Product Liability Insurance

Essentially, product liability insurance (PLI) covers any person or company if they are sued for losses, damages, or injuries caused by a defect or malfunction of a product.

As well, for companies or individuals who are manufacturing and selling their products, whether directly to consumers or via distributors or retailers, they are liable in case of defective design or a failure to declare possible dangers.

This is why any business or individual selling goods or products should take out product liability insurance.

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It is especially the case where there is potential that bodily injury or property damage could result from defects inherent in the products.

Product Liability Insurance

Do you need product liability cover?

Product liability, in legal terms, can stretch right through the supply chain.

Even though your business was not the last point of contact with the person who purchased a product, if you or your company was involved in any aspect of production, warehousing, or selling it, you can be held responsible and may be sued.

The main groups of businesses that should be investigating public liability insurance are:

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  • Developers and designers
  • Manufacturers
  • Wholesalers & distributors
  • Retailers

End-users could be injured by how a product is manufactured or designed.

Even if it was used improperly or not according to instructions, you could still be liable for resultant damage.

Each state sets its own laws defining the procedure for making claims against companies.

For example, in California, all elements in the supply chain, including manufacturers, distributors, and retailers, can be held responsible for claims of injuries and damages caused by products claimed to be defective.

Each year, nearly half a million Americans have suffered injuries, which they claim were due to the use of defective products.

Sadly, there have been thousands of deaths every year.

There are many sorts of product liability claims that are commonly filed in California:

  • Negligence or design defects that existed when the product was made or if a product has been designed in a way that makes it dangerous or deadly. This action will allege that the manufacturer should have known, or did know, the risk associated with the design. As well, the plaintiff can have a stronger argument if an alternate design would not affect profits significantly.
  • Strict liability.
  • Breach of warranty

Are there different sorts of Product Liability?

In fact, there are three kinds of product liability.

Defective Design

Suppose there is a fundamental defect in the design of the product.

Regardless of how well the product was manufactured, regardless of the precautions taken in selling the product to the customer, the product can still be deemed defective because the design itself was unsafe.

How can a plaintiff claim in a design defect case?

A plaintiff can claim defective design if he or she can show that the product posed a foreseeable risk to an end-user during its intended use for the proper purpose.

For example, suppose an electric vehicle owner can show that there was a known danger of spontaneous fire when charging the batteries.

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In that case, this could be ruled a design defect.

In the same way, an example of a defectively designed product might be if a carpenter’s finger is amputated while working with a power tool that lacks stability.

The plaintiff may be able to argue that it was foreseeable that it may slip and the operator would be injured.

In some states, a plaintiff must also show that an alternative design was possible for the manufacturer.

In those jurisdictions, the claimant will have to prove that an alternative design was possible both from a practical and from an economic standpoint and that the product’s functionality would not be affected.

In the power tool example, it would require expert evidence showing a better design for the tool, which would have eliminated the danger, and that the alternative design was not prohibitively expensive.

Like California, courts in some states apply a “consumer expectations test”.

Rather than relying on an alternative design test, which requires the alternate design to not be more expensive than the one chosen by the manufacturer, as we stated in the example above.

The consumer expectation test asks whether an “ordinary consumer” could possibly anticipate that a product poses a risk of danger exceeding what he or she could expect.

The arguments in those jurisdictions often hinge on the definition of who is an ordinary consumer.

When a product has a design defect, a plaintiff will usually litigate based on either strict liability or negligence.

The bottom line is if a defective product enters the supply chain, it poses an unreasonable risk of danger to commerce.

PLI is the only way to protect against the consequences.

Defective Manufacturing

If a manufacturer starts off with a safe design but introduces errors in the actual production, either ignoring fundamental specifications or substituting components or procedures that differ from the specifications, the resultant legal action would be based on defective manufacturing.

