If you're a manufacturer, a retailer or you sell physical goods then you may be exposed to 'product liability'.
In 2016 alone, over 24,000 product and public liability claims were reported in Australia1. Product liability claims can occur for a variety of reasons from spoilt food that causes sick patrons all the way through to a faulty camera that injures a customer.
Product liability insurance provides cover for people who manufacture, distribute or sell and protects you any resulting financial damages. It's often bundled with public liability cover.
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Product liability insurance protects businesses that sell products from lawsuits that claim a product has caused injury or damage.
What expenses are covered?
This type of insurance helps you pay for your defence and for any money you may end up owing as a result of damages (if any).
Product liability insurance is a close cousin of public liability insurance, which covers damages not caused by products. In fact, many policies combine the two into one, simply called "liability" insurance.
Do I need product liability insurance?
While it's not mandatory, product liability is strongly encouraged for businesses involved in the life cycle of a product. This can include parties that are directly or indirectly responsible for the damage. Here's who it could include:
- Designers, engineers and developers
- Parts suppliers
- Product manufacturers
- Importers, distributors and wholesalers
- Brands who use only their name to sell products
As you can see, many people could be liable for a faulty product. That's because lawyers will try to determine who's responsible for the product failure and that blame does not always lie with the same party. For example, an electrician installing a power point in a home may not have created or imported the products used but they could still be liable for claims if they didn't install them properly.
Designers, manufacturers, parts suppliers and even installers might be responsible for damages. After all, any one of those businesses is capable of physically building fault into a product.
What about Australian businesses that only sell those products? Here are some situations where businesses such as distributors and retailers could be implicated:
- The product came from overseas. Investigators might not have jurisdiction to hold an overseas manufacturer responsible, in which case the fault can then be blamed on the importer in Australia.
- The manufacturer at fault went out of business. If you’re a distributor or wholesaler, you can be dragged in to court even if you're not at fault, if the manufacturer who was at fault is now out of business.
- You give incorrect product instructions. If you're a retailer and you give a customer incorrect instructions on how to use a product, you could be held responsible for damages if the customer uses the product incorrectly.
- You alter or damage the product, making it unsafe. Anyone in the product chain can damage the product either accidentally or by altering it in some way. This can place the liability on you if someone injures themselves as a result.
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.
Why are retailers and distributors liable for product?
As a distributor or retailer 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.
Situations where your policy won't cover product damage are called exclusions and every policy has them. Below are some common exclusions you'll find in most policies. Make sure to read the policies you are considering carefully in case there are any small differences that could have a big impact on you.
Some situations where you probably won't be covered by product liability insurance:
- The product contains asbestos
- You've signed a contract with someone that holds you liable, where otherwise you wouldn't be liable by law
- The product has faults that you knew about before you got cover
- The damage is to the faulty product itself
- The damage or injury is supposed to be covered by workers compensation
- Your faulty product keeps someone from being able to use their undamaged property
- For example, if your product malfunctions in someone’s house and damages the floor, you'll be covered for damages to the floor but not for damages related to them not being able to use the house while the floor is being fixed.
- The costs are related to you fixing a faulty product that someone returns
- You own the damaged property or the damaged property is in your care
- The cost is related to any guarantee or warranty you've offered on the product
- The cost is related to recalling an item (unless you've added the special recall cover as an add-on)
- The cost is related to the loss of electronic data
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. The differences lie in how these injuries/damages happen. Here's a simple breakdown
The damage happens because of a product you made or sold. Example: You're a bicycle shop owner and you sell someone a bike with an overinflated tyre that pops and causes them to crash.
The damage happens on your premises and is unrelated to your products or direct service offerings. Example: You're a bicycle shop owner and someone slips on some gear grease that had been spilt on the shop floor.
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?
Product liability insurance is often covered under a public liability insurance policy or bundled together. In some cases you can get standalone cover. Be sure to check with the insurer before making any assumptions.
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 for professional services.
Do I need all three?
If you have a physical location, sell products and offer services, you will most likely need all three types of insurance. The good news, is that most business insurance providers will give you the opportunity to bundle and combine these policies to suit your circumstances.
How much does product liability insurance cost?
The cost of your product liability cover depends on your unique circumstances. The insurer will work out a quote based on how likely they think they'll be on the hook for a claim related to the products you sell.
Your cost could be anywhere from a few hundred to tens of thousands of dollars per year, based on the following factors:
- What types of products you sell. Someone selling pillows is likely to pay less than someone selling hunting knives, all else being equal.
- How many products you move. The higher the volume of products you sell, the more likely someone could get injured and the higher your premiums will be. It's a numbers game.
- Where you are in the product chain. A retailer is less likely to be at fault than the manufacturer would be for a faulty item, meaning retailers would pay less as far as that goes.
- The structure of your policy. You can decrease the cost of your policy by choosing higher out-of-pocket costs (excess) and lower benefit limits, and vice versa.
- Your claims history. If you've been found to be at fault for product damages in the past, you're probably going to pay more than a similar business that hasn't.
Want to avoid a claim? Here are a few tips
As we've seen, blame for a faulty product can lie anywhere along the chain of businesses that ultimately get that product to the customer. Here are some tips that will help you avoid a claim, wherever you are in that chain:
- Think safety first. Make sure product safety is central to the company's operations.
- Don't break the law. When designing, manufacturing and selling products, make sure you follow all relevant legal guidelines related to safety.
- Give clear warnings and instructions. Place the appropriate warnings on your products (such as age limitations) and make sure the usage instructions are written clearly.
- Maintain quality control. Have a system in place that allows you to detect imperfect product units.
- Train the sales and marketing teams. These teams should be able to explain how the product works, how to use it and if it poses any safety risks. They can also serve as a field service that can detect trends, identify potential hazards and help resolve safety concerns before they blow up.
- Maintain vigilance in the supply chain. You can be responsible for faulty parts, especially if the part supplier is overseas. Make sure all parts adhere to design specifications.
- Have a legal team in place. Make sure your legal team is familiar with rules and regulations surrounding your product and what you are and aren’t responsible for regarding how customers use your product.
- Keep good records. If you've taken great care to design, manufacture and sell your products, courts and juries should respond favourably to documentation that proves this.