Product Liability and Your Business

Product liability insurance, what is it and do need it for my business?

Product liability insurance will protect a business from claims related to the manufacture or sale of a product, food, or medicine or other type of good to the general public. It covers both the manufacturer’s and sellers liability for losses or injuries to the user, a bystander, or buyer caused by a defective product, malfunctioning product, or defect in the design or even failure to warn.

Understanding how the potential liability of a product could affect the business as a result of a claim and the types of potential claims faced by a business. First off, there could be manufacturing or production flaws in the product. No matter how diligent or rigid a process, mistakes happen. This could even be a component in making the product which originally was presumed safe but then has complications and issues in the future.

Asbestos is one that quickly comes to mind. Second, there could be a defective design. Children’s car seats are an example of this type of defect. The third type of defect could be a labeling or usage directions flaw. The McDonald’s hot coffee lawsuit is a recent example of this type. All too often distributors and retailers fail to secure this coverage. The logic is that, since they did not “manufacture” anything, the coverage is not necessary.

However, manufacturers are not the only ones subject to product liability exposure, retailers and wholesalers are often brought into a lawsuit for alleged negligence by the consumer. Most states follow the “stream of commerce” model of liability. This means that if your company participated in placing the product into the “stream of commerce,” it can be held liable for damages to the end user.

One common outcome of any of these types of liability cases have resulted in extremely large awards and settlements. It is important to understand how a lawsuit of this magnitude could affect your business and you as the owner. In addition, all too often, the seller of these products fails to insure against liability, thinking the manufacture will shoulder the responsibility. If the product in question is imported from China or another foreign company, the seller in the USA becomes an easier party to target and potentially collect from then a foreign entity.

It’s important to study other cases and review who is named in these types of suits. An attorney representing an injured party will sue any entity involved from manufacture through end use.

Sit down with your licensed insurance professional and determine if product liability insurance is needed for your business. Ask tough and relevant questions to your commercial broker regarding the risk your business faces as it related to product liability. If your agent is recommending this coverage, take that recommendation seriously. Check with your state department of insurance as well for any recommendations and historical data.

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