Products Liability Insurance
If you sell products to customers, product liability insurance may protect your business against claims of injury or damage.
Most compensation claims are settled out of court. However, when cases go to a jury, Australian businesses often face steep penalties. The average jury award for personal injury claims in 2018 was $7,676,720.
Covering a compensation claim could put a small employer out of business. To avoid severe financial risks, here is what you should know about product liability insurance.
What Is Product Liability Insurance?
Product liability insurance may cover your legal expenses if a customer claims that a product that you sold, distributed, or manufactured caused an injury or property damage.
Product liability insurance is a form of business insurance that insures against liability for damages allegedly incurred by a product. It essentially offers insurance for legal claims of injury or damage due to defects or misuse.
When a product causes an injury or damage to property, the manufacturer of the product is typically liable. The customer may file a lawsuit to seek compensation for the injuries or property damage. A product liability insurance policy can cover a portion or the entirety of the compensation or legal fees.
Liability for injuries or damage applies to products manufactured domestically or imported into Australia. For example, if you import goods into the country and sell or modify them, you are considered the manufacturer of the product and liable for damages.
Product liability insurance follows the same basic practices used for other types of insurance. After you obtain a policy, you make regular payments to cover the premiums. The money collected from the premiums is used to cover legal costs when a consumer files a lawsuit.
Product liability insurance is often included with a general liability policy when purchasing public liability insurance. However, you may also find that you need additional coverage beyond your general policy, depending on your industry and the potential risk of injury, death, or property damage.
Legal Requirements for Product Liability
Businesses are not legally required to obtain product liability insurance. It is an optional insurance product for businesses that want to shield themselves against the high cost of compensation claims.
Under the Australian Consumer Law (ACL), consumers have the right to seek compensation from a manufacturer that supplies a product with safety defects if the product causes loss or damage. The law defines loss or damage as:
- Injuries to the person making the claim
- Injuries or death to another individual
- Economic loss caused by damage
Economic loss covers damages to buildings, fixtures, land, or other goods. For example, if a product damages a piece of furniture, the customer may file a compensation claim to seek damages to replace the item.
Manufacturers may attempt to settle with the customer out of court. If the case proceeds to court and the customer succeeds in their claim, the court decides on the amount of compensation due.
Compared to other liability claims, the average compensation for product liability claims is quite steep. The average compensation across all categories of compensation claims is about $1.6 million. Product liability compensation averages over $7.6 million.
Product liability insurance is a common risk management strategy for dealing with the risk of compensation claims. With a product liability policy, the insurer defends the policyholder against applicable lawsuits. The cost of settling a claim or covering a jury award is paid based on the terms of the policy. Without insurance, the business is left to cover any costs related to a compensation claim.
What Is Covered Under Product Liability?
Product liability insurance covers legal fees related to consumer compensation claims. This may include lawyer fees, settlements, or jury awards. The insurer often attempts to settle out of court.
The cost of settling a claim is reported on the insurer’s financial records as expenses incurred. Along with the settlement, the expenses incurred may include the cost of defense, litigation, and medical costs.
The courts do not place a limit on the amount of a jury award or settlement. The amount of the claim is based on the severity of the injury or damages and the scope of the problem.
For example, if a product contains a defect that may cause property damage, multiple customers may experience losses. A consumer protection agency may bring a lawsuit involving more than one consumer. In these situations, the settlement or jury award may need to compensate losses for every consumer who suffered due to the product defect.
The amount covered depends on the policy. As with other types of insurance, business owners may choose the amount of coverage that they want, which impacts the premiums for the policy.
Product liability insurance only covers claims related to faulty or defective products that you supplied. It does not cover claims related to damages or losses caused by your business when providing services.
For example, if you provide a service to local customers and a worker leaves the equipment on the floor that causes a customer to slip and fall, product liability insurance will not cover the compensation claim. Insuring against claims related to services provided by a business requires public liability insurance.
Types of Businesses That Need Product Liability Insurance
The food and beverage industries often use product liability insurance to avoid claims of illness caused by their products. Furniture makers also frequently purchase liability insurance. However, any business that sells products in Australia should consider whether product liability insurance is necessary.
The ACL allows consumers to file complaints against manufacturers of defective products. Under the ACL, a manufacturer is any business that supplies goods in trade or commerce. This may include companies that:
- Make or assemble consumer goods
- Import goods from overseas for domestic sales
- Add a brand name to goods produced by other manufacturers
- Promote themselves as the manufacturer of a product
You do not need to physically produce a product to be liable for its defects. If you import a product and sell it in Australia, you are liable for any losses or damages caused by a defect.
You are liable for products that you sell using materials or components from a supplier that is no longer in business or licenses you brand name for use on other products. Repairing or repurposing products also make you liable for faults.
If your product has the potential to cause injury or damages due to defects or misuse, insurance can provide peace of mind and financial protection. However, many businesses do not need product liability cover.
Companies that provide consulting services or online services do not need product liability insurance. Examples include law firms, business-to-business (B2B) service providers, and training organizations.
Retailers may need product liability insurance, depending on the types of products that they sell. For example, a retailer that repairs, alters, or services existing products may be liable for defects that occur after the transaction. Retailers that rebrand existing products are also considered the manufacturer of the product for liability purposes.
Manufacturers and retailers have a duty of care when selling goods. Under Australian safety laws, you have the responsibility to show a level of care for keeping consumers safe and informed of any potential risks.
Common steps that businesses take as part of their duty of care include:
- Adding instructions for proper use of the product
- Adding warnings of potential risks and hazards
- Actively monitoring safety risks and product defects
- Addressing any safety concerns uncovered
Taking these steps may demonstrate a reasonable level of safety. However, product defects can occur even when following best practices and legal requirements, which is one of the reasons for obtaining product liability insurance.
