If you run a business selling products, then you know how drastic a faulty product lawsuit can be. Fault product lawsuits can bankrupt companies and are not good for their reputation. So, if your business is involved in manufacturing or selling products, then you should consider buying product liability insurance. Product liability insurance will cover the costs related to defending against claims of personal injury or property damages due to defective or faulty products.
Overall, the average small business in the US pays about $1,200 a year, or around $100 a month, for product liability insurance. Like most forms of insurance, the cost of product liability insurance varies depending on the types of products you sell and your past claims history. Most of the time, a standard general liability policy will have some kind of product liability coverage.
Product liability costs can get pretty complicated and there are a lot of specifics to know. So we put together this comprehensive guide on the costs of product liability insurance and related insurance products.
- Product Liability Insurance Costs
- Product Liability Insurance Coverage Limits and Deductibles
- Standalone Product Liability Vs General Liability Policy
- What Factors Affect Product Liability Insurance Costs?
- Who Needs to Buy Product Liability Insurance?
- Best Product Liability Insurance Providers
- Tips for Buying Product Liability Insurance
- Frequently Asked Questions
Product Liability Insurance Costs
According to Advisors Smith, the average cost of product liability coverage is about $100 a month, or around $1,200 a year for most small businesses. Most companies get product liability coverage through their general liability policy. General liability coverage can range from $300 to $3,000 a year. The riskier your products, the more you will have to pay.
One way to estimate costs is by your total product revenue. Liability coverage is usually 25 cents per every $100 in sales. So if you make $300,000 in sales a year, then liability coverage would be about $750 a year, or about $63 a month.
This cost varies greatly depending on your industry. A medical device company, for example, is more likely to pay something closer to $100 for every $10,000 in sales for product liability coverage.
Costs By Business Type
The average cost of product liability insurance for all businesses is about $1,200 a year, but there are noticeable differences and trends in specific industries.
For example, the average premium for product liability insurance in the manufacturing industry was about $1,100 a year as of 2020. Only about 10% of manufacturing businesses pay more than $1,800 a year for product liability coverage.
There are a handful of manufacturing industries that have very high average premium costs. Toy companies, food manufacturers, technology manufacturers, and medical device manufacturers often pay very high premiums due to the nature of the products that they sell and the kinds of regulations in their respective industries. Many product liability policies may specifically exclude covering businesses in these kinds of industries so pay attention when doing research.
Out of all businesses, manufacturers, wholesalers, and retail (like food trucks) need product liability insurance the most. Manufacturers do not have much foot traffic so they usually have product liability as one of their key coverages under a liability policy. Retail and wholesale locations, in contrast, have to deal with much more foot traffic and liabilities due to third parties (i.e. vendors, delivery drivers, representatives, etc.).
Costs By Product Type
The type of product you sell or manufacture is one of the most important things that determine insurance costs. Companies make a lot of different things, and different products can cause different levels of physical injury or property damage. Things like clothing or things made without any hazardous materials will incur the lowest premiums.
Products that are more complex like electronics or products that may be dangerous like knives or things that use harmful chemicals. Companies that make food and drink products also have high liability insurance premiums.
Lastly, insurance providers may charge more depending on where your products are made. For example, if you sell products made in China or Mexico, you may have to pay more for insurance. The reasoning is that different countries have different manufacturing standards, and so might be riskier.
Product Liability Insurance Coverage Limits and Deductibles
The typical product liability insurance policy has different coverage limits for different things. For example, a plan may have a $1 million limit per occurrence, and a $2 million aggregate coverage limit over the year. Policies may also have different limits for personal injury, property damages, or medical expense payments.
We said earlier that the average settlement for a product liability suit is around $1.6 million. So, if you are purchasing product liability insurance, then you will need at least $1.6 million in coverage. All other things being equal, if you pay for additional coverage, then each additional dollar of coverage will cost less than the dollar before it.
It is also important to figure out whether your policy includes or does not include legal fees to its coverage limits. A policy that does may use all your coverage limit on legal fees and not leave much money left over for the actual fee (called the indemnity fee). Make sure to thoroughly read your policy so you know what kinds of expenses count to your coverage limit.
Like most insurance policies, liability insurance has a deductible. The average deductible is between $500-$1,000 for every $100,000 in coverage. The higher your coverage limit, the more expensive your monthly premiums will be.
Standalone Product Liability Vs General Liability Policy
Most companies get their product liability coverage through a general liability policy instead of a standalone product liability policy. Most businesses can save more money if they buy general liability with product liability included instead of a standalone policy.
The cost of general liability is between $300-$1,000 a year. Most businesses pay less than $500 a year for general liability insurance. Aside from costs, there are some other reasons to get general liability with product liability included instead of a standalone policy.
