Running a small business is tough enough without also worrying about being liable if something goes wrong. But accidents happen, and without the proper protection, they can destroy the lifeblood of your business.
Product liability insurance protects you from financial damages if someone gets hurt using your product and decides to sue you. Even if your company is small or relatively new, it can be crucial, but it doesn’t have to be costly.
Here’s what to know about product liability insurance for small businesses and why it’s important to have as a small business owner.
What is product liability?
Product liability is a legal term. It refers to any lawsuit brought against a manufacturer or seller by a consumer which alleges that some aspect of their product was defective, harmful or caused an injury. The defect could be in:
- The design of the product
- The manufacturing during construction or production
- The marketing, such as improper instructions or missing warnings
So, can a retailer be held liable for defective products? Yes. If a consumer sues your company, you could be liable even if you did nothing wrong. Product liability is a “strict liability” offense — that is, even if you, the manufacturer or supplier, exercised great care, you could still be liable for damages regardless of your intent.
What is product liability insurance?
Product liability insurance helps protect small business owners from huge financial liabilities and penalties resulting from defective product claims.
Remember, even if you did everything right, you could still find yourself in the middle of a defective product lawsuit. Regardless of the outcome, these lawsuits can be time-consuming, costly and can potentially destroy your business.
Product liability insurance for small businesses can help. It typically covers bodily injury and property damage costs, court fees, legal defense costs and out-of-court settlements.
Who needs product liability insurance?
You might think that your product is low-risk, and no one will get hurt from it. The truth is that anyone can find themselves wrapped up in a product liability lawsuit.
Product liability insurance is commonly purchased by business owners who sell or distribute products directly to consumers. In some cases, companies that provide services also buy coverage.
Here are some businesses that should make sure to have some product liability coverage:
- Clothing stores (online and storefronts)
- Bakeries and food shops
- Coffee shops
- Print shops
- Pet supplies shops
- Online retailers (Etsy, eBay, etc.)
- Equipment suppliers
- Software manufacturers and distributors
- Website designers
Generally, the more products a company sells, distributes or produces, the greater its need for product liability coverage.
Why product liability insurance is important for small business owners
Getting insurance may not seem necessary if your company only has $2,000 in annual revenue. However, Jury Verdict Research data from Thomson Reuters shows that the median award for personal injury cases in 2019 was $95,000.
Most small business owners never expect to find themselves in such a legal predicament, but it’s better to be prepared for unexpected circumstances.
Think about this: Depending on the product type and lawsuit, the customer may only have to prove that the product was faulty to win. You can be held liable even if you did everything possible to prevent problems.
That’s why product liability insurance for small businesses is so important. Compared to the cost of an average claim, product liability premiums are a small investment for peace of mind.
What does product liability insurance cover?
Product liability insurance covers you and your business if a product causes them harm. While a customer must prove the product in question caused the damage, they can file a lawsuit against you — and the costs can add up fast.
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.
The liability can come from any point in the supply chain, from development and manufacturing to distribution and sales.
Keep in mind that product liability coverage does not include product recalls. Besides being costly, recalls can damage your company’s reputation.
You may be able to include product recall insurance or purchase it separately. It can help pay for the operational costs of a recall and costs to re-establish your company’s brand.
What other types of insurance do small businesses need?
Product liability insurance is only one type of insurance you need as a small business owner. Depending on your business, other types of insurance may be necessary as well:
- General liability insurance covers your business in the event of accidents while you’re performing your work. It can include physical injuries or property damage, copyright infringement, fire damage and more.
- Professional liability insurance protects you from customers who claim your work errors, missed deadlines or negligence (actual or alleged) caused them financial losses.
- Commercial property insurance protects your property, equipment, inventory and tools and technology if they need repairs or replacement.
- Commercial auto insurance is necessary if you use your vehicle for work purposes. Many personal auto insurance policies don’t cover vehicles if used for business activities.
- Workers' compensation covers your business if employees are injured while working.
Not every business needs every type of policy. For example, some states may not require workers’ comp insurance in some industries unless you hire a certain number of employees.
Modern insurers like NEXT can walk you through coverages, so you only pay for what you need with plans tailored to your specific business.
How much does product liability insurance cost?
Like most insurance coverages, the cost of product liability insurance can vary from one company to the next. Most small businesses can buy a policy as part of their general liability insurance coverage — and that costs about $500-600 per year on average.
To determine the cost of product liability insurance by itself, you’ll need to do a little calculation. Typically, you can count on $0.25 for every $100 of product sales in your business.
For example, suppose you sell $100,000 in products each year. In that case, your product liability insurance will cost $250. Of course, this is only a ballpark figure. Different considerations will affect the cost of your insurance, such as the risk level of your product, manufacturing terms and location.
It’s a small price to pay compared to the median award of $95,000 for personal injury cases. No matter what, it is important to know that the price of a lawsuit will inevitably be much higher than that of an insurance premium.
How NEXT can help you get the business insurance you need
Product liability insurance isn’t the only type of business insurance you need as a small business owner. At NEXT, you can get product liability coverage as part of your general liability insurance.
We have affordable rates and flexible coverage you can customize to meet your needs. Our process is 100% online, and we guide you through everything by asking a few simple questions.
And if you have questions, our licensed, U.S.-based insurance advisors are standing by, ready to help.