Managing Product Risk With Liability Insurance – Policy, Coverage and Cost

If your business manufactures or supplies goods, and any of those goods cause damage to someone’s property or cause somebody a personal injury, your business could be found liable. Liability means a significant compensation payout, expensive legal fees and damage to your company’s reputation – which might mean a further loss of profit later down the line. Product Liability Insurance (PLI) is designed to protect you if a customer sues you, if they sustain a personal injury or property damage resulting from a product your business designed, manufactured, supplied or sold. It can also cover companies that repair products if the repair is found liable for the fault that caused the damage. Not only will product liability insurance cover any compensation claims, but the insurer pays for legal fees and, in some cases, contributes towards loss of earnings owing to reputational damage.

Claims Covered by PLI

The burden of responsibility for a safe product usually lies with the manufacturer. However, if other parties in the supply chain are found liable for missing a safety check or for other involvement, they, too, can face costly claims. Broadly, most product liability policies cover three types of claims:

• Personal injuries caused by your faulty product
• Loss or damage to property caused by your faulty product
• Unforeseeable circumstances, e.g. product faults that your quality control system could not identify.

If you don’t manufacture the product, but you are involved in its distribution or supply, a policy should cover you if you can prove that:

• the products were faulty when they were supplied to you
• you gave customers sufficient safety instructions and misuse warnings
• you included terms with your manufacturer about returning faulty goods to them
• your supply contract with your manufacturer covers quality control and product safety
• you have good quality control processes and keep sufficient records.

Be careful not to confuse product liability insurance with product warranties or guarantees. If a product fails to perform its intended function or doesn’t arrive at the expected standard, a customer may request their money back or complain. Warranties or guarantees cover faulty products or issues related to product satisfaction. It’s only if a defective product causes harm to a person or property that product liability insurance becomes relevant.

Does Your Business Need PII Cover?

While product liability cover isn’t a legal requirement, it’s highly recommended for anybody involved in any part of the supply chain of a product. Even if you didn’t make the product, you could still be found liable: anybody involved in the supply chain of a defective product could be held accountable or asked to attend court. The following parties should seriously consider product liability insurance:

• the manufacturer or producer of a product
• any party who has their company name or branding on a product
• any person who has imported the product into an EU member state from outside the EU
• anybody who reconditions or repairs a product
• the product supplier or seller.

You should also consider product liability insurance if the manufacturer of your products is unknown. Many sellers source second-hand products to sell, in which case it can be difficult, or impossible, to identify the manufacturer. Alternatively, if the producer has gone out of business, which might be the case for vintage items, the seller should also consider product liability cover. In both these cases, liability will rest with you. Finally, if you are a seller, be wary of any ‘hold harmless’ agreements with suppliers, as such an arrangement will indemnify their liability, passing responsibility on to you. Industries such as retail and technology are particularly affected. Still, anybody who has any dealings with a product that’s being sold or given away for free ought to give it serious thought. Claims can come under many categories which affect different industries.

Malfunctions

This one applies particularly to anybody involved in an electrical product – let’s say you’re a kitchen appliance manufacturer. If one of the fridges you manufactured malfunctions and starts a fire in a customer’s home, you could be found liable. You could face enormous expense, having to cover the damage to the person’s property as well as compensation costs, sometimes paying for both your own legal fees and those of the claiming party. If you discover the malfunction is prevalent across an entire series of products that you rolled out, you would have to recall and refund the whole range and compensate thousands of customers. This is where your product liability cover can save your company potentially millions of pounds.

Missing Safeguards

This is mostly an issue for anybody manufacturing or selling dangerous machinery, such as an electric hedge trimmer, a lawnmower, an electrical drill. If your company fails to fit adequate safety design features, such as automatic shutoffs or guards, you could face a staggering compensation claim if anybody gets hurt.

Failure to Warn

If a product becomes dangerous because it doesn’t come with adequate safety warnings, this is called failure to warn, which applies to a vast array of products. It might be that missing assembly instructions cause a customer to put some furniture together incorrectly, resulting in their injury. Or if a food product fails to include a ‘consume by’ date, and the customer becomes ill, the company would also be found liable for failing to warn them correctly.

Toxic Chemicals in Products

Product liability insurance is especially crucial for anybody dealing with products containing any kind of strong chemicals. Particularly as problems can be discovered years and years after manufacture, by which point the problem may affect millions of customers. Lead in paint or asbestos in insulation are prominent examples from the last decades.

Dangerous Medications

Consuming medication comes with a high risk. Human bodies can have very different reactions to all kinds of medicine. Ingesting dangerous medical drugs can result in severe illness or even death, which will almost certainly result in a claim. A high-profile example was DES, the synthetic oestrogen, routinely prescribed from 1940 to 1971 in the belief that it would reduce the risk of pregnancy complications. Instead, it caused a high cancer risk in women who took it, and it was also linked to severe health problems for their new-borns.

