
Small businesses often struggle to find affordable product liability insurance, but it's a crucial investment to protect your assets and reputation. Many policies can cost upwards of $2,000 per year, but there are ways to reduce the financial burden.
Some insurance companies offer discounts for small businesses, such as those with fewer than 10 employees. For example, a company with a small staff may qualify for a 10% discount on their policy premium.
To qualify for these discounts, businesses must meet specific criteria, such as having a good claims history or implementing safety protocols. By taking proactive steps, small businesses can reduce their insurance costs and better manage risk.
What Is Product Liability Insurance
Product liability insurance is a type of coverage designed to help businesses pay for third party bodily injuries and property damages caused by faulty products they sell, manufacture, or distribute.
It's not typically required by law, but it's considered best practice for anyone involved in the manufacturing, distributing, or selling of a product to be insured.
Product liability insurance transfers the risk of defects, including expenses related to product lawsuits and other claims related to faulty products.
This type of insurance is specifically designed for businesses that manufacture and sell products, and it's similar to general liability insurance, but it's unique in its focus on product-related claims.
Product liability insurance offers three specific benefits: it decreases the personal risk involved with doing business, covers the cost of claims and lawsuits, and helps your business meet the insurance requirements placed upon it by outside organizations.
If your company manufactures or sells a product that has a defect and that defect causes injury or property damage, your business could be held liable, which is why product liability insurance is so important.
Product liability insurance should cover a wide array of costs stemming from product-related claims, including the cost of getting rid of your defective products, the cost of replacing defective products, business disruption and business costs, and fees potentially owed to retailers or wholesalers.
Who Needs It
If you're in a business that makes, sells, or distributes products, you need product liability insurance. This type of insurance can promote financial stability and build credibility by showing that you stand behind your goods and services.
Many states require product liability insurance, especially for manufacturers, wholesalers, and retailers. In fact, most states follow the "stream of commerce" model of liability, which means that if your company participated in placing the product into the "stream of commerce", it can be held liable for damages to the end-user.
Here are some examples of businesses that need product liability insurance:
- Manufacturers of products, food, vending machines, etc.
- Retail stores (clothing, toys, accessories, paint store, etc.)
- Restaurants, cafes, grocery stores, etc.
- Pet stores that sell food, cages, and accessories
- Appliance sales/home improvement stores
- Any business that wholesales goods/products
- Delivery services (food trucks, truckers, commercial vans, etc.)
Businesses that import, produce, distribute, or sell products also need product liability insurance. This is because no one wants to carry the risk of paying for a product liability claim, which can lead to product recalls, damaged reputation, millions in awards and legal fees, and possible loss of a business.
Three Types of Claims
If you're shopping around for cheap product liability insurance, it's essential to understand the types of claims it covers. Product liability insurance typically covers manufacturing defects, design defects, marketing defects, allergic reactions, food contamination, and strict liability.
Let's break down the three main types of product liability claims: Design Defects, Manufacturing Defects, and Improper Instructions. These claims can arise from various circumstances, and it's crucial to have the right coverage in place.
Design Defects propose that the design of the product is unsafe, often leading to recalls on products like car seats or strollers. This type of claim can be costly, so it's vital to ensure your product liability insurance policy covers design defects.
Manufacturing Defects occur when some part of the production results in creating an unsafe defect in the product. For instance, if a product labeled as "nut-free" was exposed to tree nuts in manufacturing, it can lead to a lawsuit when customers have allergic reactions.
Improper Instructions, on the other hand, are based on defective warnings or directions. This can happen if a product is not properly labeled or if a detailed and bold warning for the user to understand the risks involved is missing. The McDonald's coffee case is a prime example of this type of claim.
Here are the three types of product liability claims in a nutshell:
- Design Defects: Propose that the design of the product is unsafe.
- Manufacturing Defects: Occur when some part of the production results in creating an unsafe defect in the product.
- Improper Instructions: Based on defective warnings or directions.
Cost and Coverage
The cost of product liability insurance can vary significantly depending on several factors. Industry and exposures, business size and location, foot traffic, claims history, and policy limits and deductible all play a role in determining your premium.
A minimum of $1 million in coverage is the industry standard, but costs can range from $500,000 to $5,000,000. The cost per $100 in revenue is typically around $0.25, so a business doing $500,000 in sales a year may pay around $1,250 in annual premiums.
