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As a business owner, you’re responsible for every product you make and sell. If one of those products is faulty, or causes some sort of injury, your business could be held accountable for the consequences that follow. Product liability insurance can help mitigate the losses from these types of situations.
When it comes to small businesses, liability refers to your company being responsible for damages to a 3rd party in the eyes of the law. Whether you’re a startup trying to get off the ground, or an established entrepreneur with years of experience—you’re exposed to a variety of liability risks. In some instances, your business may not do anything wrong and you could still find yourself tangled up in a lawsuit. Having proper and adequate insurance coverage for your business and its products can help mitigate the losses you experience from liability claims.
What is product liability?
Product liability refers to situations where a customer purchases a product, and an issue with the product causes a 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. Some of the common issues customers encounter that result in product liability claims include:
- Products that cause bodily injury to the customer
- Products that cause property damage
- Sickness caused by food or beverages
There are many different things that can cause a product issue, but 3 of the common reasons are:
- Design defect: This issue will be present in a product before it’s even made. It suggests that the design of the product is unsafe or faulty.
- Manufacturing defect: This issue suggests that something went wrong while the product was being made. Perhaps it was assembled wrong, or missing an important piece.
- 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.
The right product liability policy will help protect your business from legal costs if you’re found responsible for a product causing bodily injury or property damage to a 3rd party.
Do you need product liability insurance?
There’s a common misconception amongst some small business owners that they don’t need insurance, or that it’s too expensive. The truth is, whether you’re a baker selling delicious cupcakes, or a boutique selling the trendiest clothes—you should always protect yourself from the risk of product liability claims. The minute you start selling your product you’re at risk for product liability lawsuits, which can be very expensive and time consuming.
Any small business that produces and sells a product should have this type of coverage, including:
- Clothing stores
- Gift shops
- Specialty food stores
- Coffee shops
- Pet stores
- Print and copy shops
Keep in mind that product liability claims are not only a risk for business-to-consumer operations, but also business-to-business operations. If you produce a product that you sell to other business owners, you still need product liability insurance. Some of these businesses would include:
- Software developers
- Website creators/designers
- Raw material suppliers
- Equipment suppliers
Other coverage options to consider:
Commercial general liability insurance: Commercial general liability (CGL) insurance is designed to protect you and your business from a loss if you’re found legally liable for bodily injuries or property damage to a third party caused by the product you sell or the service you provide. CGL insurance can also offer protection in situations where you or your employees are conducting business offsite.
Cyber risk and data breach coverage: Cyber attacks are an ongoing threat to small businesses and have continued to rise recently. Cyber event expense coverage is designed to help small businesses that rely on technology mitigate some of the expenses that may incur as a result of a cyber hack.
Errors and omissions (E&O) insurance: If one of your clients or customers claims your advice caused them a financial loss, your errors and omissions coverage can help you recover from the financial consequences that may incur.
Property insurance: As a small business owner, you likely rely on your property, tools, equipment and technology to help keep your business running. If one of those key pieces of the puzzle was damaged and needed repair, you may not be able to continue operations. This is when you need property insurance coverage.
Equipment breakdown insurance: Your equipment is covered in your property insurance policy for damage caused by external sources, such as fire, floods and weather damage; however, you may not be covered for electrical or mechanical damage. In these situations, you’d look to your equipment breakdown insurance.
Commercial auto insurance: If you or your employees use your vehicle for business purposes you need commercial auto insurance to protect that vehicle in ways your personal auto policy may not be able to.