Definition

Product Liability Insurance is protection against financial loss from a law suit brought against the company as a result of bodily injury or property damage caused by their product.

This coverage is often used to protect the product manufacturer or vendor against lawsuits from third parties for bodily injury or property damage.  Injury or damage  could result from a malfunction or defect in almost any kind of product, such as food, medicines, toys, tools, furniture or machines of all kinds. The injured third party could be the buyer of the product, a user or even a bystander.

Product Liability Insurance typically does not include:

  • Failure to perform – the product does not properly perform to customer expectations,
  • Product warranty – the product did not meet expectations for efficiency, durability, etc.,
  • Product recall – the cost related to recalling a product due to design, material flaws, or other reasons the product is unsatisfactory to the client or public interest.

Some considerations for insurance companies when evaluating the eligibility and pricing of Products Liability include:

  • Nature of the product,
  • Destination of sale and coverage territory,
  • The environment and industry the product is used in,
  • Volume of product sales and expected product life,
  • The safety record and claims history.

Claims

Following are some Product Liability claims examples:

Flaw in the production or manufacturing. The claim states some part of the production process created a defect in the product that then made it hazardous. For example, a hand railing manufacturer fails to properly follow the design specifications and uses inferior steel for the railing posts. Over time, the steel fatigues to the point of failure and a person is injured as a result. The injured party sues the building owner and hand rail manufacturer.

Design defect. The claim states that the product design is unsafe. Following the same example, the design specifications identified the inferior steel.  While the manufacturer followed the specifications correctly, the end result was the same.

Defective instructions or warnings. The claim states that a vendor did not provide proper instructions on the correct use of their product, or that the vendor did not warn the purchaser of possible risks. Following the example, the railing was supplied with installation instructions which did not properly address the various installation surfaces.

Strict Liability

A manufacturer or vendor could be sued on the basis of strict liability, which means liability in the absence of negligence. It is not based on fault. A claimant could win a product liability lawsuit against a manufacturer or vendor by proving all of these points:

  • The product injured the claimant.
  • The product contained a defect that was dangerous.
  • The injury happened when the claimant was using the product as it was meant to be used.
  • No major changes were made to the product after it left the vendor.

Manufacturers and vendors put products into the marketplace, and so they should be responsible if the product turns out to be defective.

Product Sellers

Usually, liability claims are made against manufacturers, but some are made against the vendor (i.e. retailers, wholesalers, distributors, or resellers). A vendor could be held responsible for an injury to a product user if the vendor helped in the marketing of the product to the consumer.

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Insurance Coverage

Product liability is most often included within a Commercial General Liability policy (CGL). It is covered in conjunction with liability for work you have completed. The combined coverage is called Products-Completed Operations Liability. Businesses that produce potentially hazardous products, such as heavy machinery or chemicals, may have trouble obtaining product liability coverage from a standard insurer. Such businesses may need to get this coverage separately from a specialty insurer.

Product Liability Rates

The premium rate for product liability coverage depends on the nature of the product and where it is sold. Logically, hazardous products cost more to insure than low-hazard products. The insurer will categorize the business and assign an appropriate class code. The product liability premium is then calculated by multiplying the rate times your annual sales.

The premium you pay at the beginning of the policy period is usually based on your estimated sales. Your insurer will adjust your premium when it conducts an annual audit. If your actual sales are less than your projected sales, you may receive a return premium. If your actual sales exceed your estimated sales, you may be charged an additional premium.