Product liability refers to situations where a customer purchases a product, and an issue with the product causes bodily injury or property damage to a 3rd party. Business owners can be found responsible for the damages if the source of the issue can be traced back to the small business. 

You will have to consult your policy documents to confirm exactly what coverage your Product Liability insurance provides but here are a few scenarios that typically would and would not be covered:

What Product Liability insurance covers:

Design defect
there’s a weak spot on the new bike frame you’ve designed, causing the front fork to buckle and throw the rider over the handlebars.
Manufacturing defect
a manufacturing error taints a batch of cosmetic products, which severely irritate customers’ skin.
Marketing defect:
This type of issue has nothing to do with the product itself, but rather how it was marketed to the customer. Incorrect labelling, incorrect safety warnings (or lack thereof) or insufficient instructions are common marketing defects.
Shareholder derivative demand costs (sometimes called Side D)
This coverage may be included as a full limit or as a sublimit. It depends on the carrier. The reason is that different carriers have different appetites for the risk that a company’s shareholders will sue the board of directors while acting on behalf of the company. This unique situation is called a “derivative demand suit.” Side D coverage will usually offer the limited protection of paying the costs required to investigate the truth behind shareholder’s claims.

What Product Liability insurance does NOT cover:

Bodily injury/property damage (BI/PD):
when not arising out of the use of the product, this should be covered by GL, property, workers comp, or employers liability.
Securities violations:
should be covered by a D&O policy
Employee benefits and ERISA violations:
should be covered by a fiduciary liability policy
Harassment, discrimination, workplace torts:
should be covered by an EPLI policy.
Professional services:
should be covered by an E&O policy
Contracts:
contracts that aren’t listed as “insured contract” should likely be covered by an E&O policy.
Side A: individual, non-indemnifiable liability
If an individual executive is named in a claim (such as a lawsuit or regulatory investigation) and that claim is alleging a “wrongful act,’ this clause may go into effect. The key is that the loss has to be “non-indemnifiable” meaning the company is not able to protect the executive itself. Most often this clause goes into effect when a company is insolvent and there are outstanding claims against officers but no money to pay for their legal defense. For this reason the retention on this clause is usually $0.
Side A: individual, non-indemnifiable liability
If an individual executive is named in a claim (such as a lawsuit or regulatory investigation) and that claim is alleging a “wrongful act,’ this clause may go into effect. The key is that the loss has to be “non-indemnifiable” meaning the company is not able to protect the executive itself. Most often this clause goes into effect when a company is insolvent and there are outstanding claims against officers but no money to pay for their legal defense. For this reason the retention on this clause is usually $0.

Product Liability insurance claim examples

The maker of a bicycle fitness tracking & GPS device instructs a user to turn at a certain time. He get hits by a car, sustaining severe injuries. He sues the company for selling a defective product.A online cosmetics retailer gets dragged into a suit when one of the products sold on their website began causing painful rashes. Even though they didn’t actually manufacture the produce, as part of the supply chain they share liability for bodily injuries to several customers.

A company manufacturers a drone that flies between hospitals to provide rapid emergency organ transportation. While on a maintenance run, the drone strikes a power line and lands on a house. The drone company was liable to the town and the homeowner for repairs to the damaged property.

A pedestrian is badly hurt while tripping over a charging station installed on the street by a bike share company. Before fault is determined in court, the customer’s family makes a claim against the company. As part of the claim, they demand reimbursement for first aid, ambulance services, x-rays, surgery, and ongoing professional nursing service. The insured submits this claim to the carrier and the carrier pays, subject to the limit, prior to establishing whether or not insured is actually legally liable in this case.

Get A Product Liability Quote

If you’re interested in learning more about a customized Product Liability insurance program, you can always reach out to a member of our team by phone 646.854.1058 or email info@foundershield.com or get a quote below!