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How Does Product Liability Insurance Work?

Your customers expect to have safe and reliable products.

Failing to meet these expectations can lead to huge financial losses.

If one of your products harms a customer or stakeholder in any way, they can sue your business, leading to costly legal fees and settlements that can easily reach six figures.

While you may do everything in your power to ensure your products are safe, mishaps can still happen.

That’s why, to protect against claims and ensure the longevity of your business, you need product liability insurance.

How does Product Liability Insurance Work?

Claims Scenario: Total product recall

The company: A food manufacturer specializing in the sale and distribution of spices

The challenge: An international distributor of spices became the target of a mass recall after several of their products were contaminated with a peanut protein.

Many consumers suffered allergic reactions, which led to claims in multiple jurisdictions.

Companies that import products, including raw ingredients that are later provided to manufacturers of final products, face serious liabilities if the imported product does not meet safety standards.

In the case of peanut allergen, the company caused serious injuries and illness to their customers and didn’t include required labels, warnings and instructions due to the accidental nature of the contamination.

Product Liability Insurance in Action:

In product manufacturing, a variety of things can go wrong throughout the production and distribution process.

Product liability insurance provides protection against a variety of unforeseen circumstances.

In this example, product liability insurance responds directly to the manufacturing and labeling defect, providing coverage for claims related to consumer injury and illness.

It should be noted that not all product liability policies help organizations recoup the costs of a full-scale recall. As such, it’s important to review policy language with a qualified risk advisor.

Benefits of Product Liability Insurance

Here’s an outline of the top benefits of product liability insurance:

  • Coverage for manufacturing or production flaws – One of the key features of product liability insurance is its coverage for manufacturing or production flaws that cause unsafe defects in the product.
  • Protection against design defects – Even after product testing and trial runs, potentially dangerous defects can still appear long after production. Product liability insurance can provide coverage for design errors that make goods unsafe for use by the public.
  • Response for packaging and warning issues – In the event that you fail to provide adequate defect warnings or instructions for using the product, your company can be sued. These claims arise when products are not properly labelled or have warnings that are not explanatory enough to reduce consumer risks while using the product. Product liability insurance helps organizations prepare for and litigate these types of claims.
  • Supplemental commercial general liability (CGL) coverage – Generally, there is limited product liability protection under a CGL policy, yet it may not be enough coverage to adequately protect your business. Product liability policies work alongside CGL coverage, providing protection against losses caused by malfunctions or defects in your product.

Interested in learning more about Product Liability Insurance?

Even if you don’t physically manufacture a product, you may be at risk for litigation.

The actual manufacturer is not the only party liable for product flaws, defects and failures – retailers and wholesalers can also be found negligent.

This is because there’s a stream of commerce that a product goes through from its inception to the hands of the consumer.

If your organization had any part in that stream, and as long as the product was defective when it left your control, you can be held liable for any problems that arise.

Product liability is a complex exposure and managing your risk can be a major undertaking even if you have access to all the right resources.

To supplement your risk management strategies and address specific exposures, talk to a certified risk advisor.

Next Step.

I’m Pat O’Neill, a Food and Agribusiness Recall Protection Specialist here at O’Neill Insurance and a Certified Risk Advisor. I’d be happy to talk with you about your risk management and insurance program, and help you determine the risk exposures you face in regards to product liability.

Please call me at (330) 331-7960 or email me at ptoneill@oneillinsurance.com.

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Components of this article were adapted from Zywave. This is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.