Is your business exposed to risks from faulty products? Protect your business with product liability insurance.
Product liability insurance provides cover for manufacturers and businesses related to the products they manufacture or sell. If your product causes loss or injury to a buyer or user, product liability insurance can protect you from the resulting financial damages. Product liability insurance is often bundled with public liability cover.
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If you’re selling manufactured goods, you can take out Product liability insurance for satisfaction that you’re covered for the legal minefield created when a product connected to your business causes the following:
- Personal or property damage, or injury and loss of any kind due to the use of your product.
- Your business has neglected its responsibilities or duty. This is known as an omission.
Product liability insurance is often linked with public liability cover, and ensures in the event of a claim, the business isn’t impacted by legal costs and payouts.
Your limit of indemnity is the maximum amount your insurer will pay out for any one claim. This is usually for a single policy over a one year timeframe. This amount is stated on a ‘schedule’ (an outline of your policy, and how much you’re covered for). It’s important to note that under this clause, your claim cannot exceed the Limit of Indemnity. You’re also covered for any supplementary payments, like legal costs you and your health provider may incur.
Do I need product liability insurance?
While product liability insurance is not mandatory, it is crucial to consider for any business that either designs, manufactures or supplies physical products for sale or distribution.
Do I need product liability insurance if I'm not the manufacturer?
Many business owners make the mistake of thinking that just because they do not manufacture the actual product, that they are not liable for claims against default products. But “manufacturer” can encompass a range of different business that deal with products. This includes organisations that:
- Make or put the actual product together
- Import and distribute the product if the manufacturer is not based within Australia
- Represent the product through the use of their brand name
- Permit other parties to promote the product as having been produced by that company
- Sell the product
As an example, an electrician installing a power point in a home may not have created or imported the materials required but they are still liable for claims in the event that their work turns out to be faulty.
Do distributors need product liability insurance?
As a distributor you could be sued for a manufacturer’s product. Here are the circumstances where distributors can be hit with claims for compensation.
- Strict Liability. Even though a distributor may have had no part in the design or manufacturing the product, the law may still impose liability on distributors. Here members in the distribution chain all benefit from the sale of the product, so each member should share the liability burden.
- Negligence. A court can find a product defect originates with the distributor’s own negligence. Here the distributor will not be able to seek indemnification from the manufacturer.
- Advice on Product Use. Distributors may also be liable for any statements they, or their sales team make about the product, and must be consistent with the manufacturer.
- Faulty Installation. Distributors that participate in the installation of the product may also incur direct liability if that installation is alleged to contribute to any harm to a patient or user of the product or device.
- Foreign Manufacturers. As outsourcing has become more widespread, the jurisdictional limits becomes increasingly problematic for distributors. This is because foreign manufacturers may be beyond the reach of Australian courts.
- Joint and Several Liability. This is aimed at providing full compensation for tort plaintiffs, when there is more than one business or operation at fault. Here each co-defendant is liable for the entire amount of the award, regardless of their proportional fault.
- Mistaken Identity. When a products liability claim arises due to a defect in a prosthetic, the patient and/or hospital will likely first file suit against the distributor. It then becomes the responsibility of the distributor to identify the manufacturer of the defective prosthesis and bring the relevant party into the suit.
Do I need my own product liability cover if my manufacturer has their own insurance?
Even if you sell a product manufactured by another company, and that company has their own product liability policy, you may still want to take out your own cover. Here are some scenarios to consider.
- Inadequacy of Limits. This is where companies share insurance coverage through a group policy. This is a single insurance policy for multiple businesses or distributors. Purchasing a policy as a group eases the cost of insurance but means you’re covered as a collective. This can be costly because you share the financial burden of your manufacturers fault.
- Additional Insured Status. Most manufacturers’ insurance policies provide coverage to parties contractually involved, but this blanket endorsement doesn’t give distributors any right to be informed about a change or lapse in the policy. This can leave them vulnerable to catastrophic losses if a claim arises.
- Manufacturer is Without Coverage. This is where a distributor believes it is covered under the manufacturer’s policy, but it’s not.
What isn't covered by product liability insurance?
There are areas where your business won’t be covered. These are known as exclusions. Here’s a list of what your business can’t be covered for:
- Asbestos. Product Liability insurance won’t cover you for any consequence involving asbestos, or any manufactured material containing the chemical.
- Assault and battery. You won’t be covered if you are directly or indirectly associated with connection to an assault or battery.
- Contractual Liability. You won't be covered if you’re unable to provide a contract agreement relating to warranty or quality of products, or any incidental contracts.
- Defamation, Libel and Slander. You won’t be covered if you are found to have lied about your product prior to taking out your insurance.
- Defects in design. Any fault with the design of a product that existed prior to the start of your policy will leave you without cover.
- Employers liability. You are not covered for any personal injury to your workers if you fail to take out some form of workplace cover.
- Erections, alterations and additions. You’re not covered for changes outside the specified design of your product, but this won’t apply for alterations or additions to buildings owned or occupied by you where the cost exceeds $500,000.
- Faulty workmanship. The policy won’t cover you for any cost to correct or improve your product following a purchase.
- Hazardous activities. There is no cover If you use explosives, are involved in bridge construction or maintenance work, building work over 10 metres in height, work in underground mines, offshore platforms, chemical plants and power stations.
- Loss of use. This relates to the loss of tangible property, which arises following delays with contract agreements or your product fails to perform properly.
- Pollution. This refers to any pollutants that damages land or water. You won’t be covered for any loss of income or the cost of the waste clean up.
- Product defect. If your product causes damage to property and is deemed to be harmful in nature, you won’t be covered by your insurer.
