A guide to product liability insurance

You’ve taken the plunge and decided to pursue your passion and dream of starting your own business. What you do not want to encounter as you work hard to build up your new venture is a claim against you from a customer who has sustained an injury because of one of your products that you sold online to them. That’s where product liability insurance comes in handy.

What is product liability insurance?

Product liability insurance is a type of cover for any business, regardless of size, which sells or manufactures products. It isn’t typically available as a standalone product and is often available as part of a public liability insurance package.

Product liability insurance is important for anyone who sells physical products, even if they are a reseller, because the seller is always the first point of call for a customer if something goes wrong. In short, the seller is the party who is held responsible, and therefore liable to be the subject of a claim.

If a product you sell causes an injury to someone, or damages their property, you could be held liable, even if you didn’t make the product yourself.

What does product liability insurance cover?

Product liability insurance will respond to protect your business should a customer incur damages because of a fault with a product you have sold to them. It covers legal fees and any other costs associated with the claim. It’s important to ensure you’re covered in case the unthinkable happens and a customer is injured as a result of a faulty product that your business sold.

A compensation claim can be made against a manufacturer within three years of using the product. In some cases, this timeline can be longer. Each claim is treated on a case-by-case basis, which means some are calculated based on the severity of the case and the amount of loss involved. This point is important as you must consider the level of cover you need so you don’t leave yourself underinsured.

Why do you need product liability insurance?

There are a number of reasons why product liability cover is important because you don’t have to be a manufacturer to benefit from holding this type of cover. If you sell, import, or even repair products, you could be held liable.

You will need product liability insurance if:

• You manufacture products.
• You commission the manufacture of a product.
• Your business name appears on the product, whether you manufactured the product or are a reseller of the product.
• You are a business that repairs or repurposes products.
• You are a business that imports materials, components, or products from outside the European Union for sale in the UK.
• As a manufacturer or reseller, you have a ‘hold harmless’ agreement with any supplier which indemnifies the supplier’s liability. A ‘hold harmless’ agreement is a legal agreement between parties that states one party will not hold the other party liable for risk, danger, injury, or damages caused to the other party.
• The manufacturer has gone out of business, then you as the seller of the product could be held liable.

The manufacturer of the faulty product will hold the ultimate liability, but you as the reseller will probably be asked to present evidence that the product/s were faulty when they were supplied to you as part of any claim investigation.

Typical examples of businesses that can benefit from product liability insurance include manufacturers of tools, machinery, electrical goods etc., and artisan makers and resellers of products such as works of art, hand-made furniture, alcoholic spirits, cakes, and other foods.

Someone could make a compensation claim against you if:

You’re a talented artist who creates large pieces of artwork that can be heavy (such as glasswork or sculptures). If one were to break it could cause an injury. This scenario could be similar for someone who makes and sells hand-made furniture.

You run a cake-making business and supply your goods at makers markets and to customers for birthdays, weddings, and other celebrations. A customer accidentally chokes on a foreign object that has inadvertently become embedded in one of your cakes.

In instances such as these, your product liability insurance would cover your legal fees incurred during the claim and the compensation awards you are required to pay.

How much product liability insurance will I need?

It is your responsibility to ensure you hold enough product liability insurance. The amount of cover you need will depend on the products that you manufacture/sell/import/repair, as some products will be more prone to risk of failure and thus causing an accident than others.

For a self-employed online crafts seller, your level of cover may not need to be high to cover a faulty product. If you are a larger scale manufacturer and/or seller, then a faulty product range that’s sold on a national scale can result in compensation awards that cost millions of pounds.

Things to consider when purchasing cover include:

Potential compensation claims – Will the level of insurance be sufficient to cover a compensation claim if the product causes an injury or property damage?

Contractual obligations – Are you required to hold a specific level of cover for a contractual agreement you have with a client?

Exclusions – Ensure you know exactly what the policy excludes cover for, to ensure you have the right cover for your business and the products you sell.

Quality control – If your product liability insurance policy stipulates certain quality control measures, you will be required to stick to these to ensure you’ll be covered in case of a claim.

Sources:

Caunce O’Hara Freelance Business Combined Policy Document pdf, P29 to P35.

www.contractscounsel.com/t/us/hold-harmless-agreement

www.upcounsel.com/hold-harmless

https://www.towergateinsurance.co.uk/liability-insurance/product-liability-guide

https://www.directlineforbusiness.co.uk/small-business-insurance/product-liability-insurance