What Vendors Need to Know About Product Liability Insurance
Insurance policies are designed to protect you from dealing with the financial burdens of an accident, injury, or other claims.
As a business owner, you already probably have health, auto, life, worker’s comp — the list goes on and on and on.
What you might not have, and could need, is product liability insurance.
Product Liability Insurance, in a Nutshell
Product liability insurance minimizes your business’s financial role in a lawsuit if your product harms a consumer.
No one wants to think that their products would be responsible for another person’s pain and suffering. However, even if you produce the softest, cuddliest little stuffed bunnies, it’s possible for someone to get hurt by them.
With this type of insurance coverage, you’re ensuring two things happen if your product causes harm.
1. Your involvement and financial assets are cushioned since the lawsuit will be aimed at your insurance, not you directly.
2. You’re providing the consumer a chance at compensation for their injuries, medical bills, or other damages without paying for them yourself.
So what do you as a vendor need to know about product liability insurance?
Why Product Liability Insurance Is Sometimes Required
Anything you sell carries a risk with it. No matter how careful you are with your safety precautions, accidents can happen. There’s no “oops” clause that you can point to when the said accident causes harm to your customer or their property, though.
Personal injury claims from faulty products usually mean substantial payouts to the client. Legal defense is expensive, and if you’re stuck with paying it all out of your business’s bank account, you may end up bankrupt.
When Is Product Liability Insurance a Requirement?
The chain of distribution includes manufacture, design, and marketing.
In product liability lawsuits, the claimant can legally sue all businesses that are part of this chain.
Legally, no one is required to carry product liability insurance. Yet, you may find some big-box retailers refuse to work with vendors, especially small businesses, that don’t have an active policy.
Should your product be the defective area in the supply chain, the damage doesn’t impact only your business.
Let’s look at an example of a plausible liability lawsuit.
A Supply Chain Lawsuit Story
A major soda company sells its product all over the world. Millions of restaurants rely on this company for their beverage supply. That soda company uses your sugar to create its product.
Unknown to you, one of your sugarcane harvests was tainted with chemicals that affected the sugar. The immediate result was a batch of the soda company’s product that tasted inferior.
Customer complaints poured in. Worse, though, was the class-action lawsuit they received claiming that their product caused physical damage to thousands of consumers.
Although it was your business’s sugarcane that caused the problem, the soda company’s reputation was just hit hard.
Do you have the product liability insurance to cover the consumers’ damages and the company’s monetary loss?
The story may seem extreme for where your business currently is and what it offers. But the plausibility of it happening is something all big-box retailers will consider.
If your business can’t afford to pay for compensatory damages, you’ll need to invest in an insurance policy that can.
Otherwise, those major corporations won’t work with you.
General Liability vs. Product Liability
Many new businesses (and some established ones that are reevaluating their insurance needs) assume that their general liability insurance policy is enough.
There’s a big difference between what general liability covers and what you’d need product liability for.
Understanding General Liability Insurance
General liability is what kicks in to cover claims that happen during operating hours. Bodily injury claims from a customer, like slips and falls, or property damage to their homes or businesses caused by your employee, would fall under general liability insurance.
It also covers your business if your reputation is on the line. Should you end up in a lawsuit because someone accuses you (or an employee) of libel, your general liability policy protects you from financial damage. It also covers your legal defense as you fight the lawsuit.
The last thing general liability insurance coverage takes care of is any injury caused by advertising. This would include copyright infringement or an accusation of a stolen idea.
But general liability insurance does not cover any work-related damage sustained by an employee on the job. That’s workers’ compensation.
It doesn’t handle your business’s property damage. You’ll need comprehensive business insurance for that.
And it doesn’t cover mistakes made in the course of your professional services, including product defects or faulty services. That insurance is professional liability coverage.
Product Liability Coverage Equals Added Protection
Almost every business will carry general liability insurance. In many cases, it’s required to lease office space in a multi-use building to protect the owner from being held liable in an accident.
What product liability insurance covers that general liability does not, though, is the part that gets pricey.
Think about it. If you didn’t have general liability coverage and someone got hurt in your business, you’d be responsible for their damages. The average slip and fall payout is between $10,000 and $45,000. Yeah — it’s a hefty amount.
But the average payout for a product liability claim is about $1.5 million.
Do you want to have to pay those damages, plus legal expenses?
It’s no wonder that major retailers have strict liability policies. Many will ask vendors to have product liability coverage if they want to work closely with the big company’s name.
How Product Liability Insurance Can Protect You
As a business owner, you can be liable for any injury, illness, or property damage resulting from the products or services you provide.
Typically, if your business is part of the supply chain, you have a legal responsibility for how your goods or service caused harm. This chain includes everyone from the retailer to the distributor and in between.
Unless you are personally responsible for every facet of the product or service you provide, you can’t control what gets released.