The type of product you manufacture, ship, or sell, the number of products that will be covered, and the claims history of your business also impact the cost of product liability insurance. Businesses in higher-risk categories, such as those that manufacture guns or motorcycles, will likely pay more for liability coverage.
Here are some factors that can impact the cost of product liability insurance:
- The size of the business
- The type of product you manufacture, ship, or sell
- The number of products that will be covered
- The claims history of your business
- The risks associated with that product
- How many employees you hire
- The insurance company you choose
Overall, understanding the factors that impact the cost of product liability insurance can help you make informed decisions about your business's coverage needs.
What Cover?
Product liability insurance covers your business against claims resulting from bodily injury or property damage caused by a product defect, design defect, or faulty product.
It pays for legal expenses to defend your business and any legal judgments against your company up to the coverage limits of your policy. Even if your business is found negligent, product liability coverage should still provide coverage unless the negligence is a specific type spelled out as an exclusion in your policy.
Product liability insurance typically covers manufacturing defects, design defects, marketing defects, allergic reactions, food contamination, and strict liability claims.
Manufacturing defects occur when an error or flaw is introduced during the manufacturing process, causing the product not to function as intended. Design defects happen when insufficient care is given to the design of the product, making it faulty, unreliable, or unfit for use.
Marketing defects, such as labeling errors or lack of warnings, can also be covered under product liability insurance. Allergic reactions and food contamination are also included.
Here are some examples of industries that may require product liability insurance:
- Beauty Professionals
- Cosmetologists
- Hairstylists
- Barbers
- Eyelash Extensions
- Salons and Spas
- Nail Technicians
- Estheticians
- Massage Therapist
- Reiki Practitioners
- Health Professionals
- Nurses
- EMTs
- Lactation Consultants
How Much Cost?
The cost of product liability insurance can vary greatly depending on several factors. Industry and exposures are key factors in determining your premium, with some industries considered higher risk than others.
Business size and location also play a significant role in determining your premium. A business with more employees and a larger revenue stream will typically pay more for product liability insurance.
Foot traffic can also impact your premium, with businesses that receive a lot of customers in a small area considered higher risk. This is why stores with high foot traffic, such as restaurants or retail stores, may pay more for product liability insurance.
Claims history is another important factor in determining your premium. If your business has a history of making claims, your premium will likely be higher.
Policy limits and deductible also impact your premium. If you choose a higher policy limit or lower deductible, your premium will be higher.
Here's a rough estimate of how much product liability insurance can cost:
Keep in mind that these are just estimates and your actual premium may be higher or lower depending on your specific business and industry.
Class Codes
Class codes are used by insurance carriers to categorize your business and measure your risks. This affects how your premium is calculated.
A class code can be outdated or incorrect, leading to overpaying for insurance or inadequate coverage. This is why it's essential to discuss your business classification with your agent.
If you're not classified correctly, you could be missing out on the right coverage for your business. This can leave you vulnerable to unexpected expenses.
Class codes are used to calculate your premium, so it's crucial to get it right.
Industry and Business
Product liability insurance is a must-have for businesses in various industries, and the cost can vary depending on several factors.
Manufacturers face higher risks and may need to pay more for this coverage. They can be held liable for damages caused by manufacturing defects, such as a chair breaking due to improperly tightened screws.
Retailers, distributors, and wholesalers can also be held liable for damages caused by products, even if they weren't directly responsible. This is why product liability insurance is important for every business in the supply chain.
Business size and location are also important factors that affect the cost of product liability insurance. For example, a small business in a high-risk industry may pay more than a large business in a lower-risk industry.
Here are some industries that may require product liability insurance:
- Furniture manufacturers
- Food retailers
- Pharmaceutical companies
- Construction companies
- Retailers selling high-risk products like essential oils
The cost of product liability insurance is based on several factors, including industry and exposures, business size and location, foot traffic, claims history, and policy limits and deductible.
Online Sellers
As an online seller, you're likely aware that many e-commerce sites now require you to carry your own product liability insurance. This is a significant shift, and it's essential to understand the implications.
You might be surprised to learn that small businesses have very limited options when trying to obtain product liability insurance through home and renters' insurance policies.
If you're an online seller, you'll need to purchase insurance that covers legal fees, medical bills, and lost wages, which can add up quickly in the event of a lawsuit.
