Do you need product liability insurance coverage for small business (food, retail, cosmetics sector)? If YES, here is an full cost, quotes and broker comparison.
If you own a business where you manufacture or sell fire alarms for instance, and a customer who buys your product suffers from a home fire disaster because the fire alarm failed to alert them to the burning house, they may decide to hold you or your business responsible for it and sue you for compensation.
If they decide to claim compensation from you or your business, how would your business be able to pay for the legal costs of defending yourself, any loss of income or income potential that may arise as a result of the lawsuit, the costs of damages or compensation, and any other type of expenses or losses that is directly related to the lawsuit. This is where product liability insurance comes to the rescue.
What is Product Liability Insurance?
Product liability insurance is a type of insurance that is designed to protect you and your business against claims of injury or damages caused by your business.
Why Do You or Your Business Need Product Liability Insurance Coverage?
The legal procedures involved in deciding whether you are at fault, the circumstances that led to the injury or damages, and how much could be regarded as fair compensation, can be a really lengthy and exhausting one. In some cases, you might be required to be present at legal proceedings and in some cases; your place of business may be closed for investigation.
All of this affects you and your business because it wastes your time and financial resources- you may have to pay a lawyer, lose some potential earnings and if you are found guilty of negligence, you may be asked to pay the victim a huge sum of money which may take its toll on your business.
You may not be able to prevent accidents and injuries from happening but you can minimize the effect on you and your business by buying product liability insurance.
Product Liability Insurance and General Liability Insurance: What is the Difference?
Product liability insurance is a type of insurance that protects a business in case of lawsuits or claims of monetary compensation arising from damages or bodily injury suffered by a third-party in the process of using the company’s products. Product liability insurance is actually a component of general liability insurance. Some insurance companies often offer coverage for product liability under their general liability insurance policies.
General liability insurance on the other hand covers for injuries or losses sustained by a third-party during the course of transacting with your business.
For instance, if the floors of your business premises were wet and slippery, and there was no caution sign to warn customers or visitors of the impending danger, causing them to trip and fall and sustain injuries in the process, the customer may decide to sue for damages.
What Does General liability Insurance Cover For?
General liability insurance may cover for a number of cases including:
- Damages/Injuries done by an Employee or Member of the Company: If a subcontractor is hurt in the process of carrying out his duties on behalf of your company, this insurance can cover for the damages.
It may also cover for injuries accidentally done by your employees or members of your company to a client or visitor to the company. However, it would not cover for employee’s medical bills or compensation as there is another insurance product designed to cover for that.
- Damages done to or by Property of the Company: If your company mounts a billboard somewhere and somehow, the billboard collapses and causes a third party to sustain injuries or losses, the general liability insurance cover can compensate the victim for their injuries and losses.
- Damages Sustained in the Course of Transacting Business with Your Company: General Liability Insurance could also cover for claims by persons who suffered losses or sustained injuries in the process of visiting your business premises or transacting business with you.
- Damages done by the Operations of Your Business: If the operations or activities of your business causes third-parties or members of the public to sustain injuries or losses, general liability insurance may also cover for it.
What Does Product Liability Insurance Cover For?
Product liability insurance typically covers for two major type of damages:
- Damage to Property: If a person’s personal property such as their homes, cars, houses, electronic gadgets, computers or working tools become damaged as a result of using your products or services, product liability insurance would cover the cost of the damage, cost of repairs, legal fees and loss of profit due to the damages.
- Bodily Injury: A common example of this is when a plastic surgeon performs a botched surgery on a client that causes bodily injury or mental or emotional injury to the client, the client may be able to sue for wrongful bodily injury and claim for compensation.
In this case, the insurance company would also have to cover any costs of care, legal fees, recuperation expenses, loss of wages, and any other injuries or losses caused by the injuries.
Product liability insurance may also cover for:
- Manufacturing Flaws: If the product made by your company came out with some defects that caused consumers to sustain injuries, product liability insurance may cover it.
- Design Defects: Some product designs may be unsafe especially when they are relatively new and untested in the marketplace. If someone uses the product and suffers injuries or losses due to the defects, product liability insurance may also pay for this.
- Insufficient/Lack of Instructions and Warnings: Potentially harmful products are expected to come with enough instructions that would show consumers how to properly use them, and what to avoid in the process of using them.
If it turns out that your company sold potentially harmful products without enough instructions and warnings, the injured party may decide to claim compensation and your product liability insurance would have to pay for it.
