What does product liability insurance cover?

Product liability insurance protects a business from the financial repercussions of lawsuits linked to product failures. It generally covers various costs, including legal fees and public relations services like crisis communications, media training, social media and reputation management to help preserve the company’s public image following a product-related lawsuit.

Exclusions in product liability insurance

Although small-business product liability insurance covers several types of defects, there are exclusions. Your policy likely won’t cover these situations:

• Software errors, coding mistakes and other information technology issues
• Property damage or injuries unrelated to product usage
• Pollution issues
• Errors, omissions or negligence in providing professional services
• Claims related to products still in your company’s possession
• Accidents or property damage

Purchasing additional types of liability coverage may help ensure that your products are protected. For example, if you’re concerned about pollution claims, your company might benefit from having an environmental liability policy. General liability insurance may protect you if someone is injured on your company’s property.

Who needs product liability insurance?

Businesses dealing with tangible products usually have product liability insurance to protect against financial losses. This includes manufacturers, importers, retailers and distributors. Some jurisdictions even require product-based businesses to carry product liability insurance.

Additionally, companies with supply chains may benefit from this type of insurance, even B2B businesses like a wholesale supplier of ingredients or mechanical parts, which could be held liable if their components contribute to a defective end product.

The amount of coverage needed depends on the volume of products sold. The more products you sell, the higher the risk of defects, making liability coverage even more important for high-volume businesses.

Some retailers protect themselves by requiring their suppliers to carry product liability insurance. For example, if you sell physical products online, you may benefit from having product liability insurance.

How much does product liability insurance cost?

Your location may significantly impact your insurance costs. For example, average monthly premiums can range from around $30 in states like Ohio to over $60 in states like California or New York, depending on factors such as industry risk and claims history.

The cost of product liability insurance also varies by provider. Some carriers may charge nearly double what others do for similar coverage, depending on factors like industry, risk profile and included services.

When purchasing a policy, you may be able to reduce your premiums by adjusting your coverage limit based on the types of products you sell and how much risk they carry. For instance, if you sell a mix of physical and digital products, you may need lower coverage limits than a business selling complex mechanical devices or electronics, where the potential for malfunction or injury is higher.

Factors influencing product liability insurance costs

Several factors affect the cost of purchasing this type of insurance:

• Location: Insurance premiums can vary by state due to differences in regulations, legal environments and claim frequency.
• Traffic and business setting: A store with high traffic or located in a busy commercial area may face higher premiums than a business in a quieter or lower-risk setting, due to the increased likelihood of incidents.
• Product type: Some products are more likely to be involved in product defect suits than others. It typically costs more to buy insurance for a company that deals with toys, automobiles, medications, medical devices, food or tools.
• Claims history: If your business has filed multiple claims, your insurance company may charge more for product liability coverage.
• Supply chain involvement: It may cost more to purchase product liability insurance if you’re directly involved in designing or manufacturing products.
• Coverage limits: Generally,the higher your coverage limits, the more you can expect to pay for product liability coverage. A coverage limit is the maximum amount an insurer will pay out for a specific claim. Many small businesses opt for policies with limits around $1 million per occurrence and $2 million aggregate, though higher-risk industries may require more.
• Industry: Some industries have a higher risk of product liability issues than others. For example, an auto manufacturer may pay more for coverage than a book publisher.
• Annual revenue: For insurance companies, high annual revenue typically indicates that you have a high-volume business. Your insurer may charge you more based on this assumption.
• Number of employees: The more employees you have, the more people are involved in designing, manufacturing and distributing products. This increases the risk of product-related claims, prompting some insurers to charge more for coverage.

Types of claims covered by product liability insurance

Insurance for product liability typically covers the following types of claims:

Manufacturing defects

A manufacturing defect occurs when a product isn’t made according to its specifications. If a medical device manufacturer uses subpar materials to produce artificial joints, the joints might wear out earlier than expected. Assuming the design specifications list sturdier materials, this would be a manufacturing defect.

Design defects

Design defects are flaws built into a product’s blueprint. These issues exist before the item is ever manufactured. By addressing risks early, manufacturers can reduce the chance of liability claims. Even so, having the right insurance helps protect against losses if a defect makes it to market.

Inadequate instructions or warnings

Failure-to-warn claims can arise from a company’s failure to provide adequate instructions or warnings about potential safety risks. For example, if a company that produces industrial chemicals doesn’t warn buyers that one of its products causes respiratory irritation, a buyer might sue for any injuries resulting from using the chemical without wearing personal protective equipment.

The importance of product liability insurance for small businesses

Companies that don’t provide safe products likely face many challenges, such as product recalls, significant financial losses and lost business. Product liability insurance is designed to cover third-party claims related to property damage and bodily injuries, so it can help you manage these challenges more effectively.

This type of coverage protects small business owners against the high costs of product-related lawsuits, and it can also help manufacturers and sellers avoid losses due to product liability claims.

How to obtain product liability insurance

One way to obtain product liability insurance is to work with an insurance broker. A broker can help you choose appropriate policy terms and get quotes from multiple insurance companies.

Several companies offer help finding product liability insurance:

• Founder Shield: Best for fast-growing startups and tech companies. They specialize in scalable policies that evolve with high-growth businesses in emerging industries.
• Insurance Canopy: Best for small businesses and independent creators. A strong fit for ecommerce, beauty, fitness or food brands that need affordable coverage with easy online access.
• Sadler & Company: Best for niche industries with higher liability exposure. Often serves sports organizations, contractors and small manufacturers with customizable policy options.
• Amazon Insurance Accelerator: Best for Amazon sellers. Helps third-party merchants meet the platform’s product liability insurance requirements when listing physical goods.

Tips for reducing product liability insurance costs

To reduce the cost of product liability coverage, consider implementing strong quality-control and risk-management policies. Maintaining safety equipment, reviewing product designs carefully and other risk-management measures may help you avoid product-related claims.

You may also benefit from doing the following:

• Reviewing your coverage annually to identify savings opportunities
• Choosing a higher deductible to reduce your monthly premiums
• Bundling product liability insurance with other types of commercial insurance
• Applying discounts to reduce your premium
• Comparing coverage, pricing and offers from different insurance providers

Common mistakes to avoid when buying product liability insurance

One of the most common mistakes when buying product liability insurance may be failing to account for all work settings. A product defect can occur anywhere employees are designing products, manufacturing products or creating instructions and other product-related documents.

Consider letting your insurer know about every work setting to provide an accurate quote. This includes places like home-based operations, warehouses or contract manufacturing sites where your products are made or handled.

Some business owners also make the mistake of buying the cheapest policy without understanding their coverage. An inexpensive policy may save you money, but it doesn’t necessarily provide adequate coverage based on your risk exposure. Consider asking an experienced insurance agent to help you find the right balance of coverage and affordability.

FAQs about product liability insurance

Does an LLC need product liability insurance?

If you own a limited liability company (LLC) that sells products, you may want to purchase product liability insurance. An LLC protects your personal assets, but it doesn’t eliminate all liability from your business. Product liability coverage protects your LLC if any type of harm occurs when a buyer uses one of your company’s products.

What is strict product liability?

Strict liability is the legal principle that holds businesses accountable for harm caused by their defective products. Under this doctrine, someone injured by a defective product doesn’t have to prove that the company was negligent. They simply have to show that they were injured by the product, that the product was defective and that they were using the product as intended.