Product Liability Insurance 101

Understanding the basics of a Product Liability Insurance policy

Product Liability Insurance coverage protects manufacturers, distributors, importers, retailers, etc. if a product results in bodily injury or property damage. It can be purchased as part of a General Liability policy or on a stand-alone basis. Product Liability policies provide a funding source for legal defense expenses and payment of a settlement or adverse jury verdicts. They also serve to satisfy any contractual requirements of a downstream purchaser such as a retailer.

Limits of Product Liability claims

Today’s General Liability policy forms automatically include Product Liability coverage. The limit of coverage for any single covered claim is represented by the each-occurrence limit. The limit of coverage for multiple claims during a policy year is expressed by the products-completed operations aggregate limit. The basic industry standard for this policy is a $1 million each-occurrence limit and a $2 million products-completed operation aggregate limit. Higher limits can be purchased in increments of $1 million through either an Excess Liability policy or a Commercial Umbrella policy.

Determining the policy cost

Policy costs vary depending upon the products’ risk profile and annual sales revenues. Product categories have classification codes. The rates per $1000 of sales vary according to underwriting data collected on each class of product and the individual loss history of the applicant. Businesses that sell low-risk products can normally find coverage in the standard market. Businesses that sell high-risk products must often resort to coverage in the nonstandard or excess and surplus lines market. Rates, minimum premiums and coverage terms are typically superior in the standard market.

Start-up businesses selling higher-risk products may find that coverage is difficult to obtain or expensive. However, there are a number of insurance brokers and carriers specializing in this niche. Minimum premiums for General Liability or stand-alone Products Liability can range from $3000 to $25,000, depending on the risk profile of the products.

Occurrence vs claims-made policies

Consider the important difference between an “occurrence” policy form and a “claims made” policy form. Low- risk product sellers can usually obtain the superior occurrence policy form. High-risk product sellers are often forced to purchase the inferior claims-made policy form. Occurrence policy form coverage applies as long as the policy was in force at the time of the covered injury. This means that coverage may exist for claims filed after the policy expires as long as the injury occurred while the policy or policies were in force.

Claims-made policy form coverage applies only if the policy was in force at the time of the covered injury and at the time the claim was filed. Setting up proper coverage under a claims-made policy form requires a professional insurance agent who is familiar with retroactive dates and optional extended reporting periods. Claims-made policy forms present problems if a temporary lapse in coverage occurs (need to properly set retroactive date) or no insurance will be carried in the future (need to purchase optional extended reporting period, also known as “tail coverage”).

Protecting your vendors

Another consideration is the common contractual requirement of the Additional Insured-Vendors endorsement. Product manufacturers and distributors are often required by their vendors to provide evidence of the Additional Insured-Vendors endorsement. This endorsement provides the vendor with primary products liability coverage over and above their own policy. This gives vendors confidence to sell the product without fear of incurring a Product Liability claim under their own policy. The additional insured vendor endorsement includes a number of conditions that can, if violated, nullify coverage for vendors. Vendors should carefully review the terms of the endorsement.

There is more Product Liability information on our website. Or contact Paul Owens at (800) 622-7370 to have your questions answered or to receive a quote.