- Accidental Contamination: If a product mistakenly comes in contact with harmful substances or if one of the ingredients was accidentally contaminated causing the consumers to fall sick or sustain other injuries and losses after consumption.
- Labeling Mistakes and Errors: Labels are not supposed to contain misleading information and at the same time, the information must be sufficient to help consumers determine if the product is safe enough for them. For instance, consumers should be able to see that a product does not contain any substance that they may be allergic to. Labels should also contain sufficient information on how to use and how not to use a product.
- Accidental Product Defect: Product liability insurance also covers for products that are either poorly designed or not tested adequately thereby leading to injuries for the consumers.
- Extortion and Malicious Tampering: Some disgruntled employees or people who have grudges with a manufacturer may decide to deliberately contaminate products as a way to extort money from the manufacturer.
- Flawed Marketing: If the marketing message contains information that may be considered misleading or false and the consumer acted on the false information and sustained losses, they may decide to make product liability claims.
- Government Recall: In some cases, the government might decide that a product is no longer fit or safe for consumption and decide that the product should be recalled. Product Liability Insurance can cover for the costs of such recall.
What Does Product Liability Insurance Not Cover For?
The product liability insurance does not cover for the following:
- Quality Control Exclusion: Even if you take out product liability insurance, you would still be expected to exercise reasonable skill and a duty of care so as to prevent damages and accidents. If you fail to follow adequate quality control procedures or a reasonable duty of care in carrying out your activities, you might be excluded from the coverage.
- Efficacy Exclusion: If your product fails to perform its main function, it may be excluded from the policy too.
- Reporting Exclusions: After taking out a product liability insurance policy contract, you would be expected to make reports to the insurance company whenever you make any changes or improvements to your products in terms of ingredients or components, designs and processes. You may not be covered by the policy if you fail to do this.
- Material Exclusion: If your product contains an ingredient or component that is legal or medically forbidden, or commonly known as harmful, you may also be excluded from receiving compensation except in cases where you agree to pay a higher premium.
How Much Does Product Liability Insurance Cost for Small Business?
Generally, you can expect to pay anywhere from $2,500 – $7,000 for product liability insurance every year but this typically depends on how risky your business or product is.
For regular and fairly risky businesses, it is usually 26 cents for every $100 worth of the products or services you sell. So if you sell goods worth $1,000,000 per year, you can expect to pay about $2,600, but if you are operating in a risky industry, you may have to pay higher than that, you may have to pay 1 cent per $100 worth of retail sales. So if you sell products worth $1,000,000 per year, you may pay about $10,000 yearly.
There isn’t a one size fits all approach to product liability insurance pricing, however, a lot of individual factors are considered before prices are determined.
Some of the factors the insurance company would consider before assigning a dollar amount to your coverage include:
- The Geographical Location of Your Business: If your business is located in a high risk area such as a place that is prone to flooding, earthquakes and other natural disasters, you may be required to pay higher premiums. If there are any local laws that may impact your business too, it would also be taken into consideration.
- Nature of Business: As mentioned earlier, the nature of your business would also impact insurance costs. If your business sells ice creams, you wouldn’t be expected to pay the same amount of premiums as a business that manufactures motor vehicles- the risks are not on the same level because one is higher than the other.
- Claims History: If you have received a product liability claims payout in the past, you would be seen as high risk and might be asked to pay a higher premium as well.
- Value/Worth of Your Business: If your business is ‘rich’ or very successful, you may also be charged higher premiums for product liability insurance because it is believed that you are an easy target for lawsuits and compensation payouts.
How to Reduce Your Product Liability Insurance Premiums
There are a number of things that you can do to avoid paying high insurance premiums for product liability insurance. You may be able to get cheaper rates if you:
- Get as Many Quotes as You Can: Don’t get one or two quotes; get the insurance companies competing for your business by talking to as many companies as possible. You can use online tools to get quotes or you can get an insurance broker to do all the legwork for you, but the trick is to inform the next insurance company that you have been talking to other insurance companies and you got a price that is lower than what they are giving you. You may be able to get most insurance companies to go out of their way to offer you the lowest quotes possible in a bid to compete with other companies.
- Improve on Your Safety Policies: The right safety policies can help you get a lower insurance quote because you would be seen as a low risk business. You need to have all the right procedures, rules, gadgets and employee training to prevent and manage accidents and emergencies.
