Product Liability

Costliness: #4

$35,000

Frequency: #7

> 5%

Understanding Product Liability

Manufactured products don’t always act the way they’re supposed to, like a faulty toaster that catches fire. Sometimes a product is contaminated before it gets to the consumer, like a can of soup that isn’t properly sterilized. Other times, there’s nothing inherently wrong with the product, but with the way it is packaged and advertised, like a high-calorie shake being marketed and labeled as a weight loss supplement.

If a product injures a customer or is labeled incorrectly, the manufacturer, the distributor, and the retailer might all be held liable for the resulting damages as well as recall costs.

Manufacturers (including food and beverage manufacturers)

Retailers

Distributors

Small Business Insurance Policies to Help Manage Product Liability

You are responsible for the safety of every product you sell or provide. These small business insurance policies may help address claims over manufacturing or production flaws, design defects, or defective warnings and instructions:

  • General Liability Insurance: General Liability may cover the cost to defend a lawsuit if a consumer is injured by your product or a product you carry. It may also help you cover the cost of recalling a product.
  • Product Liability Insurance: Product Liability can help cover lawsuits over injuries and property damage caused by your products. It is typically included in your General Liability policy.
  • Recall Insurance: This policy, typically an endorsement to General Liability Insurance, can help cover the cost to notify customers, recall a defective product, and dispose of it.
  • Include large, easy-to-read warnings on products that could be dangerous if misused.

  • Double-check your product labels for accuracy.

  • Regularly inspect and clean your manufacturing equipment.

  • Implement a system for tracking products from factory floor to store shelf.

  • Inspect retail stock for defects before putting it on the floor.

  • Check monthly for recalls and remove recalled items immediately.

  • If selling imported goods, use a US-based importer.

In many states, a customer injured by a product can benefit from the concept of “strict liability.” This means that any party in the chain of distribution, from the manufacturer to the distributor to the end retailer, can be held liable for the damages caused by the faulty product. Even if you don’t manufacture anything, be aware of what you’re selling. The good news is that Product Liability is a pretty standard coverage included in small business General Liability Insurance policies.

Attorney John O'Brien recommends that “if you have a report of some [product] defect that could cause injuries, [you should] investigate it thoroughly and take corrective action immediately.” That action should include contacting your small business insurance provider – even if you aren’t making a formal claim, keeping your insurer in the loop can help down the road.

Advocate transparency at your company. Admit any mistakes publicly and outline steps being taken to correct them.

Other corrective actions may include:

  • Issuing a statement about the product.
  • Calling retailers you know carry the product.
  • Coming up with a solution to fix the problem ASAP.

O’Brien warns not to “allow a culture of covering it up at your company,” citing the mistakes of auto maker GM, “with regard to ignition switch defects, where they ignored a known problem for years, until several people suffered severe or fatal injuries.” At that point, your behavior might be construed as criminal and you may not enjoy coverage from your small business insurance.

Above all, O’Brien says, be vigilant in seeking ways to make your product safer. State-of-the-art equipment and technology will alter the safe design of a product with time, so stay up to date and knowledgeable about your responsibilities.