For example, in the case cited above of an unstable power tool, if the design called for a metal clamp that secures the tool to its stand, but the manufacturer substituted a cheaper plastic clamp, and that tended to lose grip due to vibration, the liability rests on the manufacturer, not the designer.

Defective Warning

Consumers are supposed to be warned by manufacturers of known dangers associated with the use of a product.

A familiar example would be the information sheets that come packed with prescription medications that clearly identify side effects and prohibitions for taking along with other drugs.

Apart from ensuring the safety of the person taking the medication, it protects the manufacturer legally in case a person ignores the warning.

A case could be made of a defective warning where buyers are not informed of known dangers on the warning label, or it contained mistakes and was not complete enough.

The warning label also has to be understandable, visible, and accessible.

For example, a warning label in Chinese on a power tool that was bought in the US and came packed in a box labeled in English (no matter how bad) could be considered having a defective warning because purchasers could hardly be expected to understand the warning.

Understanding Negligence

Unlike strict liability, in negligence, attention is focused on the vendor’s conduct, not on the product itself.

In order to win a claim of negligence, a plaintiff needs to prove all the following elements:

  • The defendant owed a “duty of care” to the plaintiff
  • The defendant’s actions breached that duty
  • The breach of duty was a direct contributor to any injury to the plaintiff.

In the same way as a strict liability case, a negligence claim may assert that the liability arises from the product’s design, manufacture, labeling, or packaging.

It is possible to be exonerated for negligence but still be found liable for strict liability and vice versa.

Understanding Strict Liability

Basically, as defined in Wikipedia, strict liability is the imposition of liability on a party without finding fault (such as negligence or tortious intent).

The claimant need only prove that the tort occurred and that the defendant was responsible.

The law imputes strict liability to situations it considers to be inherently dangerous.

It discourages reckless behavior and needless loss by forcing potential defendants to take every possible precaution.

It has the beneficial effect of simplifying and thereby expediting court decisions in these cases, although the application of strict liability may seem unfair or harsh.

So, this means you may be liable if a customer was injured by a product, even if you aren’t found negligent.

As well, insufficient warning of proper use of a product can imply liability.

A more expanded definition of Strict Liability in Tort law can be found here.

The law relevant to product liability states:

Manufacturers or sellers can be strictly liable for damages caused by products that they place into the stream of commerce.

There are two basic categories to which these apply:

  • Manufacturing Defects. Manufacturers are typically liable when a mistake in the manufacturing process causes an injury. The manufacturer or retailer can be held liable even in the absence of any showing of fault or negligence.
  • Breach of Warranty. Suppose the manufacturer or seller of a product explicitly or implicitly guarantees that a product will behave in a specific manner. If it fails to do so, they will be held strictly liable for any resulting injuries, regardless of any direct fault.

Strict liability applies even if a product contained an appropriate warning, was safely designed, and was manufactured correctly.

The manufacturer, distributor, or retailer of a product may be held liable for injuries resulting from the use of the product simply because the product caused those injuries.

If a consumer had to prove who was liable in the chain of production, they would have almost zero chance of winning their case.

As a result, there is a general tendency to rule in cases of a product causing the injury that less strict rules apply in the case of negligence than in the case of strict liability.

Essentially, no matter how careful you were in the design, production, distribution, or sale of a product, you may still be liable for harm caused by the product.

You should have adequate protection from proper product liability insurance.

Understanding Breach of Warranty

For a claim of breach of warranty, it does not require the plaintiff to prove that the defendant’s product was defective.

Breach of warranty is fundamentally different from strict liability and negligence because it is based on a contract that strictly limits plaintiffs.

In general, to claim breach of warranty, the plaintiff must be “in privity” with the defendant, which requires that the plaintiff or a member of his immediate family must have been the actual buyer.

Privity is defined as “A legal relationship between two parties based on contract”.

However, the definition of privity varies widely from state to state.

One example is in Nevada, where a breach of warranty is the legal liability applicable to a product manufacturer when a product they make doesn’t work as it should.

