Business owners are responsible for every product that they sell. What that means is that your business can be held liable if there’s a product defect that causes injury or damage. If that were to ever happen, your business would be staring significant financial losses in the face. To ensure that you’re covered should that situation ever arise, it’s a good idea to find an insurance company that provides product liability insurance.
It's easy to not think about this when your business is just starting but this is the sort of thing that can kill a business before it even gets off the ground. Some simply put it on the back burner for so long when they're focused on growing their small business. Eventually, it does grow into a healthy business but by that time their exposure has increased significantly because of the number of products that they have put out without any sort of insurance.
What is Product Liability Insurance?
Product Liability Insurance is a kind of general liability insurance that covers the cost of defending a company in product liability lawsuits which can often be costly. A lot can go wrong in the entire supply chain. There can be a design defect in one of your products that goes unnoticed. The ideal scenario would be that your business figures it out and has the time to take action. That’s why many companies undertake product recalls. Pulling the product off the market allows them to limit their exposure to any product liability claim. Even they can limit their losses if they have product recall insurance.
That’s not the worst-case scenario, though. That would be if one of your products causes bodily injury or property damage, it won’t be long before someone files a product liability claim against your company. Such claims are taken up based on strict liability, meaning that the business would find it difficult to wiggle its way out of the claim based on some legal technicality. It would be held accountable if it played any part in making, selling, altering or labeling a product.
Product liability insurance covers manufacturing and design defects as well as any marketing defect which may involve mislabeling. The policies can certainly be tailored to better suit the kind of products that the business is selling. What is doesn't cover are things like employee injuries, accidents on company property or negligence on the part of company employees. Companies have to get separate insurance policies for that.
Do You Really Need Product Liability Insurance?
That's a question most small business owners ask themselves. They might feel that since they're a relatively small operation, they don't need to pay for this insurance which would eat into the company's bottom line. However, what they often forget is that it takes one product liability lawsuit to put a small company out of business.
Product liability insurance will prove to be a lifesaver if your company faces a lawsuit. It can be extremely expensive to engage a law firm to contest a lawsuit as hourly billing can easily go into the thousands of dollars. Juries tend to award millions of dollars in such cases and that can be enough to bankrupt a small business. The insurance will not only cover the legal costs but also any compensatory and business damages.
Another misconception that people commonly have is that since they're not the ones manufacturing the product, they can't be held liable for any defect. While that might make sense on the face of it, a product liability lawsuit can be filed against all parts of the entire supply chain of a product. That includes design and marketing in addition to manufacturing.
Therefore, it’s extremely important to realize what your company’s exposure might be to the product that it’s working with, even if it didn’t manufacture the product. For example, if your company sells a product from a manufacturer that has a history of making defective products, your business could be held liable based on negligence.
How Much Does Product Liability Insurance Cost?
This varies on a case by case basis. Some general liability policies already include product liability insurance. However, it’s best to understand the scope of coverage that it provides and whether it would be better for your business to have a separate policy for product liability. It can cost significantly more than that for manufacturers or companies that deal with a lot of products.
There are many insurance companies out there that will happily underwrite a policy that covers your business against product liability claims. Do take your time and research about the company that you go with before you sign any agreements. You wouldn’t want it to flake on you or trip you up in some technicality when the time comes for them to follow through.
The insurance company you decide to work with will look at several different aspects before providing a quote. That will include the type of business your company does, annual revenue, the products that it deals in, its position in the supply chain, quality and loss control procedures, and more.
The premium will be quoted based on that risk assessment. If the insurance company feels that your company is at a higher risk of a claim being filed against it, the premium will be higher and vice versa. There is no one size fits all when it comes to product liability insurance so the costs will vary immensely for a fast-fashion outlet with thousands of different products compared to a neighborhood bakery. It’s something that should definitely be considered as a product liability insurance policy can often be the only thing that allows your small business to bounce back after an early stumble.
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[author] [author_image timthumb='on']https://capitalcollab.com/wp-content/uploads/2019/11/Adnans-Headshot.jpg\[/author\_image\] [author_info][author_info]Adnan Farooqui | New York-based Adnan Farooqui has considerable experience of working with both small brick-and-mortar and online businesses to help them grow. His expertise includes content marketing, affiliate marketing and online lead generation. He has a bachelor's in English from Rutgers University.[/author_info] [/author]