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Product Liability and Insurance

Preamble

This content is independent of any content coming from insurance brokers, insurers, law firms, or other insurance lobbyists. Commercial insurance is rarely taught in schools, and when it is, it’s mostly done through the lens of brokers or insurers. There are many misconceptions around Product Liability Insurance, like many other topics in commercial insurance, due to bad habits acquired through the over reliance on insurance brokers or insurers or information providers who are lobbied by them. It is also important to note that insurance has both an operational aspect and a legal aspect, on which we put weights of 95% and 5% respectively in terms of importance to protecting a business and its investors (the point is that going to court to enforce coverage defeats the purpose of buying insurance, so you want to make sure that whatever insurance you buy protects your business right and pays out fast on large losses).

Product Liability

It is a form of Liability Risk whereby the liability originates from a faulty product, or the distribution of a product, that ultimately leads to injury and/or financial damage to its end users. The risk of product liability can be broken into two: (1) product liability as a result of the manufacturing process; and (2) product liability as a result of the distribution process.

Product Liability Insurance Definition

It is insurance that protects a business against product liability. Even if the business is not at fault yet is being sued due to damage done by its product, the insurance would pay for defence costs up to the amount of protection provided by the limit of the product liability insurance. It is important that product liability insurance be reworded and triggered clinically by risk experts independent of brokers and insurers for most effective results. Many businesses are under the illusion of protection because they do not involve independent risk advisors or risk management consultants in the procurement process, which leads to them paying annual premiums for a product liability insurance with a payout ratio < 25% on large losses (ie. if the loss is $1 million, the insurance would pay out less than $250,000). Some product liability insurance payout ratios are even lower than that, including payout ratios as low as 0%.

 

Cost Of Product Liability Insurance

The cost of the insurance varies greatly from one business to another depending on the size of the business, its industry, operational and financial details. Beware of cheap insurance, it most likely signals that protection is limited or non-existent in the first place upon analyzing the insurance policy word by word. Just put yourself in the shoes of insurers and think about whether you would truly insure the product liability risk of a business for very little premium.

Product Liability Insurance Coverage  

The coverage should protect a business and its directors, officers, and employees from product liability. The coverage, as outlined by the product liability insurance policy wording, consists of insuring agreements, exclusions, definitions, and various clauses relating to items such as defence and settlement, to claims notification, etc. Every product liability insurance is worded differently so we cannot simply summarize what the intrinsic coverage is. With that said, product liability insurance coverage should clearly and explicitly outline the loss scenarios that are relevant to your business. For example, if you are manufacturing auto components, then loss scenarios such as liability due to product recall or product malfunction should be explicitly covered with no exclusionary language within the fine print of the policy.

What Does Product Liability Insurance Cover

This depends on how the insurance is worded, but in general coverage can be made for the following causes of product liability:

·     Defects (in whole or in part)

·     Recalls

·     Distribution errors (regardless of the mode of distribution)

·     Bodily Injury to the end-user

·     Advertising Injury

·     Patent and/or Trademark infringement

·     Other causes of product liability

Product Liability Insurance Companies

There are various insurers offering product liability insurance depending on the jurisdiction(s) the business operates in. Lloyd’s, AIG, Travelers, amongst others, as well as many MGAs, offer product liability insurance. Our team can assist you with finding the right broker and insurer as part of the procurement process of product liability insurance, aside from rewording the insurance on your behalf for best value.

Where To Buy Product Liability Insurance

Contact us if you wish to purchase product liability insurance. We will structure the product based on your business operational data, trigger it at loss, and make insurance brokers compete for your business for most effective results.

Product Liability Insurance For E-Commerce

The insurance exists and can be tailored to the specific operations of an e-commerce company. That said, numerous e-commerce companies are under the illusion that they are protected for product liability through their insurance, whereas in reality it’s far from the truth. This is because they buy the insurance directly from brokers or insurers without having independent risk advisors involved in the procurement process. What ends up happening is that the product liability insurance that they buy has an average payout ratio of < 25% and is not relevant to their operational data. Many CFOs and their teams make the mistake of going for the most cost effective product liability insurance without going through the fine print of the insurance from a technical standpoint.

For example, numerous e-commerce companies buy cheap Commercial General Liability (CGL) insurance that includes irrelevant product liability insurance. At first glance, the insurance declarations page (insurance summary) would outline coverage for product liability, however if we dig into the fine print of the policy wording we will notice that the language around the product liability coverage is standard language used by the insurer that in no way, shape, or form matches the product liability risk of the e-commerce company. For example, in several instances our team found that product liability coverage was restricted to the scenario where the product is loaded and off-loaded onto/from a truck as part of the distribution process of such e-commerce companies. This only covers one and a small loss scenario in relation to the numerous loss scenarios inherent in the distribution process of an e-commerce company. In fact, the coverage won't even be applicable if the e-commerce company is transporting product by plane (as opposed to truck). Moreover, one of the most important loss scenarios, which is injury or damage to the end-user of the product, is not actually covered.

Product liability insurance must be reworded and triggered clinically by experts independent of brokers and insurers. If your business currently buys product liability insurance, feel free to fill out our request form for a free proposal by our team to provide you with risk advisory services (it’s an easy 1 step process).

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