Is Product Liability Covered Under Insurance?

Personal Injury Law

Product liability insurance is a crucial form of coverage for businesses involved in the production, distribution, or sale of products. It helps protect these parties from financial losses in case a defective product causes harm, injury, or damage to a consumer or their property. The insurance typically covers legal fees, settlements, and judgments, ensuring that businesses do not bear the full financial burden of product liability claims.

Types of Insurance That Cover Product Liability:

General Liability Insurance:

Overview: Many businesses, especially small and medium-sized enterprises (SMEs), purchase general liability insurance, which often includes coverage for product liability. This type of insurance protects against claims of bodily injury or property damage caused by products that a company manufactures, distributes, or sells.
Coverage: It typically covers costs associated with legal defense, settlements, and any damages awarded to the injured party. However, it may not cover certain types of product defects, such as those caused by manufacturing errors or faulty materials, depending on the specific policy.

Product Liability Insurance:

Specific Coverage: This is a specialized insurance designed to protect businesses specifically against claims arising from defective products. It covers claims for bodily injury, property damage, or financial losses caused by defects in the products sold.
Who Needs It: Manufacturers, wholesalers, distributors, and retailers are all potential buyers of product liability insurance, as they are at risk of being held responsible for a defective product.

Professional Liability Insurance:

Coverage Scope: While primarily aimed at service-based businesses (like consultants or healthcare providers), professional liability insurance may cover claims that arise from professional advice or services provided in connection with a product. For example, an engineer who designs a product with a defect may need this type of coverage.
Product Defects: In some cases, this insurance may also cover errors in the design, testing, or advice related to a product, even if the company isn’t directly manufacturing or selling it.

Recall Insurance:

Product Recalls: In situations where a defective product needs to be recalled, companies may face substantial costs, including shipping, destruction of the product, and notifying affected consumers. Recall insurance covers these expenses and can help mitigate financial losses associated with recalling defective products.
Scope: This insurance may cover the costs of both voluntary and mandatory recalls, ensuring that businesses can manage the financial burden of taking defective products off the market.

Excess Liability Insurance:

Supplementary Coverage: For businesses with significant exposure to product liability claims, excess liability insurance can provide additional coverage beyond the limits of general or product liability policies. This type of insurance acts as an additional layer of protection if a claim exceeds the primary policy’s coverage limits.

How Does Product Liability Insurance Protect Businesses?

Legal Defense and Settlements:

If a company faces a product liability lawsuit, product liability insurance can help cover the legal defense costs, including attorney fees and court costs. In addition, if the case results in a settlement or judgment, the insurance may cover the compensation awarded to the injured party.

Financial Protection:

Damages: Product liability insurance can cover damages resulting from the injury, including medical bills, lost wages, pain and suffering, and property damage. This helps businesses avoid major financial strain, especially in cases of significant injury or damage caused by defective products.
Recall Costs: In cases where a product recall is necessary, the insurance can cover the direct costs of recalling the product, which might include shipping costs, disposal fees, and customer notifications.

Settling Claims Out of Court:

Having insurance coverage can encourage companies to settle claims out of court, rather than face lengthy and expensive trials. Insurance companies often work with businesses to negotiate settlements that are fair and minimize legal costs.

Global and Local Coverage:

For businesses operating internationally, product liability insurance may cover claims in different countries where the products are sold. This is important for global companies that may face product liability lawsuits in jurisdictions with different legal standards or regulations.

Example:

A manufacturer of kitchen appliances produces a defective blender that causes a serious injury to a consumer. The consumer sues the manufacturer for damages.

General Liability Insurance:

The manufacturer’s general liability insurance includes product liability coverage, which helps cover the legal defense costs and any compensation awarded to the injured consumer.

Recall Insurance:

After the lawsuit, it is discovered that the blender has a widespread defect. The manufacturer’s recall insurance covers the costs of recalling the defective blenders from the market.

Final Outcome:

With the insurance coverage, the manufacturer is able to manage the legal expenses, compensation, and recall costs without facing significant financial hardship.

Limitations of Product Liability Insurance:

Exclusions:

Product liability insurance may have certain exclusions, such as intentional harm, fraudulent activities, or claims arising from product modifications made after the product leaves the manufacturer’s control.

Policy Limits:

Every insurance policy has a coverage limit. If a claim exceeds this limit, the business may be responsible for covering the excess out of pocket. Businesses should ensure their coverage limits are adequate based on the potential risks associated with their products.

Ongoing Product Issues:

In cases where a product defect is ongoing or systemic, insurance may not cover repeated claims or continuous issues if the business has failed to take corrective actions or has been grossly negligent.