For small business owners, there is a limit to how much risk they can bear. Every day, they face a myriad of challenges, from financial uncertainty to employee management and product development. However, one risk that small business owners may not be aware of is product liability. If a product sold by a small business causes harm or injury to a customer, the business could be held responsible for the resulting damages. Product liability insurance is a type of coverage that can help protect businesses from the financial burden of such lawsuits.
How Does Small Business Product Liability Insurance Work?
Small business product liability insurance works by providing financial protection to the business in the event of a product-related lawsuit.
When a claim is made against the small business, the insurance company will investigate the claim and then determine if it is covered by the policy. If the claim is covered, the insurance company will provide legal representation for the business and cover a range of costs, including legal fees, settlements, and judgments, associated with these claims of bodily injury or property damage resulting from the use of the product which the small business manufactures, distributes or sells.
Product liability insurance is particularly important for small businesses as they typically do not have the financial resources to handle a lawsuit resulting from bad products.
Types of product liability claims that a small business may face
- Manufacturing Defects: These claims arise when a product is defective due to an error in its manufacturing process. For example, if a small business sells a bicycle with a cracked frame that breaks during use, the business may be held responsible for any resulting injuries.
- Design Defects: These claims arise when a product is inherently dangerous due to its design. For example, if a small business sells a ladder that is prone to tipping over, the business may be held responsible for any resulting injuries.
- Marketing Defects: These claims arise when a business fails to provide adequate warnings or instructions for the safe use of a product. For example, if a small business sells a cleaning product that is toxic and does not include proper warning labels, the business may be held responsible for any resulting injuries.
Importance of Product Liability Insurance for Small Businesses
Product liability insurance is essential for small businesses for several reasons:
- Protection from Financial Loss: Product liability claims can be costly, with settlements and judgments potentially reaching millions of dollars. Product liability insurance can help small businesses mitigate the financial impact of such claims, ensuring that they can continue to operate even in the face of a lawsuit.
- Credibility: Having product liability insurance can help small businesses build trust and credibility with customers. Knowing that a business is covered in the event of a product defect or injury can give customers peace of mind when purchasing products from that business.
- Legal Compliance: Many states require businesses to carry product liability insurance, particularly for products that are considered high-risk. Failure to carry this insurance can result in legal penalties, fines, or even closure of the business.
What Does Product Liability Insurance Cover?
Small business product liability insurance covers the costs associated with claims of bodily injury or property damage resulting from the use of a product. This includes:
- Legal defense costs
- Settlements and judgments awarded to the plaintiff.
- Medical expenses incurred by the plaintiff as a result of the injury caused by the faulty product.
- Wages lost by the plaintiff as a result of the injury.
- Cost of any damage to property resulting from the use of the product.
- Punitive Damages: This includes damages awarded to punish a business for willful or malicious behavior that led to a product liability claim.
Cost of Product Liability Insurance
The cost of product liability insurance varies depending on several factors, including
- The size and type of business
- The level of coverage required
- The product sold or the risk level associated with a particular product. For example, a small business that sells children’s toys may pay more for product liability insurance than a business that sells office supplies.
Generally, small businesses may pay anywhere from a few hundred dollars to several thousand dollars per year for product liability insurance.
Finally, small businesses that sell products through online marketplaces such as Amazon or Etsy should also consider purchasing product liability insurance. While these marketplaces offer some protection, it may not be sufficient to cover all the costs associated with a lawsuit.
It is also important to note that product liability insurance policies have exclusions and limitations. For example, the policy may not cover claims related to intentional wrongdoing, breach of contract, or damage caused by a product that was modified by the user.