Product liability insurance, as the name suggests, is to cover the cost of compensation (including legal defence costs) in the event that anyone (a third party) is injured (bodily injury or death) by a defective product that you supplied. This insurance also covers damage caused by your product to a third party’s property (no bodily injury or death but damage to someone else’s property or assets). If a third party has suffered injury or damage as a result of your defective product then the costs associated with the third party’s loss of use, loss of business and loss of revenue can be high. Naturally, this would include products manufactured by you but would also include products that you designed, assembled, repaired or supplied, even if they were manufactured by a third party.
The definition of “Products” can be wide but you need to check your own insurance policy wording and make sure you have declared to your insurer the estimated amount of sales revenues you expect to earn from overseas, particularly any exports to the USA - as many insurers limit the amount of sales going to the USA (and sometimes Canada) if it is more that 10% of your annual turnover, unless you can obtain an extension. It is typical that insurers will apply an increased “deductible” or “excess” applying to any exports to the USA (or Canada). If you sell a wide range of products but only export a limited type of products to the USA or Canada then ensure you describe the product to your insurance company because insurers have their own view of what is hazardous (more likely to cause injury or damage) and what isn’t and this will have a deciding factor on your premium.
Any business that supplies a product in any of the ways exampled below should really have product liability insurance. This is anyone who causes a product to enter the “stream of commerce” or “passes it on” in the stream of commerce because they can be held liable for harm caused by defects in the products.“Stream of commerce” is the flow of products from manufacturers, suppliers, retailers, distributors and lessors to the customer. You can still be liable even if you give products away for free.
Example definition of “Products”:
If a product fails, is dangerous and causes injury then it is subject to fair compensation from the manufacturer or seller. Therefore, you could find yourself liable for compensation if a product that you supply is found to be faulty and causes some kind of personal injury, or loss or damage to property. This could be the case if your business’s name is on the product, if your business repairs, upgrades, refurbishes, or changes the product in any way. Claims can arise from incorrect containers, labelling, instructions, packaging or advertising as well as what was agreed in the contract with your customer.There are of course legal defences which can reduce or even dismiss product liability claims against you including defences incorporated in your contracts with customers. .
Taking out the right insurance may not be enough as you are expected to take sensible steps to reduce your potential liability. This can include providing adequate safety advice or instructions for use to customers, providing terms for the return of faulty goods, adopting robust quality control and record keeping systems, and strong supply contracts with manufacturers that cover product safety, quality control, and returns.
Getting the Design right in the first place is one of the best and lowest cost methods to avoid claims (cost effective in the long run) and to ensure it is safe and does what it is supposed to do.
Successful testing proves it achieves standards but not necessarily safe
Suitable labels and warnings - safety
Build to your detailed specifications
Insurance policies are legal contracts, like any others. It is important to remember that they provide protection against unintended or fortuitous events – they do not cover deliberate acts by policyholders. As with all contracts , there are conditions to comply with and there will be certain exclusions in the insurance policy , so it is important that you understand what these are (and read the whole policy because extracts or individual sections may not provide the entire meaning).
Typical exclusions would be to exclude the costs of recalling a defective product or the costs of rectifying defective work. Intellectual Property is not “physical” or material property so this is typically excluded under a Products Liability policy. Any legal liability that you may be faced with arising from services that you provide to others solely for a fee is a “professional service” and is to be covered under a Professional Indemnity or “Errors & Omissions” policy (or to be a specific extension added to your Products Liability policy). Services provided to others for a fee would include: advice , design, specification, inspection or certification.
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