Everything You Need to Know About Product Liability Insurance

If your business makes, sells, or distributes physical products, one lawsuit could be financially devastating. Product liability insurance is designed to protect you from that risk. Let’s look at what it covers, who needs it, and how much coverage to carry. 

What is product liability insurance, and what does it actually cover?

Product liability insurance covers bodily injury and property damage caused by a product your company manufactures, distributes, or sells. According to Michael Huddleston, an Equity Shareholder at Munsch Hardt Kopf & Harr, the coverage includes warranties and representations, as well as protection for failing to provide adequate warnings or instructions. 

And it protects your company regardless of whether it’s the manufacturer, distributor, or retailer. Insurance coverage typically includes:

• Third-party bodily injury: A customer is injured by a defective product.
• Property damage: A product that damages a customer's home or vehicle.
• Legal defense costs: Attorneys fees and court costs if the case goes to trial.

However, product liability insurance doesn’t apply to the transportation of the product or injury to the product itself caused by a defect. For example, if you manufacture tires, the cost of replacing a defective tire isn't covered. But if a consumer is injured when that tire fails, coverage would apply. 

[Read more: How to Choose Small Business Insurance]

Which types of businesses need product liability insurance most?

Any business that sells physical products should consider product liability insurance. This includes manufacturers, wholesalers, distributors, and retailers.

"Many state laws hold all parties in the chain of commerce responsible," says Product Liability Attorney Jason Turchin, "from the company that designed and produced the product to the distributor to the store that sold the product." 

Here are some industries that are at especially high risk:

• Food and beverage producers.
• Children's product manufacturers and retailers.
• Consumer electronics brands.
• Supplement and health product companies.
• Toy makers and sporting goods companies.

Tim Gallagher, Senior Vice President of Business Insurance for Marsh McLennan Agency, adds that customers may choose not to work with you if you can't provide a certificate of liability insurance.

How to choose the right coverage limit for your product and risk level

Gallagher recommends a minimum of $1 million in coverage but notes that businesses dealing with higher-risk products may need $5 million or more. Product liability coverage is often bundled into a commercial general liability (CGL) policy, but not always.

Review your existing CGL policy carefully to confirm whether product liability is included or whether you need a standalone policy. Here are a few other coverage considerations worth flagging:

• Defense costs: Some policies exclude legal fees from the coverage limit. Without defense costs built in, even a meritless claim can generate six figures in legal expenses that you'll pay out of pocket.
• Vendor endorsements: Standard policies don't automatically extend coverage to others who handle or sell your product. A vendor's endorsement can fill this gap.
• Additional insured status: If you're a retailer, check whether the manufacturers or distributors you work with have named you as an additional insured on their policy, and if they haven't, ask them to. Obtain a copy of the declaration page and keep it on file.

[Read more: Everything You Need to Know About Professional Liability Insurance]

Product liability insurance FAQs

Is product liability insurance required by law? 

It's not federally mandated, but many states and commercial contracts require it. Retailers and distributors are often asked to show proof of coverage before doing business.

Does a home-based business need it? 

Yes, if you're selling physical products. A homeowner's or renter's insurance policy won't cover business-related product claims.

What if I only sell products I didn't manufacture? 

You still carry risk since retailers and distributors can be named in lawsuits regardless of who made the product. Check with the manufacturer about additional insured status, and consider your own policy as a backstop.

Where do I start? 

Talk to a licensed commercial insurance broker who can assess your specific product risk, recommend appropriate limits, and help you understand what your current policy does and doesn't cover.

[Read more: What Does Commercial General Liability Insurance Cover?]

Erik J. Martin contributed to this article.

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