What Am I Insuring Against?
Product liability insurance insures against legal claims filed by customers after a product allegedly causes injuries or damages. Obtaining liability insurance is a form of risk management. You are protecting against the risk of incurring large legal fees due to faults in a product.
Potential faults may include design defects, manufacturing flaws, or inadequate instructions or warnings. Defects include issues that occur due to the design of the product, such as a car that is prone to tipping over due to its top-heavy design. Manufacturing flaws occur during the production of consumer goods. For example, a screw or bolt may be loose or weakened.
Manufacturers may also be sued for inadequate instructions or warnings, such as a chemical that does not include warnings about using it in a ventilated area.
Customers may file claims for injury or damages due to product defects, but the Australian Consumer Law (ACL) does not cover all types of claims. A customer cannot file a claim related to:
- Damages to commercial property
- Losses from international agreements
- Losses for claims due to workers’ compensation
- Losses arising from a business relationship
Customers also have a time limit for filing claims. They must bring an action within three years of becoming aware of the loss or defect. The claim must also be presented within 10 years of the date that the manufacturer supplied the product.
The product involved in the claim must have a safety defect that does not meet the level of safety that the public generally expects. The court and jury help determine the level of expected safety and whether the defect meets the criteria for negligence.
Some of the factors that the courts consider include:
- Product packaging
- The marketed purpose of the product
- Instructions and warnings included with the product
- Reasonable safety expectations for comparable products in the same industry
Along with these considerations, the courts consider the age of the product. Older products have different expected levels of safety compared to products that were recently produced.
For example, a safety defect may not have existed when the product was initially supplied. Manufacturers may also have had insufficient technical or scientific knowledge to prevent the defect. Products that were components of other products may also not be liable for compensation claims.
If the injury or damages meet the criteria for a liability claim under the ACL, customers can take the manufacturer to court. They may also file a complaint with a consumer protection agency.
After a claim is filed, a product liability insurance policy event is triggered. The insurer handles the defense of the manufacturer. With a product liability policy, you insure against the costs associated with your legal defense and any subsequent settlement or award up to the amount of your cover.
How Much Cover Is Needed?
Many insurers have a minimum and maximum cover amount for liability policies, which may range from a minimum of $100,000 to a maximum of $20,000,000 or more. The amount of cover needed depends on a variety of factors, including the potential for serious injury or damages and the size of the market. Some products may also possess more of a risk compared to others.
A common starting point for estimating suitable cover for your policy is to review product liability claims for related products. This may give you a good idea of a potential settlement amount or jury award.
You should also consider contractual obligations. Contracts with vendors, suppliers, or retailers may require you to maintain a minimum level of product liability cover.
The cost of the insurance is typically based on the amount of the policy and the risk category of your products. For example, a custom-motorcycle builder will likely pay more for liability insurance compared to a spice distributor.
Along with the cover amount, pay attention to exclusions. Exclusions provide insurers with reasons to deny claims, forcing you to cover legal costs after a successful consumer complaint. Common exclusions include:
- Quality control exclusion
- Material exclusions
- Reporting exclusion
- Efficacy exclusion
- Product recalls
The quality control exclusion requires you to meet specific quality control standards. If you fail to meet these standards, your insurance claim will be denied.
Material exclusions exclude specific materials. If your products contain excluded materials, the policy will not cover consumer complaints. Failing to report details related to your manufacturing processes may also exclude coverage. The efficacy exclusion denies claims when a product fails to perform its main role.
Many of these exclusions are standard for the insurance industry. Almost all product liability insurance policies also include exclusions for product recalls. If you recall a product, the policy will not cover the costs related to the recall.
What’s the Difference Between Public Liability and Product Liability Insurance?
Public liability insurance and product liability insurance address different types of compensation claims. Public liability insurance covers public services and product liability covers products.
Product liability describes liability for the products that you provide to third parties. This includes consumer goods, buildings, fixtures, and materials.
Public liability describes liability to the public, which includes any third party to your organization. With public liability insurance, you receive coverage for claims related to injuries or property damage that occur while performing a job or service. Product liability is used for injuries or damages that occur after you distribute, supply, or manufacture a product.
For example, a store is publicly liable for slip and fall accidents that occur on its premises. A worker who damages a client’s property is publicly liable for the damage. An electrician may leave a cable lying across the floor, creating a tripping hazard. If the client trips over the cable and becomes injured, they may sue the electrician. Depending on the details of the policy and the incident, public liability insurance would cover the legal costs of the lawsuit.
Many businesses require both public and product liability insurance, as work completed by a business becomes a product after it is handed over.
For example, if an electrician installs a new light fixture and an electrical fire occurs, the electrician is typically liable for damages. However, the type of insurance needed depends on when the electrical fire occurs and the cause of the fire.
If the fire occurs while the electrician is performing the job, public liability insurance is needed. If the fire occurs after the job is completed, the electrician may need product liability insurance.
Construction is another industry where employers may require both types of insurance. If a beam were to fall and hit the property owner during construction, the contractor would require public liability insurance. If a beam were to fall and hit the property owner after construction is completed, it becomes a product liability issue.
Due to the need for both types of insurance, public and product liability are often bundled together. They are also typically included in a general liability insurance policy. However, general liability policies may not include enough coverage to deal with a major compensation claim.
Product liability insurance covers the costs related to your liability for damages caused by a product that you manufacture, sell, or distribute. Anyone can file a compensation claim due to a faulty product. Every business that offers physical products is potentially at risk of a lawsuit.
If you sell products in Australia, you should review your product liability insurance policy. Ensure that you have enough coverage to protect your business against expensive lawsuits due to injuries or property damage caused by one of your products.