The average cost of a product liability case in the US is just over 5 million dollars.

For most small business owners, a claim like this (without proper insurance) is catastrophic. At that point, you might as well start packing up and fixing to close your doors for good. Which… isn’t something any business owner wants to hear or do.

So, if your business sells physical products, product liability insurance isn’t something you can afford to go without unless you don’t mind the potential of having to pay several million dollars out of your pocket, of course.

But with countless types of business insurance out there, it’s hard to tell them apart. So, if you’re not sure what product liability insurance is, who needs it, how it works, or what product liability insurance covers, you’re in the right place.

Let’s get started!

An Introduction to Product Liability Insurance

Product liability insurance protects your business if one of your products causes property damage or bodily injury. Let’s walk through a quick example.

Pretend your business manufactures water bottles for athletes. As your business scales, you’re no longer able to check every bottle before it hits the shelves physically. What happens if a small mechanism inside the lid breaks and someone chokes on it while running?

You and your business may be liable for any medical bills as a result of this incident. You’ll also have to pay big bucks to build a defense team and legal case. These financial burdens can add up quickly.

Product liability insurance helps cover these costs, so you aren’t stuck paying them out of your pocket.

What’s the Difference Between Product Liability Insurance and General Liability Insurance?

With so many different types of business insurance, it’s easy to get confused. In a nutshell, product liability insurance is a type of general liability insurance that specifically covers accidents, injury, or property damage resulting from a product you sell.

Lower-risk industries may find that general liability insurance is enough because it typically includes general liability coverage for product-related problems. But, mass producers and higher-risk industries need more coverage than what general liability offers.

So, that’s where product liability insurance comes in.

How Does Product Liability Insurance Protect a Business?

If someone files a product liability lawsuit against your business, product liability insurance helps cover legal, medical, and other financial costs resulting from the claim. These are frequently the most expensive claims for businesses to defend.

Most business owners don’t feel comfortable leaving things like this to chance.

Humans are curious creatures, and you never know what they’re going to do with your products (or packaging) after leaving your hands. So, product liability insurance helps reduce your risk of filing bankruptcy or going out of business if someone files one of these claims against you.

Who Needs Product Liability Insurance?

You should carefully consider purchasing product liability insurance if you sell physical products of any kind. Regardless of your target market, humans are unpredictable, and you shouldn’t rely on the public to use your products as you intended.

Consumers can file claims against you even if you have no intention of hurting someone (or their property). That said, product liability insurance is especially important if you sell:

• Baby products (i.e., clothes, toys, diapers, wipes, furniture)
• Anything people eat (i.e., supplements, food, candy, vitamins)
• Products that contact people’s skin (i.e., clothes, fragrances, makeup, face wash, lotion)
• Pet-related products (pets can be as unpredictable as humans)
• Things that need electricity (i.e., appliances, electronics, gadgets, lighting)
• Anything that operates close to the face (i.e., hair styling products)
• Machinery (i.e., vehicles or farm equipment)
• Medical products or medicine
• Construction materials

What Does Product Liability Insurance Cover?

Detailed liability coverage varies based on the plan and insurance provider you go with, but some common types of cases are covered under product liability insurance.

There are four different types of product liability claims, including:

• Product defects/design defects — a product is harmful or dangerous from day one, resulting in a product recall
• Marketing defects — covers businesses if the warning labels or instructions are ineffective or inadequate
• Manufacturing defects — a manufacturing issue resulted in a dangerous product
• Strict liability — a catchall for any other product issues you’re responsible for

In strict liability cases, consumers have to prove:

1) your product is defective and dangerous,
2) it hurt someone or their property while it was being used as intended, and
3) no significant changes were made to the product prior to the incident (i.e., they broke it).

It’s important to note that product liability insurance covers the manufacturer and those responsible for selling it, such as a third party like a distributor, wholesaler, or retailer. A general liability policy does not provide product liability protection.

So, product liability insurance helps cover damages and legal fees to protect your business if any of the above claims are filed against you.

What Doesn’t Product Liability Insurance Cover?

Understanding what it doesn’t cover is just as important as knowing what it does cover. This can help give you a clear picture of the other types of insurance you may need for your business.

So, product liability insurance doesn’t cover things like:

• Official product recalls (See product recall insurance)
• Negligence or oversight (see professional liability insurance)
• Consumers intentionally hurting themselves
• Damages or injuries that occur at your place of business (See business property insurance)
• Employee injuries or damage to your property
• Accidents during shipping or transit
• Criminal/Fraudulent acts

Is Product Liability Insurance Required?

Product liability insurance isn’t required by law, but other businesses may refuse to do business with you if you don’t have it. Plus, many massive and successful manufacturers have faced financial hardships as a result of these types of cases.

With that being said, you should carefully consider product liability insurance if you sell physical products.

How Much Does Product Liability Insurance Cost?

The premium cost for product liability insurance will vary based on the type of product, use, and potential to cause damage. In low-risk industries, the average cost of product liability insurance is $0.25 per $100 in revenue. So, if you sell $1,000,000 of product every year, you can expect to pay a premium of around $2,500 for product liability insurance.

Medium and high-risk industries should expect to pay anywhere from 5 – 10x more per year because of your products’ elevated risk.

How Is Product Liability Insurance Calculated?

It shouldn’t be surprising that specific industries experience more claims than others. The cost of product liability insurance varies based on factors like:

• Your industry
• Business location
• Claims history
• Coverage limits
• Annual revenue
• Your quality assurance process