Product Liability Insurance
Why It Matters
Product liability insurance protects businesses from financial loss arising from claims that a product caused bodily injury or property damage. Understanding how product liability works helps clarify who is responsible when products fail and why this coverage is critical for manufacturers, distributors, and sellers.
Understanding Product Liability Insurance: A Practical Guide
Product liability insurance addresses risks associated with designing, manufacturing, distributing, or selling products. Unlike professional liability, which focuses on advice or services, product liability focuses on physical products and the harm they may cause.
This guide explains how product liability insurance works, what types of claims it covers, and how it fits into a broader commercial insurance program.
What Is Product Liability Insurance?
Product liability insurance provides financial protection when a business is held legally responsible for bodily injury or property damage caused by a product it manufactured, sold, distributed, or supplied.
Coverage typically includes legal defense costs and settlements or judgments related to covered product-related claims.
What Problem Does Product Liability Insurance Solve?
Product liability insurance addresses the risk that products may cause harm due to:
- Design defects
- Manufacturing defects
- Inadequate warnings or instructions
- Product misuse that was reasonably foreseeable
Even a single claim involving serious injury can create substantial legal and financial exposure.
Who Typically Needs Product Liability Insurance?
Product liability insurance is relevant for:
- Manufacturers
- Wholesalers and distributors
- Retailers and e-commerce sellers
- Importers and private-label sellers
- Businesses selling physical or consumable products
Liability can extend across the entire supply chain, not just the original manufacturer.
How Does Product Liability Insurance Work?
At a high level, product liability insurance works as follows:
- A business purchases coverage, often as part of a general liability policy or standalone form.
- A product allegedly causes bodily injury or property damage.
- A claim or lawsuit is filed against one or more parties in the supply chain.
- The insurer provides legal defense.
- Covered settlements or judgments are paid, subject to policy limits and exclusions.
Multiple parties may be named in the same lawsuit.
Types of Product Liability Claims
Product liability claims generally fall into three categories:
Design Defect
Claims alleging the product was inherently unsafe due to its design.
Manufacturing Defect
Claims alleging the product deviated from its intended design during production.
Failure to Warn
Claims alleging inadequate instructions, warnings, or labeling.
Coverage applies only if the claim meets policy definitions.
Key Coverage Components
Most product liability policies include:
-
Bodily Injury Coverage
Covers physical injury caused by a product. -
Property Damage Coverage
Covers damage to property caused by a product. -
Legal Defense Costs
Covers attorney fees and litigation expenses. -
Products-Completed Operations Coverage
Applies to claims arising after the product has left the insured’s control.
Product liability coverage is often part of a general liability policy but may require enhancements.
Product Liability vs General Liability
While related, they address different risks:
-
General Liability
Covers premises and operational liability. -
Product Liability
Covers harm caused by products after sale or distribution.
Products-completed operations coverage is the key linkage point.
What Product Liability Insurance Typically Does Not Cover
Common exclusions include:
- Product recalls (unless endorsed)
- Known defects or intentional misconduct
- Contractual liability beyond policy terms
- Damage to the insured’s own product
- Professional advice related to product use
- Fines or penalties
Separate coverage may be needed for recalls or contamination.
Product Recall and Related Coverage
Some policies offer endorsements for:
- Product recall expenses
- Crisis management and brand rehabilitation
- Contamination or tampering events
These coverages are distinct from core product liability insurance.
What Affects the Cost of Product Liability Insurance?
Premiums are influenced by:
- Type of product sold
- Manufacturing and quality control processes
- Distribution volume and geography
- Claims history
- Safety testing and certifications
- Coverage limits and deductibles
Products with higher injury potential generally cost more to insure.
Risk Management and Quality Control
Insurers may evaluate:
- Product testing and certification
- Supplier and vendor controls
- Warning labels and instructions
- Recall plans and traceability
- Compliance with safety regulations
Strong controls can reduce both risk and premium cost.
Smart Questions to Ask an Agent or Broker
When evaluating product liability insurance, consider asking:
- Are all products and SKUs explicitly covered?
- Does coverage apply worldwide?
- Are products-completed operations limits adequate?
- Is recall coverage included or separate?
- How are private-label or imported products treated?
These questions help prevent coverage gaps across the supply chain.
When Product Liability Insurance Makes Sense — and When It Might Not
Product liability insurance makes sense if:
- You sell or distribute physical products
- Products could cause bodily injury or property damage
- You operate in regulated or consumer-facing markets
It may be unnecessary only if:
- Your business provides services only
- No physical products are sold or supplied
For product-based businesses, product liability coverage is essential.
Cheat Sheet
| Feature | Product Liability Insurance |
|---|---|
| Coverage Focus | Product-caused injury or damage |
| Covered Parties | Manufacturers, sellers, distributors |
| Policy Basis | Occurrence-based |
| Covers Product Defects | Yes |
| Covers Product Recall | No (separate) |
| Typical Users | Product-based businesses |
Key Takeaway
Product liability insurance protects businesses from claims arising out of product-related injury or damage across the supply chain. Understanding defect types, coverage scope, and exclusions is essential to ensuring protection matches the real risks associated with selling physical products.