Product liability insurance protects a company against claims or suits arising from the company's products, whether they were made by the company or sold by them. This form of insurance covers a manufacturer's or seller's liability for bodily injury or property damage sustained by a third party due to a product's defect or malfunction. The product may be virtually any type of good sold to businesses or the public, like machines, food, medicines, and clothing. The injured third party may be a buyer or user of the product or even a bystander.
Situations that are typically covered by Product Liability Insurance may include:
Product Liability Insurance makes sense to consider for any financially responsible business owner. When you put your products in the hands of your customers, you never know what may happen. Product Liability Insurance gives you the peace of mind that if anything were to occur, you would have a formidable safety net to fall back upon.
Some examples of small businesses that could use Product Liability Insurance are:
There are different types of claims that a dissatisfied customer may claim against your company, Some of the more common claims include:
1. Design Defect
A design defect claim alleges that a product was unsafe or dangerous from the conception of its design. This differs from a production or manufacturing flaw in that the cause for harm was not born out of faulty craftsmanship or production, but the product's inherent design was dangerous in and of itself.
For example, a customer purchases a children's book that contains some beads on one of the pages. Due to the small size of the beads, the customer's child chokes on the bead. Although a claim could be made for production or manufacturing flaw, the customer could also claim that the children's book was inherently dangerous from its design. I.e., a children's toy should not contain any small material that a child could choke on.
2. Production or Manufacturing Flaw
As its name implies, this type of claim alleges a flaw in the production or manufacturing of merchandise that created a dangerous or unsafe product. Production or manufacturing flaws are any mistakes that occur during the production of the product that creates a potential cause for bodily injury, property damage, or consequential economic loss.
For example, a customer who had purchased a pair of shoes from your business recently slipped and hurt herself due to the heel not being securely fastened to the sole of the shoe. She incurs medical costs because of her injury and has sued you for producing a shoe that was unsafe for normal wear.
Without Product Liability Insurance, your business would be solely responsible for fronting all the legal and court costs to fight this claim. Furthermore, if the customer were to win the case, depending on the outcome of the claim, your business might also be liable for the customer's legal costs and medical costs.
3. Misleading/Defective Warnings or Instructions (Marketing Defect)
A customer may seek action against your company for not supplying the necessary warnings regarding dangerous aspects of your product. The claim here is that a company did not adequately and appropriately notify the consumer of all the potential obvious risks and harm that the product may cause.
For example, your business sells homemade natural cosmetics. A customer purchases one of your ointments that contains many harsh ingredients that should not be applied to sensitive areas of the face. She puts the ointment on her eyelids and suffers severe chemical scarring. Because your company did not warn the customer or properly instruct her, a claim may be made against you for defective or misleading warnings or instructions.