Product Liability

Product liability insurance helps protect a business when there’s a claim that a product it made or sold caused harm. Claims of physical injury or property damage can be brought by the buyer of the product, a user of the product or a bystander.

The physical harm or damage caused by the product can be the result of the following:

  1. Design flaws.
  2. Product defects.
  3. Inadequate instructions, labels and warnings.

Just about any product has the potential to cause harm or property damage. For example, food sold at a restaurant could make someone sick. A small toy not labeled correctly could be a choking hazard. A computer purchased online might overheat and cause damage. A mower repaired at a local shop could malfunction and injure the user.

Business Type Who Needs Product Liability

Product liability insurance is not legally required, but a business that does any of the following product-related activities should consider purchasing it:

  1. Manufacturing
  2. Distributing
  3. Wholesaling
  4. Importing
  5. Retailing
  6. Installing
  7. Repairing / Modifying

Coverage

Typically, product liability claims arise from design defects, manufacturing defects, warning or use defects, and strict liability.

  1. Design defects are claims related to the product issues that were present even before it was made.
  2. Manufacturing defects are claims related to problems that occurred while the product was being created or assembled.
  3. Warning or use defects are claims that the seller failed to provide adequate labels or warnings on risks and proper use.
  4. Strict liability is a claim that is based on the absence of negligence but where injury or damage resulted from proper use.

In short, a good product liability insurance policy will cover you in the case of the following:

  1. Injury: For example, a forklift made by your company malfunctions, which results in the injury of a worker. Your policy will pay for legal fees and any settlements related to the claim.
  2. Property Damage: For example, a remote control your company sells malfunctions. Its battery explodes and burns a hole in the customer’s carpet. Your product liability policy covers legal fees and settlements in such a case as well.
  3. Illness: For example, you own a grocery store that sold someone cheese that was expired, which caused the person to become ill after eating it. Product liability protects you from these types of claims too.
  4. Wrongful Death: To use the first example again, say your company sells a forklift that malfunctions, which leads to an accident that ends in death. In such a case, your product liability insurance can cover not just legal costs, but also burial costs and other expenses related to the death caused by your faulty product.

Exclusion

Product liability insurance does not cover the following:

  1. Employee Injuries: If an employee is injured by a product defect, your product liability insurance wouldn’t cover the costs of the injury. This is why businesses buy workers compensation insurance, which pays all costs related to employee injuries and recovery.
  2. Third-Party Accidents: As we already mentioned, if a customer or partner is injured on your property, that is something that would be covered by a general liability insurance policy, not by product liability insurance.
  3. Product Recall Costs: A separate insurance product called product recall insurance covers the costs of recalling a defective product. This is often added as an endorsement to a product liability policy but is rarely included in one without the endorsement.
  4. Technology Products: Product insurance will not cover lawsuits related to technology products. A technology error & omissions policy is what software companies and other technology companies purchase to protect themselves from claims related to mistakes made when creating software products that caused ended up causing damage to third parties.

Extended Coverage

Product liability insurance does not cover the following:

  1. Employee Injuries: If an employee is injured by a product defect, your product liability insurance wouldn’t cover the costs of the injury. This is why businesses buy workers compensation insurance, which pays all costs related to employee injuries and recovery.
  2. Third-Party Accidents: As we already mentioned, if a customer or partner is injured on your property, that is something that would be covered by a general liability insurance policy, not by product liability insurance.
  3. Product Recall Costs: A separate insurance product called product recall insurance covers the costs of recalling a defective product. This is often added as an endorsement to a product liability policy but is rarely included in one without the endorsement.
  4. Technology Products: Product insurance will not cover lawsuits related to technology products. A technology error & omissions policy is what software companies and other technology companies purchase to protect themselves from claims related to mistakes made when creating software products that caused ended up causing damage to third parties.

Sum Insured

In Product Liability Policy, the sum insured is referred to as Limit of Indemnity. This limit is fixed per accident and per policy period which is called Any One Accident (AOA) limit and Any One Year (AOY) limit respectively. The ratio of AOA limit to AOY limit can be chosen from the yearly limits basis.

The amount it is required to pay as civil liability pursuant by the law, as compensation (capital, interest, and costs) of damage involuntarily caused to third parties as a result of product defects

Minimum Data Requirement

The following factors will affect your exposure to risk and, therefore, the cost of your premiums:

  1. Complete the questionnaire for quotation
  2. Type of insurance business (Occupancy).
  3. Sensitivity/hazards of the insured’s products.
  4. Exposure (risk size) e.g. size of business, estimated annual turnover.
  5. Market distribution channels (domestic or export sales).
  6. Policy territorial limit.
  7. Limit of liability requirement.
  8. Deductible
  9. Loss history

Claim Procedures

A products liability claim based on injuries caused by a defective consumer item can use a broad range of legal theories. Most often, these claims are brought under a theory of strict liability, but sometimes a theory of negligence may be more appropriate, depending on the state. The difference between strict liability and negligence is that strict liability does not require showing that the defendant acted carelessly, while negligence does require this element. Regardless of whether strict liability, negligence, or another theory forms the basis of the claim, a consumer usually will need to prove that one or more of three types of defects existed. These are manufacturing defects, design defects, and marketing defects, also known as failures to warn In addition to proving the existence of the defect, the consumer will need to show that the defect caused their injury. This means that they would not have been injured if the defect had not been present.

Report as soon as possible to the insurance company accompanied by taking the necessary rescue and security measures to avoid a bigger claim and complete the required documents:

 

  1. Claim Form
  2. The loss report includes a chronology of events.
  3. Laboratory results and/or expert report stating that the product is defected.
  4. Photographs depicting the following:
  • Location situation where the incident took place.
  • The condition of the affected third party’s property and/or the injured person
  1. Claim letter from the third party lodged against you along with his/her ID card.
  2. Document that evidencing the third party in the location at the time of accident.
  3. Repair’s quotation from workshop related to the damage as the result of the accident
  4. Original invoice for the medical treatment to the injury arising out from the accident.
  5. Other related documents

Note: Please do not admit any liability to the third party and make any agreement prior to the Insurer’s approval to settle the claim

 

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