Faulty products can be a result of design defects, manufacturing flaws, or defective instructions. They can also happen because of insufficient warnings that seem like common sense. If they weren’t there and someone sustains an injury, “common sense” isn’t a defense.
Financial Impacts of a Product Liability Lawsuit
Wholesalers, in general, take on liability risks when they supply retailers with their goods. Part of that risk management is ensuring everyone in the supply chain has adequate product liability insurance coverage.
Without liability insurance, you are responsible if someone claims that your product was a hazard of any kind. In the meantime, this can impact your finances by delaying your payment for the supplies — even if it’s not your fault.
Whether you have insurance or not, you need a backup plan in place.
Possible Financial Hold-Ups From a Product Liability Investigation
Consider this very common financial result of a product liability investigation. As a small to medium business, you rely on your clients to pay their invoices in a timely manner.
If your contract with a big company is tied up pending the results of a lawsuit, your business needs the other invoices to cover working capital.
What’s your backup plan?
In another scenario, the purchaser may have requested product liability insurance as part of the condition. You, as the vendor, didn’t have it, but the sale went through anyway.
The purchaser’s company had an audit and found out that you were non-compliant, and your invoices are on hold during the investigation. You were relying on these invoices to cover your overhead next month.
Where will you get that working capital?
You could take out a loan, but then you’ve put yourself in an even bigger financial hole. And if you didn’t have product liability insurance, you need the funds for your outstanding invoices to cover the expenses of fixing the damaged product.
You don’t need more debt.
If you’ve already partnered with an accelerated invoicing company, like Now, the answer is obvious. While the long-term consequences are dealt with through insurance companies and lawyers, businesses still have to deal with the short-term effects.
While the investigation runs its course, Now kicks in and covers your invoice. You can continue business as usual.
Statistics on Product Liability Lawsuits
So why is product liability insurance such a big deal?
As we touched on earlier, these kinds of lawsuits tend to be the most expensive categories in the legal world.
Although they’re common, you don’t hear a lot about product liability lawsuits unless they’re major companies.
Major Product Liability Suits in the News
Defective product lawsuits from mega-companies tend to be headline news, even if they’re not from manufacturing defects.
Case in point, the never-forgotten, often referenced lawsuit between McDonald’s and the lady who spilled her coffee. Stella Liebeck, a 79-year-old woman, was awarded almost $3 million in punitive damages after her takeout coffee caused her severe burns.
More recently, Johnson & Johnson’s decades-old talcum powder, used on babies and adults, was in the courtrooms. A class-action lawsuit claimed that the talcum in the product caused cancer in thousands of women.
The company removed the product from the shelves in 2020. However, they still ended up paying billions of dollars in compensation and legal costs.
Most of these settle out of court, but that doesn’t mean the claimant doesn’t walk away with a large settlement.
Yet, the average cost of product liability insurance coverage is around $1,200 per year for small business owners.
How to Choose a Product Liability Insurance Carrier
With a lot of things in life, we go for what’s cheapest.
This is not the philosophy to use when you choose a product liability insurance company.
The question, “How much does product liability insurance cost?” doesn’t have a simple answer.
Your rate will vary based on things like:
- The insurer you choose
- Your deductible
- Your claims history
- The exclusions in the product liability insurance policy
- Your business’s annual revenue
Another factor that plays a massive role in your policy’s rates is the product safety of what you offer. The insurance industry will weigh the risk of customer lawsuits because of your products or services and offer you a product liability insurance quote based on those risks.
For example, a manufacturer who sells firearm ammunition is generally a higher risk than a clothing retailer. The ammunition business will therefore have a more expensive policy.
Finding a Reputable Insurance Carrier
Look at reviews by AM Best and Standard & Poor to find the most reputable insurers.
Price isn’t the selling point with insurance that could be this essential. Instead, look for the company’s financial strength rating and customer satisfaction rates.
Watch for exclusions that pertain to your company’s products or services.
For instance, importers are another business that could be a “high risk.” If you’re a U.S. distributor relying on foreign product liability insurance coverage, chances are, you’ll be out of luck. Most of these policies aren’t valid overseas.
If your business does anything “out of the ordinary,” make sure it’s not excluded in the fine print.
See also: 8 Common Vendor Insurance Requirements
You’ve probably heard it said that today’s world is “sue-happy.” Whether they’ve dealt with it from personal experience or from observing others, major companies know they have to protect themselves from lawsuits.
Your company is your livelihood. You may not need insurance coverage if you can afford to take the financial loss and risk of a product liability lawsuit. Yet, this choice can also prevent you from working with big-box retailers and expanding your business.
Product liability insurance isn’t “required,” but it sure is a good idea!
Don’t rely on it solely, though. Have a backup plan for the short-term effects, including an accelerated invoicing company like Now, savings, and other financial cushions.
The more proactive you are, the less damage an accident will have on your business.
See if you qualify for accelerated invoice payments, sign up for your own NowAccount!