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Businesses that create, manufacture, distribute and sell products should consider product liability insurance. This type of coverage protects your business from costs if a product doesn’t work properly and causes harm to a third party.

Defects in your company’s product could cause injury or property damage. Even if a product is used incorrectly by the customer, a business could be liable for any damage caused by the product.

Product liability insurance also covers legal fees, medical costs and compensatory damages brought forth in third-party lawsuits. The potentially high cost of lawsuits makes product liability insurance a vital component of a small business insurance plan.

How Much Product Liability Insurance Do You Need?

The more products that you manufacture and create, the greater the chances that one of the products could have a defect. As your risk increases, so does your need for a higher amount of product liability insurance.

If you sell a product you’re a good candidate for product liability insurance—especially with the prevalence of lawsuits these days. These types of businesses often buy product liability insurance:

  • Stores
  • Distributors
  • Manufacturers
  • Online sellers on Amazon, eBay and Etsy
  • Pet supply shops
  • Print shops
  • Restaurants
  • Wholesalers

A product liability insurance policy is also suitable for a construction and contracting business because it offers financial protection if a client decides to sue over damage caused by the finished work. For example, if a contractor puts in a custom cabinet but the doors turn out to be defective, product liability insurance could cover the cost of fixing the defect.

The types of defects covered by product liability insurance include:

  • Design defect. There was an error in the product’s design.
  • Manufacturing defect. There was a flaw in the manufacturing of the product.
  • Marketing defect. The marketing of the product had an error, such as not providing the proper instructions.

“The product liability coverage limit will vary depending on industry, location, annual revenue amount and claims history,” says Michelle Shaver, senior vice president of Chubb Small Business. “If products are more hazardous in nature or sold in a highly litigious geographic territory, it may be advisable to carry higher coverage limits.”

Bryan Smith, vice president of product management at The Hartford, says the amount of product liability insurance coverage should be commensurate with the expected liability exposures that a business will face.

“The type and amount of product, the volume of sales and the number of parties involved in the production and stream of commerce will all impact the insurance needs of a business,” Smith says.

Cost of Product Liability Insurance

The average cost of product liability insurance is $1,192 a year for small businesses, according to AdvisorSmith.

When it comes to product liability premiums, your industry makes a difference. For example:

  • Manufacturing businesses have an average premium of $1,146 per year, with a range of $736 to $1,854.
  • Wholesale businesses paid an average premium of $1,159 for general liability insurance that included product liability insurance. Premiums range from $751 to $2,431.

Product Type Affects Insurance Cost

A key factor affecting the cost of product liability insurance is the type of product being created, manufactured or sold by your business. Products differ in the chance that they’ll cause property damage or injury to someone. Insurance rates for product liability insurance reflect this wide range of risks.

Companies selling safer products, such as office supplies and stationery, have lower premiums.

Higher-risk products include furniture, electronics and bicycles. But the highest-risk products are food and beverages and products used by children. These products will have among the highest rates for product liability insurance.

How to Buy Product Liability Insurance

You can purchase product liability coverage as part of a general liability insurance policy. This basic level of product liability insurance may cover companies with low product risk.

The second option is to purchase a standalone product liability insurance policy. A standalone policy would be appropriate for a company with a high risk of product liability.

“Product liability insurance is frequently offered through a general liability insurance policy. It can also be offered as a standalone policy,” says Smith at The Hartford.

“Product liability insurance helps protect a business from claims caused by an actual or alleged defective product. The product might be manufactured by the business or sold by the business and cause bodily injury or property damage to a third party,” he says.

Product Liability Insurance for Sellers on Amazon

Small businesses selling on Amazon can purchase product liability coverage through a digital network called Amazon Insurance Accelerator.

Amazon requires its third-party sellers to buy product liability insurance after attaining $10,000 in sales in one month. The Amazon Insurance Accelerator will help U.S.-based small businesses get product liability insurance quotes from companies such as Chubb, Harborway, Hiscox, Liberty Mutual, Markel and Travelers.

Tips For Buying Product Liability Insurance

Choose the right coverage limit. “When purchasing product liability insurance, it is important to select the appropriate coverage limit as well as the suitable coverage territory—the geographic area an insurance policy will cover,” Shaver at Chubb says. “In the event of a covered claim, having the right coverage limit will determine how much the insurance company will cover and how much the small business owner will have to pay out of pocket.”

Know your coverage territory. “The policy’s coverage territory can impact whether a claim will be covered or not,” Shaver says. “If the product can be used in any location after it is made, then the small business should consider worldwide coverage.”

Location makes a difference. If a product is being manufactured or sold within a particularly litigious region, there is a greater likelihood of the company being sued, Shaver notes.

Be aware of contract requirements. “Some vendor contracts may require a small business [to] have specific coverage limits in place to cover any claims or losses for which they may be responsible,” Shaver says.

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