Product Liability Insurance
Everything You Need To Know
What is product liability insurance?
Irrespective of the degree of threat a product poses, consumers can get injured or suffer damage due to the usage or malfunction of the product. For instance, whether it is getting injured by construction equipment or slipping on marble because of fuzzy slippers, defective or faulty products could cause serious injuries. In such cases, who can consumers blame for their injuries? Since products are produced by a business, the responsibility for any product that causes injury, loss, or damage on the consumers falls on the company.
Product liability is a legal liability of producers, suppliers, traders, or retailers who are held accountable for any injury or damage incurred by their products. Public and product liability insurance protects businesses from claims of any loss, injury, or illness caused by their products. Products liability coverage is a policy usually added as a part of general liability insurance.
In the case of a lawsuit filed against a company, product liability insurance the business’ defense costs and settlement costs. The jury utilizes two defect tests to determine the legitimacy of alleged product defects that are:
- Consumer expectations test: The consumer expectation test examines how dangerous the product is to ordinary consumers with substantial knowledge of the product.
- Product risk-utility test: The risk-utility test measures the utility of the product against the risks it poses.
Insurance Information Institute detailed that product liability jury awards in 2017 totaled to an average of more than $5 million.
What does product liability insurance cover?
The business product may cause losses or damages to consumers due to certain risks associated with product defects. These defects include:
Mass–produced products have high chances of defects due to manufacturing errors. These defects and errors could cause harm to consumers.
For example, faulty wiring on a refrigerator can cause a power outage on the whole house or unit. The buyer could file a lawsuit against the producing company for the power outage.
According to LexisNexis’ case brief, MacPherson v. Buick Motor Co. was the first case against manufacturing negligence in which an injured consumer sued the automobile manufacturer for the use of wheels made of defective wood. Evidence supported that the defects could have been discovered with inspection by the manufacturers. The verdict was that the manufacturer is obligated to produce and inspect the product carefully.
Consumers may suffer from injuries when they experience a malfunction from using the product. For example, an NBCSports article stated that Francisco Garcia of the Sacramento Kings settled his lawsuit against the manufacturer of the exercise ball, Ledraplastic, that exploded while he was lifting weights on it in 2012. This incident caused him to break his forearm. Hence, he sued for the loss of income and injury and got the undisclosed settlement in his favor.
Despite having done research and development, production companies may have overlooked some design flaws of their product. These types of defects in the design could obstruct the product’s functionality and cause damage or loss to users.
For example, the Remington Rifle company has been running rounds of the court since its inception. With many gun owners accidentally shooting themselves and some accidental deaths, according to CNBC, the company engaged in a decades-long coverup of their defective guns that shoot without pulling the trigger.
Companies market their products with various claims which encourage consumers to buy them. However, these products are not always what they claim. False or misleading marketing can cause damage to consumers who use products that don’t perform as expected.
For example, Dannon – a yogurt producer – proclaimed their products were “clinically” and “scientifically” proven to regulate digestion and boost immune systems. abcNEWS reported the company had to pay $45 million to consumers under charges of false health claims in 2010.
Consumers depend on the label of the products they purchase to make their buying decision. However, sometimes due to misinterpretation or incorrect information on product labels can lead to dire consequences for the consumers.
For example, in 2018, the food giant Heinz was fined for claiming a range of toddler snacks to be healthy. Known for its ketchup, the company had to pay a settlement of $2.25 million for misleading consumers since the snack products contained more than 60% sugar, according to ABC.
Failure to warn:
Products include warnings to safeguard the consumers from damages that the product may cause. There may be some situations in which consumers suffer an injury or loss due to unclear or absence of product warnings.
For example, the famous 1992 McDonald’s coffee case exemplifies failure to warn. Stella Lieback suffered severe burns on her thighs, buttocks, groin, and genital area by spilling her McDonald’s coffee. An article in the HuffPost states that although the cup had a reminder that the coffee was hot, the court decided it didn’t serve as an actual warning.