- Product recall. If you have to recall your product because there is a defect, you won’t be covered. This includes inspecting, repairing, reconditioning and replacing goods.
- Professional Liability. If you or anyone acting on your behalf gives advice that is wrong or fail to mention a key aspect of your product to make a sale, you will be liable.
- Smoking. Any personal injury caused by smoking tobacco or any similar ingredients in your goods will see your business void any form of cover.
- Technology, information and the internet. This exclusion refers to any documents or information that appears online, which could jeopardize your operation, or cause financial concern. As a business, you must ensure your confidential information is safe. This is solely your responsibility.
- Vehicles. You won’t be covered for any damage to a vehicle that is owned or registered by your business. This does not apply to personal injuries or property damage caused by a crash, or the loading or unloading of vehicles or trailers.
- Watercraft. Any water-bound vessel with a hull larger than 8 metres in length, which is owned or used in your operations is not covered.
How is product liability insurance different to public liability insurance?
Product liability insurance covers one facet of liability. Another key type of liability protection is public liability insurance.
Public Liability Insurance
Provides cover against injuries or losses that the public might suffer through the actions of the insured. Public liability can provide cover for property damage or personal injury sustained through negligence or faulty workmanship.
Product Liability Insurance
Covers manufacturers, wholesalers and retailers against lawsuits filed by users or bystanders in the event they incur losses, damages or injuries from the use of a product or defective product.
Both types of insurances are related to each other in the sense that they protect the manufacturers and the other people in the commerce chain against lawsuits filed by users.
Can product liability and public liability insurance be taken out together?
There are instances when a business might take product and public liability insurance together to cover against liability for personal injury, advertising liability or property damage.
While the scope of public liability is reduced in cases where the business is not operating, the product liability risk is still intact as the products are being sold through wholesalers or retailers. The coverage of the policy remains for the period of insurance and if the policy is cancelled mid-way, the business owner would be personally responsible for any claims made for personal injury, property damage or advertising injury.
What's the difference between product liability insurance and professional indemnity insurance?
While both public liability and professional indemnity insurance are designed to protect professionals and/or business owner, both types of cover have some key differences to be aware of.
Professional Indemnity Insurance
- Provides coverage for claims against business owners against alleged or actual breach of professional duty.
- Professional indemnity insurance covers the risk that is linked to professional duty when providing advice, design or a service for a fee.
- This type of cover is often taken out by a whole range of professionals including computer consultants, marketing and PR agencies, consulting engineers, architects, project managers, accountants and photographers.
Product Liability Insurance
- Provides the business owners with funds to compensate a third party that may have suffered injury or property damage arising from use of products or through an occurrence related to the insured’s business activities.
- Product liability cover does not usually recognise claims where there has been no pure financial loss sustained.
Many insurance brands offer business insurance packages that cover both professional indemnity and public/products liability cover.
As the cover and exclusions can overlap between these types of cover, it can be worth reviewing the policy with an adviser to ensure the business is not left exposed to any losses.
How much does product liability insurance cost?
The cost of product liability insurance is not fixed and depends on a number of factors. There are no exact figures to quote product liability insurance but it can be calculated as per the individual business. However, there are certain factors considered by insurers when determining an appropriate premium. These factors include:
- Type of business: The type of business being carried out has a significant impact on the premium charged. For example, the premium for a consultant working from home would be lower than for the tradesman working on a job site. In comparison to a manufacturing business, both the consultant and the tradesman would be paying a lower premium.
- Size of business: The size of business also has a significant impact on the price of cover as a company with greater revenue or a higher number of staff members would be at a higher risk than a small company with less revenue and fewer staff.
- Nature of business: The perceived risk of business also contributes towards the cost of cover. A business less susceptible to a claim arising from a client will obviously have lower premiums.
- Other factors: The location of the business and the business turnover are other factors that can affect the insurance premium for a business.
Tips for comparing product liability insurance policies
With so many different business insurance providers operating in the Australian insurance market, finding adequate cover is not always as straightforward as many would hope. There are a number of factors for anyone looking to apply for product liability insurance to consider when comparing different policy options.
- The insurer: It is worth taking the time to look into the provider offering the policy. Things to consider include:
- Financial strength (Nobody wants their insurer going bankrupt mid-claim)
- Assistance during application
- Range of insurance options available
- Flexibility to adjust cover
- Claims process
- Range of built in benefits
- Additional cover options available
- Exclusions applied
- Conditions for claims payment
- Excess payable for each benefit
These are just some of the things to consider when comparing product liability policies. It is worth speaking to a consultant to help you get a better understanding of the different components of your policy prior to application.
Want to avoid a claim? Consider the following
- Management Coordination and Control. Incorporate product safety into the company's planning, operational, and control activities.
- Design/Product Development. Design reliable products that can be used safely, and to be consistent with all legal guidelines.
- Product Warnings/Instructions. Every attempt should be made to eliminate or change all known hazards during the design phase. Warnings and instructions are vital.
- Manufacturing/Quality Control. Detect and correct products that differ from design specification.
- Sales/Marketing. Sales and advertising should be familiar with the product, its uses, and limitations when selling.
- Vendor management. Vendor management is responsible for sourcing materials and components at a competitive cost, but must ensure consistency with design specifications and requirements for delivery schedules.
- Legal. The Legal Department plays a key role in orientation and education on various legal aspects within the organisation.
- Field service. Here the sales team should maintain close contact with the customers and users of products. They have the ability to resolve concerns before a legal battle mounts.
- Record Keeping. Document history is useful to demonstrate to courts and juries, that the company has taken extreme care with its design, manufacturing and selling of a safe product.
- Post-Sale Management. Field monitoring systems help review feedback that can help detect developing trends and identify potential hazards in your design.