Product liability insurance

Product liability insurance is essential for any business that produces or sells goods.

It protects you against legal claims for damage or injury caused by your products, including defending claims so you can go about your business without worry.

Most small businesses can't afford unexpected costs, so having product liability is vital for protecting your company against expensive legal claims.

The huge cost of compensation if your business is found to be liable, coupled with loss of income, can prove fatal for small businesses that lack product liability cover.

According to the Association of British Insurers, around £7.5m is paid out in liability claims each day in the UK.

Product liability is one of three liability insurance policies small businesses need to consider, alongside public liability insurance and employers' liability insurance.

Public liability provides cover against third party injury or damage claims caused by your business activities.

You can also cover employee injury claims with employer's liability insurance.

While employer's liability insurance is a legal requirement if your business hires staff, both product and public liability are voluntary and not required by law. Both are usually sold together as a package.

What is product liability insurance?

Product liability insurance covers the cost of legal action and compensation if someone is injured or their property is damaged by a product that your business has made or sold.

The product can be any type of goods sold to other businesses or to the public including equipment, machinery, software, vehicles, food, clothing, household items and medicines.

The person doesn't have to be the buyer or user to make a claim, as long as they were injured or their property damaged.

Product liability insurance is sold as a policy from specialist business insurers.

It's an essential purchase as without it your business can be sued if found liable for damage or injury.

Crucially, product liability insurance covers the cost of compensation up to a specific amount, and the legal costs involved in defending against any claim.

Does my business need product liability insurance?

The Consumer Protection Act 1987 holds manufacturers, suppliers, distributors and retailers responsible for injuries caused by their products or parts of their products - though the degree of liability is decided on a case-by-case basis.

While product manufacturers have the largest liability, all businesses along the supply chain have a duty of care to their customers so if your business makes or supplies products it's a good idea to buy product liability insurance.

However, product liability insurance isn't required by law. As a business you do not have to hold a policy, but manufacturers, suppliers, distributors or retailers that your business works with may require you to have it as part of your contract.

You'll need product liability insurance if you make or sell products part-time or as a hobby, such as cupcake baking or making and selling jewellery.

The amount of time for someone to bring a claim against your business is lengthy, too.

A compensation case can be brought anytime within three years of using the product.

In some cases, it can be brought up to ten years after the product was sold.

This means you should have product liability insurance to cover gaps in manufacture or even if you stop trading.

Do I need product liability insurance when selling goods?

It's not just product manufacturers that could face a legal claim.

Your business can also be liable if a manufactured product carries the name of your business, if you re-sell goods that you have purchased, or if you've repaired or refurbished them - even as a hobby, such as a business repairing musical instruments and reselling them on eBay, for example.

Your business may also be liable if a manufacturer can't be traced or has gone out of business - and you may also be liable if you use materials or import goods to sell in the UK from outside the European Union.

While retailers such as shops and distributors of products may not be seen as wholly responsible when a product liability claim is made - especially if the manufacturer is still a going concern - retailers do have a duty of care to customers.

In practice that means retailers should only sell products that are safe, meet appropriate regulatory standards, and they should be able to account for the entire supply chain, such as the materials used to make the products sold.

If your business sells products, it's worth ensuring you have evidence of the manufacturing process and ensure that all products meet UK and EU safety standards.

Not doing so could leave your shop facing a claim for selling a defective product, such as an imported phone charger that electrocutes a customer.

What does product liability insurance cover?

Product liability insurance covers two main costs: the compensation amount that is awarded to a customer in the event of a successful legal claim, and the legal fees involved in defending a claim including going to court.

It covers your business if a customer sues for personal injury or damage caused to property, such as a mobile phone breaking when connected to a faulty charger, for any products made or sold by your business.

However, there are exceptions.

Most product liability insurance policies would not cover your business if the fault was the result of poor-quality workmanship. Some policies may cover your business if the fault was beyond your control, such as an unexpected fault that would not have been able to have been identified through any quality control processes your business has in place.

For retailers and distributors, the story is slightly different.

Product liability insurance will cover your business provided you have taken adequate steps to protect customers and that you can prove the products were defective when they were supplied.

This includes providing clear usage instructions as well as safety warnings about misusing a product.

You also need to show that your contract with the manufacturer covers returns, safety and quality control - and you'll need to include details of how to return a faulty product to the manufacturer with the product when sold.

It's a good idea to keep good records of your product evaluation and selection, and ensure you're up-to-date with all consumer goods regulations and requirements.

How much product liability insurance do I need?

The level of product liability insurance your business needs depends on the size and type of your business, and the type of products you sell.

There are no set rules for the amount of cover you should get, so it's up to you to decide - but it's important not to skimp on buying product liability insurance and end up underinsured.

As each claim is treated on case-by-case basis, there's no legal limit on the cost to your business if it's sued.

Costs are calculated on the severity of the case and the scale of loss.

If a faulty product has large distribution and harms a number of people, compensation costs may run into the millions.

There may also be other costs involved such as the need for a product recall and professional assessments of the fault.

Even if it's just an individual claim, a customer suffering loss of earning for several months can mean a claim of thousands of pounds.

When choosing the right level of cover, consider the following:

Potential scenarios

Assess the ways your product could injure someone or damage property.

If that happened, such as food poisoning or faulty safety equipment, assess the likely level of damage.

Contractual obligations

Consider any contractual obligations with suppliers.

Many will specify a minimum level of cover, so check contracts. It's worth seeking legal advice before signing contracts with manufacturers and exporters of the products you sell.

Watch for indemnity or 'hold harmless' clauses that releases a third-party from any liability for goods sold or produced.

Such clauses can affect the price you pay for product liability insurance and you should seek to have them removed from the contact.

Potential payouts

If someone makes a successful claim against your business, calculate the likely payout.

If your product is unlikely to result in much harm or damage, then you may consider a lower-level of cover.

It's a good idea to get advice on the level of cover you need from industry or governing bodies.

As a rule of thumb, insurers typically offer policies that cover your business for compensation costs anywhere from £1 million to £10 million.

Legal fees may be covered up to £100,000.

How to buy product liability insurance

You can buy product liability insurance directly from an insurer or from a specialist broker through the British Insurance Brokers' Association (BIBA).

Generally, product liability is not sold as a separate policy.

It is usually included in other business insurance packages such as a public liability insurance policy.

When buying a policy check that it covers all issues such as medical claims, manufacturing quality and safety claims.

Check policy exclusions to see what isn't covered, and any stipulations or requirements - such as a certain degree of quality control - that are required for the policy.

By taking additional measures such as improving the quality control process you can often negotiate lower premiums.

If in doubt, always get advice from a solicitor specialising in contracts.