Product information omissions:
The Food and Drug Administration (FDA) has some specific requirements for labeling. However, the loopholes of the requirements may cause omission of information about products. These omissions may be the cause of some damage to unsuspecting consumers.
For example, Roundup is a common weed and grass killer product that claimed that it was safe for humans and animals. However, according to Bloomberg, 42,000 people have filed cases against the herbicide for being the root cause of cancer among the users.
Common exclusions and endorsements
- Efficacy exclusions
Product indemnity insurance doesn’t provide coverage if the product fails to fulfill its intended use or function.
- Cost of product recalls
Product liability claims may force companies to recall their products, which will again incur a lot of expenses. A separate policy called product recall insurance covers these expenses.
- Lost inventory
Most frequently, product liability claims arise due to product defects. The overlooked defect in the product causes a huge loss in inventory for the producer. However, product liability insurance doesn’t cover the inventory loss of the defective products.
- Quality control exclusion
Products that do not go through quality control are excluded from the product liability insurance coverage as the policy requires companies to maintain quality control standards.
- Reporting exclusions
Any change in the products from the product mix, ingredients to the methods and materials used needs to be reported to the insurer so that the change is included in the policy. Unreported changes in the company’s products excludes the product from the product liability insurance coverage.
- Material exclusions
Most product liability insurance policies exclude certain materials that aren’t approved by the United States Food and Drug Administration. Product liability policies also have a silica exclusion that excludes products that include silica packets.
- Employee injury exclusions
Public & product liability insurance doesn’t cover on-the-job injuries in a manufacturing company since workers’ compensation insurance covers such claims. However, if the cause of the injury is due to defective machinery that was manufactured by the company, then employees can sue the company under the dual capacity doctrine for product liability. Product liability insurance protects the company against such lawsuits.
- Vendor’s endorsement
Besides these exclusions, businesses that disseminate their products to retailers for reselling get vendors endorsement to include the vendors as insured to their policy. Manufacturers usually use this policy to attract a seller or retailer to distribute the manufacturer’s products.
Types of insurance that include product liability policy:
How much does product liability insurance cost?
The factors that determine the cost of product liability insurance are:
- Business/Product type:
The type of business or product has a lot to do with the product insurance cost. Specific industries like pharmaceuticals, medical devices, and automotive industries have higher premiums because of the high probability of risk and the extent of damage their products could cause.
- Position in the supply chain:
Whether the business is a manufacturing company or a retail store, the entity can be held liable for the products it produces or even sells. However, businesses in the supply chain that are directly linked to the manufacture of the product have a higher cost than those that are simply involved in its distribution or sale.
- Size of company:
The size of the company can be in terms of revenue and number of employees. The cost of product liability insurance for a large company will be higher as compared to the cost of product liability insurance for small business.
- Number of products:
There are various risk factors that the large product portfolio companies will need to consider for each of its product lines. This is the reason why the cost of product liability insurance is higher for a large company with a vast product portfolio as compared to product insurance for small business.
- Quality control procedures:
Quality control procedures that help companies inspect the quality of their product can reduce the probability of risk to the consumers. Hence, companies that have a standardized quality control procedure will have to pay lower premium prices as compared to companies that don’t.
- Loss control procedures
Companies take preventive measures to decrease the chances of claims, such as including caution notices, clear instructions, and other useful information in the label. These loss control procedures help to lower the cost of insurance.
- Claim history
The claim history of a company is also a factor that determines the probability of risk to consumers. Companies that receive many public and products liability claims will have to pay a higher premium. In comparison, companies that have not had any cases of product liability claims will have a lower premium.
Frequently Asked Questions (FAQs)
What is product liability?
What does product liability insurance cover?
- Faulty product
- Usage failure
- Design defect
- False/misleading marketing
- False/misleading labels
- Failure to warn
- Product information omissions
Who needs product liability insurance?
Does general liability insurance cover product liability?
For small businesses that do not produce or sell high risk products, general liability insurance can cover for product liability under the products-completed operations coverage. However, businesses that produce or sell products with higher risk, like pharmaceuticals and heavy-weight machinery, must get a separate product liability insurance.