But, product liability insurance isn’t just for manufacturing companies. As demonstrated in the previous examples, businesses involved in the production, distribution, marketing, sale or repair of products may also need this form of coverage.
Product liability insurance may not be required by law, but it is often contractually required by various business partners. Regardless, if your company could potentially be named in a lawsuit that alleges injury or property damage due to a defective product, this is an important coverage to have, especially given the prevalence of product liability lawsuits.
According to the 2023 Product Liability Litigation Report from Lex Machina, 5,826 product liability cases were litigated in 2022, excluding multidistrict litigation cases. Between 2018 and 2022, $214 million in total damages were awarded as approved class action settlement damages and $201 million in total damages were awarded as punitive damages.
Does general liability insurance provide product liability coverage?
Commercial general liability insurance provides fairly broad coverage for third-party injuries or property damage. For example, if a customer falls while in your store and pursues legal action, general liability insurance can help protect your business against financial losses.
However, some general liability insurance policies may exclude product liability coverage. Because of this, companies with product liability exposures will likely need to purchase product liability coverage as an endorsement on an existing policy or as a standalone product.
Product Recall Insurance
A product recall could occur alongside a product liability lawsuit, but the coverage needs for these two events are quite different. Product liability insurance does not typically provide coverage for product recalls, but recalls can be costly for companies due to the expenses associated with public outreach, refunds, collection of defective products and product disposal.
Product recall insurance is designed to provide coverage for these costs. Businesses may be able to purchase it as a standalone policy or as an endorsement to another liability policy. When purchasing coverage, it’s important to note whether a policy covers voluntary recalls, involuntary recalls or both.
Product Liability Insurance Cost
Product liability insurance premiums can vary significantly. Consider the following variables:
- Business Size. Larger companies tend to face larger risks, especially when it comes to the potential for class action product liability lawsuits. As a result, larger companies will typically need higher limits and, consequently, pay more for coverage.
- Type of Product. Risk levels for a business (and an insurance carrier) can vary depending on the type of product involved. For example, products made for babies and young children may have higher levels of risk than similar products made for adults. Food, building, vehicle and medical products may also come with greater risks.
- Claims History. Companies with a poor claims history or lack of risk management strategies may face higher insurance costs.
How much product liability coverage do businesses need?
Lawsuits related to product liability can be incredibly costly. For example, according to Investopedia, Philip Morris was ordered to pay damages of $28 billion plus $850,000 in a lawsuit filed by a woman who blamed the tobacco company for her lung cancer, although the amount was later reduced to $28 million. In other examples of pricy product liability cases, General Motors paid $150 million to settle a class action lawsuit filed by 35 million customers, while Owens Corning agreed to pay $1.2 billion to settle asbestos-related lawsuits, which ended up causing the business to file for bankruptcy.
Product liability cases could also become more common and more expensive due to third-party litigation funding and its impact on social inflation. According to a 2021 report from Swiss Re, litigation funding companies are backing claims in product liability mass tort and other types of liability, and this can create social inflation by incentivizing litigants to initiate and prolong lawsuits.
Given the potential for extremely high costs, companies should consult with their insurance broker to consider whether their policy limits are high enough to handle a class-action product liability lawsuit.
Is your business covered?
The worst time to realize you need product liability insurance is when you’re facing a lawsuit. Higginbotham’s team of business insurance brokers and compliance specialists can help you review your risk exposures and current coverage to make sure your business has adequate protection.
