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What is Product Liability Insurance for Small Business?

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By Next Insurance Staff
Jul 28, 2019 min read

You’ve developed an awesome product and are about to launch it into the market. You’ve worked hard on the perfect design, manufacturing, marketing and so much more. You’re ready for the perfect launch and for your product to go viral in the open market. Before that, it’s important to make sure that you have appropriate insurance in place to protect yourself.

Many small businesses make the terrible mistake of not purchasing the correct insurance when starting. Why? It can feel expensive and often unnecessary. After all, you know that your product is great and of the highest-quality, so why should you have any problems? 

Having the proper insurance is critical when running a small business. It protects you, and your business, from potentially devastating lawsuits. In this post, we will discuss product liability insurance and why it is so important. Read on for more information. 

What is Product Liability Insurance? 

First, let’s discuss what liability is. Liability means that you are responsible for damages in the eyes of a third party. If damage occurs due to your product or business, you may be liable and have to pay damages, go to court and more. 

Product liability insurance for small business is essential for any business selling a product. It doesn’t matter if you earn $1000 or $500,000 dollars per year, you are at risk if a product you make or sell is in the hands of others. Product liability insurance aims to protect you against lawsuits claiming that your product caused damage to an individual, company, structure and more.

If a customer purchases one of your products and it causes bodily or property damage, you can be held responsible. There are various reasons that products can cause damage. The top three are design defect, manufacturing defect or marketing defect.

Even if you did nothing wrong, you can still find yourself in the middle of a product lawsuit. These lawsuits have the potential to destroy your business and your personal finances. This is why it is critical for every small business to have a good product liability insurance policy. 

Who Needs Product Liability Insurance? 

Everyone who creates or sells a product. 

You might think that your product is “low-risk” and no one will get hurt from it. The truth is that everyone can find themselves wrapped up in a product liability lawsuit. These lawsuits can be both time consuming and expensive. If you find yourself in this situation, you will regret not having purchased the appropriate insurance.

Here are some businesses that should make sure to have product liability insurance coverage:

  • Clothing stores (online and storefronts)
  • Bakeries/food shops
  • Restaurants
  • Coffee shops
  • Restaurants
  • Print shops
  • Pet supplies shops
  • Wholesalers
  • Online retailers (Etsy, eBay, etc.)
  • Equipment suppliers
  • Software manufacturers and distributors
  • Website designers

Keep in mind that no matter where you fall on the product supply chain, you need product liability insurance. Even if you’re not manufacturing the product yourself, you may be responsible if something goes wrong.

What other types of insurance do I need?

Product liability insurance is only one type of insurance that you need to have as a small business owner. Depending on your business, there are other types of insurance which may be necessary as well:

  • General liability insurance - This type of insurance covers your business in the event of accidents to people while you’re performing your work. This can include physical or property damage, copyright infringement, fire damage and more. 
  • Public and product liability insurance - These two types of insurance often go together. Public liability insurance protects you against claims made against your business. This includes property or personal injury and also legal costs.
  • Professional liability insurance - This insurance protects you from customers who claim your work caused them damage (financially, emotionally, physically and more). 
  • Property insurance - This insurance protects your property, equipment, tools and technology if they need repairs or to be replaced. 
  • Equipment breakdown insurance - This insurance covers specific situations in which your regular property insurance won’t cover equipment damage (such as electrical or mechanical damage). 
  • Commercial auto insurance - If you use your vehicle for work purposes, you may need to have commercial auto insurance. 
  • Worker’s compensation - This insurance will cover your business if employees are injured while working.

What Does Product Liability Insurance Cover?

If a customer wants to file a lawsuit against you, he/she will have to prove that the product in question caused them harm. This damage can be due to the design, manufacturing or distribution of the product in question. 

As mentioned before, product liability insurance covers three main categories of defects:

  • Design defects - The product was originally designed incorrectly.
  • Manufacturing defects - The product was manufactured incorrectly, causing damage to the customer. 
  • Marketing defects - The product was marketed incorrectly. For example, not including sufficient warnings or not providing correct instructions for use. 

Depending on the type of product and lawsuit, sometimes the customer may only have to prove that the product was faulty to win. This means that even if you did everything possible to prevent problems, you can be held liable. 

This is exactly why product liability insurance for small business is so important. 

How Much Is Product Liability Insurance?

In certain cases, product liability insurance may be part of your general liability insurance policy (which on average costs approximately $500-600 per year). 

If you want to calculate the price of product liability insurance by itself, the typical calculation is $0.25 for every $100 of product sales in your business. This means that if you sell $100,000 in products each year, your product liability insurance will cost $250. Of course, this is only a ballpark figure and there are different considerations when determining the cost of your insurance. For example, the risk level of your product will affect insurance costs, as well as manufacturing terms and location. 

No matter what, it is important to remember that the price of a lawsuit will inevitably be much higher than that of product liability insurance.

Product Liability Insurance Explained

As we’ve explained in this post, having a product liability insurance policy for your small business is an absolute must. 

At first, product liability and other business insurance costs may seem too high for your company to handle. It is important to remember that these insurance policies exist to protect you in the case of a lawsuit, damage to an employee or other unexpected circumstances. Most small business owners never expect to find themselves in such a situation, but when they do, are grateful that they have the appropriate policies in place. 

To sum up, don’t pass on getting the appropriate business insurance policies. It’s not worth the risk. Today, there are more and more affordable options out there, and we’re here to guide you along the way. 

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By Next Insurance Staff
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