Does Your Business Need Product Liability Insurance?

An expert weighs in on small business insurance coverage

A business owner smiles while standing in front of their store.
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Kentaroo Tryman / Getty Images

As a small business owner, purchasing insurance is a critical part of protecting the company you’ve worked so hard to build. Choosing which kinds of insurance best fit your business can feel overwhelming, especially with the many different options available.

You may have heard the term “product liability insurance” and wondered if it’s necessary for your small business. Learn what product liability insurance covers, how much it typically costs, which factors affect its price tag, and how to go about getting coverage.

Key Takeaways

  • Product liability insurance helps protect businesses if a product they made or sold causes harm.
  • General liability insurance typically includes product liability insurance. However, business owners can purchase additional limits if they want more protection.
  • The cost of business insurance coverage can vary, but it typically depends on how hazardous the company’s products are, the nature of the business, the amount of revenue a business makes from its products, its experience, and past claims.

What Product Liability Insurance Covers

In general, product liability insurance protects your business if a product you made or sold causes harm, certified SCORE mentor and business insurance expert Walt Abbott told The Balance via a phone interview.

To explain the importance of product liability insurance, Abbott gave the example of a restaurant. If a customer at your restaurant got food poisoning or had some other bad reaction to the food, then product liability insurance would give you protection, assuming the incident happens for a covered reason. In general, your policy might cover:

  • Design defects
  • Manufacturing defects
  • If a customer hurts themselves with your product, even if it wasn’t your fault
  • If you didn’t provide proper warnings on how to use the product correctly

Typically, the insurance company would pay your legal fees and other costs related to defending your business during the lawsuit.

If a patron is injured from the incident but doesn’t sue the restaurant, then the business owner would submit the information to their insurance company, who would make a determination of whether they want to provide a settlement—via financial or other means.

When you’re looking at your insurance policy, you’ll notice that product liability insurance is typically combined with completed operations coverage. This is a type of coverage primarily for protecting contractors involved in building and construction. It likely won’t affect your business if you’re not in that industry, but you’ll probably still see the wording on your policy, Abbott said.

Is It Part of General Liability Insurance?

While there are rare occasions when product liability insurance is separate, it’s typically included as a part of general liability insurance, Abbott told The Balance. The purchase of general liability insurance has several different sections, and product liability insurance is often one of the sections that’s automatically included.

If you feel it’s necessary to increase your protection beyond what your general liability policy offers, you can purchase additional limits of product liability insurance, Abbot said.

You’ll also likely see product liability insurance included in a business owner’s policy, which is a specific type of insurance policy designed for small businesses. It includes general liability insurance, and business owners can add property and facilities coverage, too.

Having general liability insurance is always recommended, Abbott said. Depending on what industry you’re in and what businesses you’re working with, it may be required as part of your contract when dealing with other companies.

How Much Does Product Liability Insurance Cost?

The cost of business insurance coverage can vary considerably depending on a number of factors. A small business with a relatively small revenue could expect to pay around a $500 minimum premium for an annual business owner’s policy with general liability insurance, Abbott estimated. Whereas a manufacturing company dealing with a hazardous product would have much higher premiums; Abbott estimated an annual business owner’s policy starting at $2,000 in this case.

The price of a business owner’s policy is based on your business’s revenue and the nature of the small business itself, among other factors. Underwriters also look at what experience a small business has in the particular field they’re working in, as well as what kinds of claims have been made against the business in the past.

How To Get Product Liability Insurance

A good place to start your search for business insurance might be reaching out to the company you have personal insurance with, and asking it if they also offer small business insurance policies.

An insurance company will typically send you an application with a list of questions regarding the nature of your business, your experience, and information about past claims, among other details; it will quote the policy accordingly.

You could also contact an independent insurance agent who could provide you with quotes from several different companies for comparison.

It can sometimes be difficult for a company to find coverage, Abbott said. Even though many insurance companies provide business insurance, they often won’t insure small businesses.

Frequently Asked Questions (FAQs)

What is the difference between product liability and strict liability?

Product liability is a general term used to talk about your business’s liability if a product causes harm. Strict liability refers to a cause for a product liability claim in which one of your products injures someone and it’s not your fault.

Why can it be difficult for startup companies to obtain product liability insurance coverage?

Startup companies can often have challenges finding coverage as they don’t have a business history and their revenue is typically small, among other issues. However, Abbott said, insurance is available; it’s just a matter of finding the right fit.

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Correction - June 10, 2022: This article has been updated to correct the starting estimated rate for an annual business owner's policy.

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