First, most business contracts require some kind of proof of general liability insurance, not product liability insurance. Second, most insurance companies know that the vast majority of businesses sell products, so most liability coverage for a general policy is product liability. The only exception is work that requires installations of being at a customer’s house.
Lastly, general liability with product liability gives you more coverage for other things not related explicitly to products. General liability policies also cover things like injuries and other mishaps on your property.
That being said, businesses that trade in high-risk products might be excluded from product protection under general liability, so they will have to buy a standalone product liability policy from a specialized provider.
Business Owner’s Policy
Another option for product liability insurance is to buy a business owner’s policy (BOP). A business owner’s policy is a bundled insurance product that bundles together business liability insurance and property insurance. BOPs often contain product liability coverage under the business liability portion of their plan.
A standard BOP will cost anywhere between $500 to $3,000 a year. Most businesses pay less than $2,000 a year. Only a small percentage of small businesses will pay more than $3,000 a year for business and property insurance.
Buying a BOP can be a way to save on business insurance. So if you need product liability insurance you can consider getting a BOP. BOPs will also usually come with commercial property insurance, workers’ compensation, and professional liability insurance.
What Factors Affect Product Liability Insurance Costs?
Product Liability costs can vary greatly depending on the kind of risk that your product presents. Things like product size, materials, marketing facts, safety features, and distribution/supply chains. High-risk items will cost more to cover than low-risk items.
- Type of Product. The major thing that affects product liability costs is the kind of products that you sell. Medical devices are more expensive and have more risks than something like towels, so product liability coverage for a medical device will be much more expensive than product liability for towels.
- Industries. Different types of products have different types of risks and different industries also have different standards. For example, a medical device company has to meet a much higher product standard before selling than a towel company. Lawsuits related to medical devices also tend to be much more expensive than lawsuits related to towels, so you will have to pay a higher premium for the former than the latter.
- Revenue. The overall liability a company faces is determined by its total revenue. So, insurance policies tailor theri limits and premium costs to the revenue of your business.
- Location. Different states have different insurance requirements. If you live in a state like California that has many business insurance requirements then you will have to pay more for your coverage.
- Coverage Limit. Most product liability policies start at $100,000 in coverage, although some policies offer tens of millions of dollars in coverage. The higher your coverage, the more risk the insurance company is taking on, so your premiums will be higher.
- Claim History. As is the case with any kind of insurance policy, the costs of your monthly premiums depend on your past insurance history. If you have claims on your record, you will most likely pay more for coverage.
Who Needs to Buy Product Liability Insurance?
In short, any business that is part of a product supply chain needs to buy product insurance. Whether your company extracts materials, manufactures products, or physically sells those products in stores and online, you need a product liability policy.
You can still be the subject of a product liability lawsuit even if your company does not actually make the products that you sell, Product “defects” also cover defects in sales in marketing. For example, if your store misleads customers with inaccurate marketing and advertising practices, you could be subject to a liability claim.
More generally, any company that makes, sells or alters physical products needs product liability coverage. Physical products can cause physical injury or property damage. Moreover, product liability lawsuits are some of the most expensive there are, so it’s in your best interest to get coverage no matter how small your role in the supply chain is.
The average cost of product liability insurance in the retail industry is about $1,450 a year. Product liability for wholesale businesses and manufacturers is generally more expensive as retail locations that rely on physical traffic usually have product liability under a general liability policy. Some retail businesses can pay as low as $300 for a year of product liability insurance.
Best Product Liability Insurance Providers
If you own a retail business, the first place to look for insurance is from, your manufacturer. Many manufacturers have vendor coverage on their product liability policy that will cover anyone selling their products. If you sell products from several different manufacturers, then you need to see if all of them offer vendor coverage. Car dealers for example will be in this situation, however dealerships use specialized garage insurance.
The Hartford is one of the best commercial insurance providers in the nation and offers a wide range of business insurance policies including general liability coverage with product liability endorsements. The Hartford offers what they call Stretch policies where you can bundle commercial policies together to save.
Unfortunately, though, The Hartford does not provide exact figures for insurance costs, so you need to call an agent and ask for a quote if you want to see prices. Some sources indicate that the average annual cost of a commercial liability policy is around $670 a year. Most policies have a starting limit of $1 million per product incident. They have a very high A+ rating for consumers.
CoverWallet is an online insurance broker that offers insurance bundles for businesses and individuals. CoverWallet specializes in giving product liability coverage to first-time retail operations that have no previous liability. CoverWallet policies are more expensive than the industry average but they offer highly customized support for businesses in different industries.