Here are some potential costs you might face:
- Legal fees
- Medical bills
- Lost wages
Protection and Prevention
Manufacturers can take steps to prevent product liability claims by implementing robust quality control measures, such as regular product testing and inspections.
To reduce the risk of product recalls, companies can establish a recall plan that outlines procedures for identifying and notifying customers about defective products.
By conducting thorough risk assessments, businesses can identify potential hazards and take steps to mitigate them, reducing the likelihood of product-related injuries or illnesses.
Companies can also benefit from maintaining accurate and up-to-date records of product design, testing, and manufacturing processes, which can help establish a defense against product liability claims.
Regular employee training on product safety and quality control can also help prevent mistakes that might lead to product liability issues.
Recall and Injury
If you manufacture or sell products, you're at risk for recalls and injuries. Product liability insurance can cover the cost of hiring an attorney if an item causes a bodily injury.
A product recall can be a costly and time-consuming process, but with the right insurance, you'll be prepared. It would cover the resulting settlement or court-ordered judgment if an item causes a bodily injury.
If an employee is injured by a product sold or manufactured by your business, workers’ compensation insurance would cover the employee’s medical expenses. This includes everything from medical bills to lost wages.
Similar to Recall
Product liability insurance covers lawsuits and damages if a product is recalled due to contamination or claims of bodily harm, but it doesn't cover recall costs or associated financial losses.
Product recall coverage is specifically designed to help with the costs of removing defective products from shelves and recouping a company's reputation.
Product recall coverage is a separate type of insurance that's often confused with product liability insurance, but they serve different purposes.
Product recall insurance can help a company recover from a recall by covering associated costs, financial losses, and the cost of removing defective products from shelves.
Injury Caused by Object
If an item you made or sold causes a bodily injury, you may need to cover the cost of hiring an attorney and the resulting settlement or court-ordered judgment through product liability insurance.
Product liability insurance can help protect your business financially if a product you made or sold causes harm to someone.
If an employee is injured by a product sold or manufactured by your business, workers' compensation insurance will cover their medical expenses.
This means you won't have to worry about paying for your employee's medical bills out of pocket.
If the employee sues over the injury, workers' compensation insurance will also cover your legal costs.
Wrongful Death Due to
Wrongful death caused by a product can have devastating consequences for families and businesses alike. Product liability insurance can help mitigate these costs.
Lawsuits related to wrongful death can be lengthy and costly, with some cases lasting years and costing millions of dollars. Product liability insurance can help cover these expenses.
Product liability insurance also covers burial costs, which can be a significant financial burden for families. This includes funeral expenses, medical bills, and other related costs.
The financial impact of a wrongful death lawsuit can be overwhelming, but product liability insurance can help provide some relief.
Importance and Requirements
Product liability insurance is a must-have for small businesses that sell, make, or distribute products. This insurance protects your business from lawsuits and financial losses if a product causes harm to someone.
In the US, product liability insurance is not compulsory under law, but other companies or regulating bodies may require it as a condition of doing business. This is often the case in contracts, partnership agreements, and retail requirements.
Having product liability insurance creates a financial safety net for your business, so you can be prepared when the unexpected occurs. This is especially important in a litigious society where lawsuits can be costly and time-consuming.
If a product allegedly hurts someone or causes financial loss, product liability coverage will help pay your legal fees, judgment, or settlement. This can include costs such as repairs, replacement costs, funeral expenses, legal fees, medical bills, and lost wages.
Here are some examples of the types of expenses that product liability insurance can cover:
- Repairs
- Replacement costs
- Funeral expenses
- Legal fees
- Medical bills
- Lost wages
Frequently Asked Questions
What is the best protection against product liability?
To minimize product liability risks, implement thorough product testing, review suppliers, and provide clear warnings on potential hazards. Additionally, consider taking out product liability insurance for extra protection.
How much is $1 m liability insurance?
A $1 million general liability insurance policy typically costs between $40 to $150 per month for small businesses, depending on the operation size and coverage. Get a more accurate quote by learning more about your business's specific insurance needs.
Sources
- https://www.insureon.com/small-business-insurance/product-liability
- https://www.insurancecanopy.com/product-liability-insurance
- https://www.progressivecommercial.com/business-insurance/general-liability-insurance/product-liability-insurance/
- https://tivly.com/product-liability-insurance
- https://www.embroker.com/coverage/product-liability-insurance/
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