It could be based on an express warranty or on a consumer’s reasonable expectation that a product works the manner it’s intended for.

A manufacturer can face a claim for breach of warranty when the product doesn’t work as it should.

Example – under Nevada law

A promise made by a manufacturer aimed at inducing the sale of a product is an express warranty.

For example, suppose an appliance comes with a three year warranty.

In that case, the manufacturer guarantees that it’s going to work properly for that length of time.

If it stops working after two years, a claim for breach of express warranty can be made against the manufacturer.

With every product sold in Nevada, there comes an implied warranty that it will work for its intended purpose.

For example, for a washing machine that leaks water or doesn’t spin-dry fully, there could be a breach of warranty claim against the manufacturer.

There are generally two classes of warranty in Nevada:

  • implied warranty of merchantability
  • warranty of fitness for the declared purpose.

Warranty of merchantability is similar to strict liability requiring proof that the product was defective.

On the other hand, the warranty of fitness for declared purpose requires the purchaser to prove that he told the supplier about his specific needs about the product, such as dimension, weight, speed, and that he received assurance that it would meet those requirements.

It’s also required for the claimant to prove that the product failed to meet those specifications.

How does product liability coverage work?

Product liability insurance protects a business against a claim by a customer for damages as a result of any fault with the product sold.

Suppose the case judgment goes in favor of the plaintiff.

In that case, product liability insurance covers all costs associated with the case, including compensatory costs and associated legal fees.

Claims can be brought at any time with the first use of the product, within a period since purchase, specified in each state and usually three years or even longer.

It has important implications because even if your own business’ activity has reduced or even stopped, you should keep cover going until the relevant window in your state has closed.

Claims are treated on a case-by-case basis, and there are no legislated legal limits on costs, which will be based on severity and scale of loss.

For end-point suppliers, liability does not just come from a physical connection with the customer.

Traders on the internet, either from their own websites or shared platforms like Amazon, should also take product liability insurance for eCommerce.

Amazon doesn’t require proof of product liability insurance for Amazon sellers, Amazon seller product liability insurance.

In fact, product liability insurance is solely your requirement since Amazon has no liability in the transaction.

What else does product liability insurance cover?

A product liability insurance policy for small businesses can help to protect your business even if it is found not to be at fault.

The cost of your defense, amounting to legal and court costs, may not be assigned to a losing plaintiff and can significantly impact your business’s finances.

However, with proper insurance coverage, not only damages awarded against you but also associated legal costs and court fees are paid by the insurance company under your product liability insurance policy.

How much will PLI cost?

Product liability insurance costs are mostly dependent on the size of your business but can also be affected by your location, the general type of business, and most importantly on your claims history.

As a first-time customer, you may have to pay more than the average.

In most states, premiums are calculated per $100 of annual sales revenue and generally start in the range of 15¢ – 20¢ but could go as high as $1.50.

FAQ

Do distributors need product liability insurance?

Yes. Any person or company that handled a product that ended up in a claim may eventually require PLI.

This is especially the case if the companies down the supply chain either have gone out of business or manage to evade the claims against them.

Liability passes throughout the chain and can end up in your lap.

Does product liability insurance cover services?

No. As the name implies, only physical products that have been sold to a third party can be covered by PLI.

Does product liability insurance cover professional indemnity?

Understanding product liability vs professional indemnity insurance requires consideration of where the business and the customer are based.

Professional indemnity is associated with British law, and may also apply in the British Commonwealth countries like Canada, Australia, New Zealand, and South Africa.

Final thoughts

Rather than starting to think about what product liability insurance costs, consider the following:

What happens to you if you don’t have PLI?

There is no upper limit to the final compensation payout, which can quickly run into the thousands of dollars and maybe much more.

If you are taken to court, you are taking a massive risk, and if found liable for injury or damage, you will end up forking out all the costs from your own pockets.

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