CoverWallet also offers general liability coverage starting at as low as $39 a month. You can also add other common business insurance products to CoverWallet policies including workers’ compensation and professional liability policies. One of the best parts of CoverWallet is that you can get online quotes in just a few minutes.
The main downside is that CoverWallet does not offer specialty product liability coverage. So, if you work with hazardous coverage and need specialized insurance,
Chubb is one of the most well-known providers of commercial insurance in the country and specializes in insurance for businesses in nearly all industries. Chubb emphasizes small business coverage but they also insure larger organizations as well. Chubb also is what is known as a surplus lines insurer, meaning they can cover products that are difficult to categorize.
One of the best features of Chubb is that they handle all claims completely in-house so they can manage to provide extremely customized coverage with high limits. Chubb also offers in-house consulting to help you manage product risk and will assist you in the event that one of your products is recalled.
Nationwide is a major supplier of commercial insurance and offers comprehensive product liability coverage for vendors and retailers. For product liability insurance, Nationwide works with K&K Insurance to provide specialty products with higher amounts of coverage. Nationwide liability policies have broad coverage and they do not restrict how many events you can attend.
AIG offers product liability coverage under its subsidiary Lexington Insurance. AIG specializes in product liability insurance for all entities in the supply chain; from manufacturers to vendors. AIG is also known in the industry for offering insurance for new technological products, so they are a good choice for tech and engineering firms.
Similar to Chubb, AIG handles all their claims and underwriting in-house so they can offer highly customized insurance products. AIG is generally more expensive than other insurance providers but they offer policies with extremely high coverage limits and broad coverage policies.
The main downside is the AIG insurance is pretty expensive. AIG insurance plans generally cost double the industry average, but they consequently have much higher insurance coverage limits than most providers.
Great American Insurance Group has an A+ rating from both of the largest insurance ratings companies in the country and has been around since 1872. The company specializes in product liability coverage and insures businesses in the manufacturing, auto, toy, electrical equipment, and cosmetics industries.
Great American is also one of the few companies tha provides comprehensive discontinued product liability coverage. Like most other large traditional insurance companies, Great American does not post exact prices online, so you will need to call an agent and request a quote.
Tips for Buying Product Liability Insurance
Try to Find a Specialized Agent
Product liability is a complex area of business las so you should consider a company that specializes in product liability insurance policies. Not all companies are aware of the intricacies of product liability cases that can arise, and their policies might be deficient.
Consider Bundling Insurance
Most of the time, you can get discounted rates by bundling insurance policies from different providers. For instance, it’s often cheaper to purchase a general liability policy with product liability endorsement to maximize your coverage while minimizing costs.
Go For High Coverage Limits
Product liability lawsuits are notorious for being extremely expensive, so you want to make sure you have a po9licy with a substantial indemnity limit to cover any court-mandated damages or payments. You will have to pay a higher deductible but the increased cost is worth it if you face a product lawsuit.
Watch Out for Exclusions
Product liab8ility insurance agreements have common exclusions. For example, they generally do not cover unintended uses of your products, and they will not cover the cost of recalling your products.
Frequently Asked Questions
Do I need product liability insurance?
No, generally speaking, you are not legally required to have product liability insurance. Note that, as a product manufacturer, supplier, or seller, you have a duty of care to your customer/. Breaching that duty of care by selling negligent products could be grounds for a negligence lawsuit.
How much does product liability insurance cost?
The average small business will pay about $100 a month for product liability insurance, or around $1,200 a year. The costs of product liability coverage vary greatly depending on what kind of products you sell. High-risk products, such as fireworks, will cost more to cover than low-risk products like clothing.
What does product liability insurance cover?
Product liability insurance covers any damages related to physical injury or property damage caused by a product you made, sold, or altered. For example, if your company sells exercise equipment and one of your unit malfunctions, injuring a customer, product liability insurance will cover legal and medical expenses.
What is the average product liability coverage limit?
The typical product liability policy offers $1 million per accident and a cumulative limit of $2 million. Most providers offer increased coverage limits for an extra fee every month. Given that the average product liability settlement is over $1.5 million, you want to choose policies with a substantial coverage limit.
What is the difference between product liability and general liability coverage?
Both product liability and general liability exist to cover bodily or property injury. The main difference is that general liability is meant to cover injuries sustained while on the premise of your business while product liability is meant to cover injury or damage caused by products that you sell or manufacture.
If someone slips and falls in your store, then general liability would kick in. If someone hurts themselves using your products, then product liability would step in.
Any business that sells or manufactures products needs to have product liability insurance. Product liability insurance may not seem necessary but it can save you tens of thousands if not hundreds of thousands in lawsuit expenses. Even if you sell relatively “safe” products, you should consider getting product liability coverage under a general liability policy to give you peace of mind.