What Is Product Liability Insurance?

Product liability insurance is indispensable for businesses, providing vital protection against lawsuits arising from faulty products, and covering liabilities like bodily injury and property damage. Effective COI tracking software also plays a pivotal role in maintaining compliance with insurance mandates and fostering transparency in contractual engagements.

Whether you operate as a manufacturer, distributor, or retailer, comprehending the intricacies of this insurance is crucial for safeguarding your business and reputation. 

What Is the Purpose of Product Liability Insurance?

Product liability insurance is essential for businesses that manufacture, distribute, or sell products. Its primary function is to mitigate financial risks and legal liabilities stemming from injury or damage-related claims caused by defective or harmful products. 

Without adequate insurance, the costs of legal defense, settlements, or judgments can be devastating, if not catastrophic.

 If confronted with a lawsuit, such protection makes it easier to manage legal proceedings without diverting funds from essential operations. This stability allows businesses to maintain their activities, uphold contracts, and continue serving customers without interruption. 

What Do Product Liability Claims Typically Cover?

Product liability claims can arise amid allegations that a defective or malfunctioning product caused injury or damage. Such claims are often rooted in the principle that manufacturers, distributors, and sellers are responsible for ensuring they are safe for use. 

Liability claims generally fall under three categories: design defects, manufacturing defects, and marketing defects. 

• Design defects occur when there is an inherent flaw in the design, making it unsafe from the start. 
• Manufacturing defects happen when there is an error during the production process, resulting in a deviation from its intended design. 
• Marketing defects, also known as failure to warn, involve inadequate instructions or warnings about the product's proper use or potential risks.

Product liability insurance typically covers various types of damages arising from these claims. Bodily injury is among the most common, encompassing any physical harm caused to a person by a defective product, ranging from minor injuries to severe, life-threatening conditions. 

Property damage is another significant area, covering the costs of repairing or replacing property damaged by a faulty product. Additionally, product liability claims may include legal expenses, settlements, and court-ordered compensation.

It also helps to be mindful of common scenarios that result in claims, such as faulty wiring igniting a fire from a household appliance, a choking hazard posed by a child’s toy, or a pharmaceutical drug causing severe, undisclosed side effects. In each case, the affected party seeks compensation for the harm or loss experienced due to the defective product. Product liability insurance provides the necessary financial protection to handle these claims effectively.

What Does Product Liability Insurance Not Cover?

While product liability insurance provides extensive protection, there are exclusions and limitations. 

Intentional Misconduct

One primary exclusion is intentional misconduct. If a company knowingly sells a defective product or engages in fraudulent activities, any resulting claims will not be covered. This is meant to promote greater ethical business standards, rather than allowing organizations to rely on insurance to shield them from deliberate wrongdoing.

Technical Issues

This coverage is not designed to protect against issues arising from software, apps, IT, and technical products. Specifically, it does not cover coding mistakes or software errors that result in financial harm to customers. For example, if a software glitch causes a client to suffer significant financial loss, the resulting claim would not be covered under a typical liability insurance policy. Businesses in the tech industry often need specialized insurance, such as technology errors and omissions (E&O) coverage, to safeguard against these types of risks.

Contractual Liabilities

It does not cover damages arising from a breach of contract unless the breach leads to a covered liability, such as bodily injury or property damage. This means businesses cannot depend on their policy to address issues solely related to failing to meet contractual obligations or warranties.

Product Recall 

There is no coverage for the costs associated with recalls, which can impose significant financial burdens on businesses. Recalls are often initiated to retrieve defective or potentially harmful products from consumers to prevent further harm and maintain consumer safety. The expenses incurred during a recall can include retrieval, transportation, disposal, and communication costs with affected customers. 

Environmental Hazards

If a product causes environmental damage, such as chemical spills or contamination, these incidents are generally not covered under standard product liability policies. Businesses involved in activities with potential environmental risks often need specialized environmental liability insurance.

Gradual Deterioration

Another exclusion relates to gradual deterioration. Claims connected to wear and tear or products that fail due to age or lack of maintenance are not covered. This exclusion encourages businesses to ensure their products are regularly maintained and inspected to prevent failures that could lead to claims.

By understanding these limitations, businesses can better prepare and seek additional coverage where necessary to ensure comprehensive protection.

Who Should Have Product Liability Insurance?

Any business involved in manufacturing, distributing, or selling products should have insurance to protect against claims of injury or damage caused by defective products. Common industries that benefit from such coverage include: 

• Manufacturers
• Distributors
• Retailers
• Wholesalers
• Importers

How Much Is Product Liability Insurance?

On average, small businesses pay around $42 per month for coverage, according to Insureon. Ultimately, the cost of coverage largely depends on several risk factors, including:

• Industry Risks
• Property Value
• Coverage Limits & Deductible
• Type of Products
• Location
• Sales Revenue

Partner with BCS for Seamless COI Tracking & Risk Management Solutions

Whether you need full-service or self-service tracking solutions, bcs offers comprehensive tools to streamline your insurance management efficiently. Our advanced Certificate of Insurance (COI) tracking solutions enable effortless communication, proactive identification of issues through AI-powered alerts, and guidance for non-compliant third parties to ensure adherence.

Let bcs manage your risk management processes from start to finish, providing a secure and hassle-free experience. Optimize your insurance tracking today with BCS. 

Contact us today or schedule a demo to enhance and streamline your insurance tracking workflows with confidence.