- Avoid Over-insurance: Some insurance agents in a bid to sell more products and meet up with their sales targets, make you buy additional coverage that you don’t necessarily need. Make sure you don’t fall for this temptation and buy only what your business needs- say no to irrelevant upsells and redundant coverage.
What Type of Businesses Need Product Liability Insurance?
Product liability insurance is helpful for businesses that sell products that are potentially harmful to the consumers. Companies that manufacture, sell or distribute products like drugs and pharmaceutical products, electronics, toys and other potentially harmful products need product liability insurance especially in this age and time where lawsuits are very common.
Some of the companies that need product liability insurance include:
- Small Businesses: If you own a small business, your cash flow cannot be compared to those of larger businesses. With limited cash resources at your disposal, a product liability lawsuit could leave your business at a very disadvantaged position.
Product liability insurance can help to significantly reduce the impact of lawsuits on your business. Product liability insurance may also protect your business in situations where a manufacturer decides to recall a product; any losses or negative impact this decision may have on your business would be reduced as well.
2. Retailers: As a retailer, you are the closest to the consumers and you are likely to be the first person a consumer would blame for any damages they suffer from using a product. They may not have direct access to the manufacturer of the product but they sure know the store where they bought the defective product from and that is likely to be their first port of call.
As a retailer, you cannot completely relax expecting that the manufacturers or wholesalers would be the ones to take the blame for defective products as most times, the burden is often shared amongst all three parties although the manufacturers might get the largest portion of liability.
Product liability insurance helps to cover your portion of liability as a retailer for the products you sold so that the costs of lawsuits and liability would not have a devastating impact on your business.
3. Wholesalers and Distributors: Wholesalers and distributors of products are not completely absolved of the blame when it comes to product liability cases. Sometimes, the blame is pushed on the wholesaler especially in cases where the products were not properly stored or exposed to harmful chemicals and substances whilst they were in storage.
Product liability insurance would help to protect you as a distributor or wholesaler should you be found guilty of mishandling or poor storage of products which led to the deterioration of the products, causing damages for the consumer.
4. Manufacturers: You cannot do without product liability insurance if you are a manufacturer. In the course of producing and manufacturing goods, contamination may occur. Products may also be defective, have missing or incomplete parts or fail to perform as expected; all of these may cause a client to sue and claim for damages from your manufacturing business.
5. Software Developers: Software developers also need product liability insurance. If an error in the codes or any other malfunction of the software causes your client to lose money or exposes their businesses to risks, they may decide to make claims against your business.
6. Pharmaceutical and Healthcare Companies: If you manufacture, distribute or sell any products used for healthcare management and healing, you need product liability insurance too because a lot of consumers would not hesitate to sue you should they or their loved ones suffer any losses or damages to their health and wellbeing after using your products. Some consumers would even sue you if the product doesn’t perform as promised.
7. Engineers and Architects: Engineers and architects may be blamed for poor design of a building structure if the building collapses or has any other building defects.
8. Gym Owners and Instructors: If you own a gym, you should consider getting product liability insurance as well so as to cover for any injuries and accidents that may occur while clients are training in your gym.
9. Food and Beverage Companies: If you manufacture, distribute or sell food or edible products, consumers may sue you for wrongful death, food poisoning and other damages suffered from consuming your products.
10. Clothing Manufacturers and Designers: If you design clothes and clothing materials, you are not completely immune to product liability claims too as consumers may sue you for defective shoes, jewelry and clothe designs.
11. Cosmetic Product Manufacturers: Cosmetic products may also cause damages especially burns and skin irritation to users if they contain harmful ingredients or if they are not properly handled during production.
12. Toy Design, Manufacturing and Distribution Companies: Toys are meant to be safe because they are often used by children. If a child gets harmed or sustains injuries from using a toy, the parents or guardian of the affected child may decide to sue and claim damages.
13. Haulage Companies: Products may become contaminated or damaged during the process of transferring them from one point to another and the haulage company may be blamed for this.
14. Packaging Companies: Packaging companies may be sued for flawed or defective packaging and packaging products.
15. Beauty Salons: Beauty salons may also be partially responsible for defective products especially since they are required to conduct a patch test before using products on their clients.
The cost of product liability insurance is cheap compared to the cost of business interruption, liability claims and legal costs that you would have to deal with should you be found guilty in a product liability lawsuit. It is best to ensure your business is adequately protected from such lawsuits.