A few years back, a prominent electronics brand’s tablets were causing explosions and fires due to overheating. In the process, these products were leaving a number of customers injured. Matters came to such a head that these products were banned on-board by most airline carriers around the world. The company had put out a recall notice and warning to customers to stop using that particular product immediately.
Companies that offer products are vulnerable to legal risks arising out of claims from third parties. They also have financial risks that arise out of losses caused to third parties due to such products. In such cases, the Product Liability Insurance can save the day. As the name suggests, product liability insurance provides coverage for losses and expenses arising due to inferior-quality products that a company offers which can cause bodily injury or property damage to the consumer.
History has been replete with incidents where famous brands have been forced to recall their products because of had the potential to significantly endanger the lives of its consumers. In all such cases, it is Product Liability Insurance and Product Recall Insurance that have come to the rescue of these brands who were facing liabilities to the tune of billions of dollars.
Immunity to massive liabilities arising from defective products might be difficult for small businesses. If a small business is sued for a defective product that causes injury to customers, the business could sink. Thus, it is essential to stay protected. Let’s look at this insurance in detail and understand why even small businesses that offer products must have this insurance.
WHAT IS PRODUCT LIABILITY INSURANCE
A company has several liabilities to third parties such as the liability of bodily injury, property damage, financial losses caused, and much more. Product liabilities are those that occur due to the products that a company has offered. A faulty product might cause death, disability, shock or mental injury to a third party. It could even cause destruction to the property of a third party, which could leave the property unfit for use. This insurance helps a business by compensating financial losses and expenses incurred by the third party in cases when a defect or a fault in a product causes bodily injury or property damage to a third party.
Let’s understand what is a defective product
The cases of defective products can be broad but the claims typically fall into three categories based on the reasons:
- Design defect: When there are flaws in the basic design of a product
- Manufacturing defect: Defects that have occurred during the manufacturing process
- Marketing defect: When the product is not accompanied by adequate instructions and warnings about the proper use of the product.
WHO SHOULD HAVE PRODUCT LIABILITY INSURANCE?
Those companies that offer products to customers must consider product liability insurance. The form of the product could be anything – food & beverage (F&B), electronic goods, software, raw material and more. Product liability insurance can be helpful in the case of the products being supplied in the business-to-business (B2B) and business-to-consumer (B2C) industries.
Let’s understand the need for Product Liability Insurance for F&B companies in the SMEs sector.
The F&B industry is fraught with risks – non compliance of safety standards, expiry of consumption date, packaging, taste, use of food grade ingredients and a lot of other aspects could go wrong even with the smallest of negligence or error. Moreover, the industry is huge including beverage, dairy, bakery, confectionery, read-to-eat packaged food, raw food, food preservatives, taste enhancers, colour, and more. Even a small fault in the chain could lead to the risk of lawsuits and legal claims.
Companies that manufacture, sell, distribute or pack food products can be held liable for bodily injury (illness, death, disability and more) or property damage caused by the consumption of the food. A particular company might not be at any fault, but it can still be held liable under the law. In the event that the court establishes a link of the damaged food product to the company, it will have to pay the damages awarded by the court. These damages could be so high that without the support of insurance, a company might sink.
According to The Food Safety and Standards Act, 2006, the liability for food products rests with all the stakeholders in the food product supply chain – the manufacturers, packers, wholesalers, distributors, and retailers. If the food is not in compliance with this Act, or the rules or regulations, the manufacturer shall immediately initiate procedures to withdraw the food from the market and consumers indicating reasons for its withdrawal and inform the competent authorities. Hence, a Product Liability Insurance and a comprehensive Product Recall Insurance will provide a holistic protection for F&B companies.
WHAT DOES THE PRODUCT LIABILITY INSURANCE COVER?
The product liability insurance provides coverage towards legal claims made for bodily injury and property damage arising from a product manufactured by the insured. The amount of coverage that the insurance provides is based on the coverage decided by the insured at the time of purchasing the policy. Hence it is important for the company purchasing this insurance to assess the right amount for the insurance.
For example, a manufacturer of heavy machinery that produces textile would have higher financial risks compared to the manufacturer of ready-made clothes. The amount of coverage to purchase would depend on the risk assessment associated with a product. Product Liability Insurance provides financial compensation for the following:
- Legal liability expenses, which include costs, fees and defense costs of the person making the claim.
- Costs towards judgments and settlements.
WHAT ARE THE EXCLUSIONS
It is important to note the difference between product liability and product recall insurance. And similarly, the general commercial liability insurance and this insurance. There are a number of exclusions that should be noted at the time of purchasing the policy. Here are some of the exclusions.
- Expenses and losses from a product recall, unless a separate extension for product recall is purchased.
- Deliberate defects in products
- Deliberate non-compliance with standards
- Product guarantee
- Copyright, patents or trademarks infringement
- Radioactive toxic explosives and other hazardous materials
- War and terrorism
- Repair, modification or replacement for a product
- Liabilities for fines, penalties or penal damages.
WHY SHOULD SMALL COMPANIES HAVE PRODUCT LIABILITY INSURANCE?
Small businesses and startups have a lot going on, especially in the initial days when the business has just started. In all the important aspects to attend to such as finance, product launch, revenue generation, marketing processes and more, even the thought of a product liability insurance might not make it to the to-do list. But this could cost a company that manufactures products immensely.
- It helps companies mitigate losses and expenses arising out of products
- It can help companies expand the business and gain new partnerships
- It can help companies stay afloat during times of legal claims
- It can help companies from complete shut down due to huge financial expenses
- It can help companies build credibility and reputation
HOW TO PURCHASE A PRODUCT LIABILITY INSURANCE?
1. Ask yourself these questions about the products that you manufacture and supply:
- Can the product cause physical injury?
- Can the product cause property damage?
- Can the product cause losses or expenses to a third party?
Your answers will help you assess the risks associated with your products.
2. Consult an experienced insurance broker or insurance broking company. A competent insurance broking company will be able to help you in assessing your product related risks, your business and industry-specific risks as well. The insurance company can help you with a selection of insurers and quotations for product liability insurance for you to make the right choice based on your budget and preferences.
If your company manufactures or supplies any product, the decision to purchase a product liability insurance should be a no brainer. You could explore this insurance in detail with the advice and guidance of PlanCover. The insurance broking company’s expertise in the SMEs insurance market is an added advantage for small and mid-sized enterprises.