What is product liability insurance?
Matt Hands, VP, Insurance and MoneySense
Product liability insurance, or product risk insurance, is a type of commercial insurance policy that covers you if you’re held liable for a product you manufacture, distribute, or sell. If your product causes a third party (someone unrelated to your business) to injure themselves or damages their property, you could face expenses for legal fees and compensatory damages.Having a product liability insurance policy, however, can cover these costs and get your business back on track as soon as possible.
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Do I need product risk insurance?
If your business provides a product to your customers, consider adding product liability insurance to your commercial policy. You wouldn’t one claim to shut down your business operations completely, so it’s always a good idea to stay a few steps ahead financially.
Example 1: A food poisoning incident at your restaurant may cause several customers to sue. Product liability insurance can help cover the expensive legal costs and damages you may incur.
Example 2: The sweater your business manufactures uses a type wool causing rashes on your customer's skin. This results in a costly lawsuit, but your product liability insurance can cover the legal and damage fees.
Businesses that should consider product liability insurance include:
- Restaurants, coffee shops, and bakeries
- Clothing stores
- Pet stores
- Gift shops
- Specialty food stores
- Cosmetic, skin care, body care, and hair care shops
- Wholesalers, manufacturers, and suppliers
- Software developers and web designers
Even if you run a small e-commerce business from your home, product liability insurance might be worth it. A common misconception is that small businesses don’t need business insurance because the likelihood of a lawsuit isn’t as probable with fewer customers. If someone sues you due to an allergic reaction from your homemade soap, you’ll rest easier knowing you have product liability insurance.
What does product liability insurance cover?
Product liability insurance pays for damages (e.g. legal fees, medical expenses, compensatory damages) in cases of third-party bodily injury or property damage your product may cause. Product liability claims are typically a result of at least one of three reasons.
The product's design is faulty or unsafe before it's even put together (e.g. toxic materials chosen).
The product was put together incorrectly (e.g. food past its expiration date, or a used, or missing screw).
The product itself isn’t defective, but the marketing is misleading or missing important information (e.g. incorrect labelling, lack of thorough assembly instructions).
How much does product liability insurance cost?
The cost of product liability insurance will vary according to a few factors, but you can expect to pay about $0.25 for every $100 your company makes in sales. So if you sell $100,000 worth of products each year, product liability insurance will cost you about $250 annually.
Factors that go into your product liability insurance quote
Aside from the amount of coverage you’re seeking, business insurance companies will also look at a few other factors to calculate your quote. This includes the product type and quantity you sell, manufacture, or distribute, your business revenue, and your past insurance claims.
Product type
The type of product your business sells, manufactures, or distributes has an impact on your product liability insurance quote because different products present different levels of risk. A bookstore, for example, could technically be held liable for a paper cut – although it’s highly unlikely. On the other hand, a skin care manufacturer faces numerous product risks, from chemical burns to allergic reactions, ultimately resulting in a higher cost for product liability insurance.
Quantity of products sold
Depending on how successful your business is, you could be selling many more products than your competitors. This does, however, result in a higher cost for product liability insurance because there is a higher chance a customer could hold you liable for your product. For instance, a coffee shop that serves a few regulars each day probably won’t have too many legal issues, even if the milk was spoiled and caused food poisoning. However, if the same thing happened to your restaurant that receives hundreds of customers each day, there’s a higher chance a customer will speak up and file a claim.
Revenue
Your business revenue is also factored into the cost of your product liability insurance. A third party could claim more in damages if they know your business revenue is high enough for the pay-out. For example, a small start-up won’t have as much at stake in a legal battle in comparison to a well-known, successful company if a product turns out to be faulty. Therefore, the more money you make, the more you’ll likely have to pay for your product liability insurance premium.
Past business insurance claims
Insurers often look at any claims you’ve made in the past for your business to determine the likelihood of a claim in the future. If you’ve been known to mislabel the materials on your clothes, it’s quite likely it’ll happen again. So with a clean history comes cheap product liability insurance, but a not-so-clean history – that will raise your insurance quote.
Why do I need product risk insurance?
Anyone can make a mistake when working with a product, and sometimes, one small mistake can lead to larger repercussions. In some cases, you might not even be at fault, but a customer could still hold you liable if they believe your product caused them injury or damaged their property. Regardless, having product liability insurance provides you and your business with extra financial protection – just in case. Here are a few potential situations in which having product liability insurance could come in handy.
Design defects
Manufacturing defects
Marketing defects
Frequently asked product liability insurance questions
Is product liability covered under general liability?
Most business insurance companies will include product liability under their general liability insurance, but some may offer it as a stand-alone policy. Be sure to speak with your insurance broker to clarify what’s included in your package to ensure you have all the coverage you need.
How do I get product liability insurance in Canada?
If you’re looking to protect your business with product liability insurance, take a few minutes to compare business insurance quotes with us. We’ll provide a quote and connect you with a licensed insurance broker in Canada who will help you finalize the coverage for your business as seamlessly as possible.
Does product liability insurance cover you internationally?
If your business sells, manufactures, or distributes products on an international level, be sure to inform your insurance broker as you may need more coverage. Also, be sure to verify the industry standards (e.g. label requirements) for your product in other countries to prevent liability claims as best as possible.
Is product liability insurance mandatory?
No, product liability insurance is not mandatory in most businesses industries. However, if your business offers any sort of product, you should consider it as one claim could cause immense financial trouble.
If you work with other businesses to sell, manufacture, or distribute your product, you could be required by another party to purchase products liability insurance. Also, ensure that the other parties (eg. supplier, manufacturer) have enough coverage and speak to your insurance brokers about listing each other on your policies - you wouldn’t want someone else’s mistake to become your financial responsibility.
Does product liability insurance cover services?
No, if your business offers services instead of a physical product, product liability insurance will not cover you if a third party holds you liable for the service. Instead, purchasing professional liability insurance will protect you against claims of property damage or bodily injury resulting from your advice.
For instance, if you operate a gym that also sells merchandise, you should opt for a fitness insurance policy that includes both products liability insurance and professional liability insurance. Products liability insurance will protect you if a customer injures themselves using the equipment you sold them, while professional liability insurance will compensate for damages if a customer injures themselves because of a workout you led.
On the other hand, you may only need either one of product liability insurance or professional liability insurance. If you’re shopping for contractor insurance, and you build chairs for sale, product liability insurance would be the right coverage for your case. If you offer a service, such as construction management, you should opt for professional liability insurance instead.
Matt Hands, Business Director of Insurance
With 6+ years of experience at Ratehub.ca, Matt’s focus has been on growing its newest business unit, Insurance. He is a thought leader and a valuable resource to respected publications across Canada. read full bio
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