Other Mistakes

While customers can sue if a product has a missing part or safety device, they can also file a lawsuit if they find something unexpected in their product. People have been known to find needles left in their clothes, which exposes a safety problem in the manufacturing process. Products can extend to food items, too. If your company bakes cakes for weddings and events, and somebody chokes on an unexpected piece of plastic in the cake, you would be liable. On top of a high compensation payout, you’d have to foot the bill for the claimant’s legal fees and medical expenses.

Extent of Coverage Required

There are several significant factors to consider when deciding how comprehensive a policy you need. Firstly, consider the type of business you own. If you’re a manufacturer, you’re certainly going to need more insurance than the distributor, as you will likely bear the brunt of any claim against a fault resulting in damage or injury. Next, consider the type of products you’re dealing with and their potential to cause harm. If you make clothes, there’s likely going to be less risk of damage or injury than if you were making an electrical appliance. You might remember the high-profile case in 2012 when Toyota had to pay out over $1 billion (around £800 million) after admitting that millions of their vehicles would accelerate dangerously of their own accord. Most packages for small and medium-sized enterprises offer a standard limit of up to £2 million of cover for product liability. You can usually choose to extend this limit if you work with higher-risk products. While this may seem a lot, the costs related to a claim for a serious injury can quickly rack up. Once you’ve factored in a hefty compensation claim, the legal fees of both parties, medical expenses and any reputational damage, you could be set back more than a couple of million. A final consideration to take into account is any contractual obligations you might have: whether any of your clients have stipulated a minimum level of product liability insurance in your contract with them. Government contracts, in particular, tend to require a minimum level of cover.

Calculating Cost and Premium Reduction

The price you pay depends mostly on the same factors as above – the type of business you are, how directly liable you are, and the type of product you make or sell. Product liability insurance can start from as little as £5 a month – but it may be worth investing more money, for more exhaustive cover.

Duty of Care

Anybody involved in producing or selling goods has a responsibility, by law, to ensure the products are safe for their intended use. To minimise the risk of any faults, defects or other mistakes, be sure to take care to do the following:

• Provide instructions on proper use
• Provide warnings of any potential risks through proper use, as well as dangers of improper use
• Take a proactive approach to monitoring and improving the safety of your product
• Retailers must take reasonable steps to know the sources of a product they sell or use, as well as their safety.

As all manufacturers, producers and retailers have a legally binding duty of care, product liability insurance is unlikely to cover you for products that cause harm if it’s not directly related to a fault. If your safety tests and product testing did not highlight a fundamental product flaw, the insurer might not pay out for related claims.

Reduce Your Premiums

If you can demonstrate to insurers that you have implemented effective product safety management, you may be able to reduce your premiums. Some of the steps you can take include:

• introducing rigorous quality management procedures
• planning product recall procedures, in case you discover a problem with a product
• showing that you have adhered to all available advice on product-specific regulations which affect your products
• investigating all safety standards relating to your product and modifying your product to adhere to them all
• if you’re a distributor, keeping meticulous records of who supplied the products you sell.

It’s also worth having a management liability insurance policy in place to further protect against some of the above instances.

Final Thoughts and FAQs

One of the biggest faux-pas of entrepreneurs, small businesses and corporate giants alike, is underinsuring their business ventures. Having the right protection in place is crucial for the longevity of any successful business. As we’ve seen, whether you’re the manufacturer, the distributor or a second-hand seller, liability for injury or property damage can fall on your shoulders. And considering you can get a product liability insurance policy for less than £100 a year, it seems a small price to pay when faced with a three-million-pound lawsuit. Still have questions? Find answers to the most common questions surrounding product liability insurance here.

• Is Product Liability Insurance a Legal Requirement in the UK? – Legally, businesses do not need to have public liability insurance. That said, many manufacturers, suppliers, distributors and retailers may refuse to work with you without product liability insurance in place. It’s important to remember that there is no upper limit to compensation payouts. If you are taken to court and found liable for injury or damage without product liability cover, you’ll have to fork out all the costs from your business, which can quickly run into the millions.
• What Other Cover Does a Small Business Need? – On top of product liability insurance, small businesses should consider public liability insurance, which covers your business against claims made by members of the public for injury or property damage resulting on your premises or because of work carried out at their property or in public. Business owners are also legally obliged to have employers’ liability insurance if they have any employees. Other protection to consider includes cover for business interruption, professional indemnity and business contents insurance, particularly relevant for shop owners, officers or pubs and hotels. You should also consider stock insurance if your business carries a significant amount of stock on premises.