What Is Product Liability Insurance Coverage?

Product liability refers to the legal responsibility of manufacturers or sellers to compensate individuals for injuries or damages caused by defective products. Even with stringent quality controls, unforeseen issues can arise, leading to potential lawsuits and significant financial exposure. Product liability insurance serves as a financial safeguard, protecting businesses from the substantial costs associated with these claims.

Understanding Product Liability Insurance

Product liability insurance (PLI) is a specialized form of coverage designed to protect businesses from financial losses stemming from claims of bodily injury or property damage caused by a product they manufacture, distribute, or sell. This insurance offers a defense against lawsuits alleging that a product was defective or harmful. It covers the costs associated with legal defense, including attorney fees and court expenses, even if the business is ultimately found not liable. Additionally, it can fund settlements reached out of court or judgments awarded to plaintiffs, up to the policy’s specified limits. This coverage is often found as part of a commercial general liability (CGL) policy, sometimes under a “products-completed operations” provision, or it can be purchased as a standalone policy.

What Product Liability Insurance Covers

Product liability insurance addresses claims arising from various types of product defects that lead to bodily injury or property damage.

One primary category is manufacturing defects, which occur during the product’s creation, causing it to deviate from its intended design. These flaws might affect a single item or an entire production run, such as contamination in food products or dangerous chemicals in goods.

Another area of coverage involves design defects, where the product’s inherent design is flawed, making it unreasonably hazardous even if manufactured correctly. Even if manufactured correctly, a product with a design defect is inherently unsafe from its conception.

Product liability insurance also covers claims related to warning or marketing defects, which involve inadequate instructions or insufficient warnings about potential dangers. These claims arise when a product is not properly labeled, lacks clear instructions for safe use, or fails to warn consumers about hidden risks. Even if a product is well-made, improper labeling, such as undeclared allergens in food, can lead to serious issues. Policies generally cover damages such as medical expenses for bodily injuries, lost wages, pain and suffering, and costs for property damage.

Key Exclusions

Product liability insurance policies contain specific exclusions that define what is not covered. Intentional acts or damage caused by deliberate actions are typically excluded, as insurance covers accidental occurrences rather than willful misconduct. Coverage for professional services or advice is generally not included, as these risks are addressed by professional liability (errors and omissions) insurance. These exclusions help manage the insurer’s risk and the policyholder’s expectations.

Costs associated with product recalls are also commonly excluded from standard product liability policies, though recall coverage may be available through a separate endorsement or specialized policy. Contractual liability is often excluded unless the liability would exist even without the specific contract, meaning the policy covers tort liability rather than breaches of contract.

Coverage for damage to the product itself is usually excluded, as product liability insurance focuses on harm caused by the product to third parties or their property, not the product’s inherent failure. For instance, if a faulty component damages the machine it is part of, the cost to replace the component itself is not covered, but the resulting damage to the rest of the machine may be. Punitive damages, which are awarded to punish a defendant rather than compensate a plaintiff, are also frequently excluded, particularly where state law prohibits insuring against such penalties.

Businesses That Need Coverage

Any business involved in the supply chain of a product, from its creation to its sale to the end consumer, needs product liability insurance.

Manufacturers, as the primary creators of goods, face substantial exposure because they are often held responsible for defects in design, manufacturing, or warnings. This applies whether they produce electronics, toys, food, or pharmaceuticals. Even if a manufacturer outsources production, they may still bear liability if their name is on the product or they designed it.

Distributors and wholesalers also require coverage, as they handle products between manufacturers and retailers and can be drawn into lawsuits even if they did not cause the defect. They may be held liable if the original manufacturer cannot be identified or is no longer in business. Importing a product from another country can also classify a distributor or wholesaler as the “manufacturer” in the eyes of U.S. law, placing the full burden of product safety on them.

Retailers, who sell products directly to consumers, are also exposed to product liability claims. A customer who suffers harm from a product may sue the retailer, regardless of where the defect originated. For instance, if a toy sold in a store causes injury, the retailer could be named in a lawsuit. This broad exposure across the supply chain means any entity placing products into commerce should consider this coverage.

How Product Liability Policies Work

Product liability policies operate with specific financial structures that define the extent of coverage. Policy limits establish the maximum amount an insurer will pay for covered claims. These limits typically include a “per occurrence” limit, which is the most the policy will pay for a single incident, and an “aggregate” limit, representing the total maximum payout for all claims during the policy period. For example, a policy might have a $1 million per-occurrence limit and a $3 million aggregate limit, meaning no single claim will exceed $1 million, and the total payments over the policy term will not exceed $3 million.

Deductibles represent the amount a business must pay out-of-pocket before the insurance coverage begins. This amount is subtracted from the claim payment, making the insured responsible for the initial portion of the loss. Deductibles can be fixed amounts or a percentage of the claim. The presence of a deductible means businesses share a portion of the financial risk.

Defense costs are a significant component of product liability policies, as legal fees can accumulate rapidly even if a business is not found liable. These policies typically cover attorney fees, court costs, and expert witness expenses associated with defending against product-related claims. Often, defense costs are covered outside of, or in addition to, the policy limits.

When a claim arises, the insurer’s role involves a structured process. After the insured notifies the insurer of a potential claim, the insurer investigates the incident to determine if the product was at fault and whether the claim falls within the policy’s coverage. This investigation may involve asking questions about how the product caused damage, its intended use, and any disclaimers or instructions provided. If the claim is covered, the insurer will manage the legal defense, including appointing legal counsel, and will ultimately pay settlements or judgments up to the policy limits, after the deductible is met. This process ensures that businesses have expert support and financial backing when facing complex product liability litigation.