Product Liability Insurance: Coverage And Costs (2024)

If you own a business that creates, manufactures, distributes or sells products, your company could be liable if a product causes harm to others—even if the customer uses a product incorrectly. The potentially high cost of lawsuits makes product liability insurance a vital component of a small business insurance policy.

What Is Product Liability Insurance?

Product liability insurance is a type of small business insurance covering claims that a product you created, distributed, manufactured or sold caused injury or property damage to someone or their belongings.

For example, if your company sold lotion that caused a severe allergic reaction, resulting in a lawsuit, your product liability insurance would pay for medical and legal expenses.

Who Needs Product Liability Insurance?

If you sell a product, you’re a good candidate for product liability insurance. These types of businesses often buy product liability insurance:

• Stores
• Distributors
• Manufacturers
• Online sellers on Amazon, eBay and Etsy
• Pet supply shops
• Print shops
• Restaurants
• Wholesalers

A product liability insurance policy is also suitable for a construction and contracting business because it offers financial protection if a client decides to sue over damage caused by the finished work. For example, if a contractor installs a custom cabinet but the doors are defective, product liability insurance could cover the cost of fixing the defect.

How Much Product Liability Insurance Do I Need?

The amount of product liability insurance you need varies depending on industry, location, annual revenue amount and claims history, says Michelle Shaver, senior vice president of Encova Insurance.

“If products are more hazardous in nature or sold in a highly litigious geographic territory, it may be advisable to carry higher coverage limits,” Shaver says.

Bryan Smith, vice president of product management at The Hartford, says the amount of product liability insurance coverage should be commensurate with the expected liability exposures that a business could face.

“The type and amount of product, the volume of sales and the number of parties involved in the production and stream of commerce will all impact the insurance needs of a business,” Smith says.

What Does Product Liability Insurance Cover?

Product liability insurance covers legal fees, medical costs and compensatory damages in third-party lawsuits. It covers problems caused by your product, such as:

• Damages to someone’s property
• Bodily injuries
• Illness
• Wrongful death

The types of defects covered by product liability insurance include:

• Design defect. There was an error in the product’s design.
• Manufacturing defect. There was a flaw in the manufacturing of the product.
• Marketing defect. The marketing of the product had an error, such as not providing the proper instructions.
• Improper warning. There aren’t enough warnings about the proper use of the product.
• Strict liability. A customer gets hurt by a product, even if your business isn’t found negligent.

What Does Product Liability Insurance Not Cover?

Product liability insurance covers lawsuits for physical harm or damage caused by a product. It’s not designed to cover problems caused by software, apps, IT and technical products.

For example, product liability insurance doesn’t cover coding mistakes and software errors that cause financial harm to your customers. You need errors and omissions insurance for technology-related problems.

Product liability also does not cover:

• Product recall costs
• Employee injuries
• Accidents involving customers, such as slip-and-fall injuries

How Much Does Product Liability Insurance Cost?

Product liability insurance costs an average of $1,192 a year for small businesses, according to AdvisorSmith.

When it comes to product liability insurance premiums, your industry makes a difference. For example:

• Manufacturing businesses have an average premium of $1,146 per year, with a range of $736 to $1,854.
• Wholesale businesses pay an average of $1,159 a year for general liability insurance that includes product liability insurance. Premiums range from $751 to $2,431 a year.

Factors Affecting Product Liability Insurance Costs

The main cost factors that affect the cost of product liability insurance include:

• Your industry.
• The types of products your business sells.
• Your business location.
• Claims history.
• Policy limits.

Why Is Product Liability Insurance Important?

Without product liability insurance, your business may have to pay out of pocket for medical expenses, property repairs, legal fees, and other expenses related to accidents related to product defects.

Consider this potential scenario: Your company sells exercise equipment. Someone suffers an injury while using the equipment due to an equipment defect. They sue your company for medical expenses, lost wages and more. If your company is found liable and you don’t have product liability insurance, you’ll be responsible for all legal costs and any amount awarded to the injured customer.

Product Liability Insurance for Sellers on Amazon

Small businesses selling on Amazon can purchase product liability coverage through a digital network called Amazon Insurance Accelerator.

Amazon requires its third-party sellers to buy product liability insurance after attaining $10,000 in sales in one month. The Amazon Insurance Accelerator will help U.S.-based small businesses get product liability insurance quotes from companies such as Chubb, Harborway, Hiscox, Liberty Mutual, Markel and Travelers.

How To Get the Best Product Liability Insurance

You can purchase product liability coverage as part of a general liability insurance policy. This basic level of product liability insurance may cover companies with low product risk.

The second option is to purchase a standalone product liability insurance policy. A standalone policy would be appropriate for a company with a high risk of product liability.

“Product liability insurance is frequently offered through a general liability insurance policy. It can also be offered as a standalone policy,” says Smith at The Hartford.

Product Liability Insurance Frequently Asked Questions (FAQs)