If you run a business that manufactures, sells, or supplies goods in Australia, then you’ll need to think about getting product liability insurance. It’s a specific type of business insurance that will protect your operations from financial losses if a product you provide causes personal injury or property damage.
Given the complexities and risks involved with creating and distributing products, having product liability insurance is a way to protect your business — and yourself — from the financial fallout and legal liability of any future claims, whether the fault lies with the design, manufacturing, or even the use of the product.
Here’s everything you need to know about how product liability insurance works and what it covers.
What is product liability insurance?
So, what is product liability insurance? This particular type of business insurance is a way to make sure you’re financially protected from the legal costs and compensation tied to claims of injury or property damage due to a product you make, sell, or supply.
In Australia, businesses can be liable if their product causes personal injury or property damage, even if the fault isn’t theirs. That means if a product is poorly designed, improperly labelled, or contains a defect that causes harm to a customer, your business could be responsible for the fallout (i.e. damages).
If you have a product liability claim, your insurance may cover the legal fees, settlements, and compensation costs related to the defective or unsafe product.
Claims arising from these issues can be complex and expensive, especially when multiple parties make up the manufacturing or distribution chain. Your liability policy will apply to tangible products (e.g. consumer goods) and industrial equipment or machinery that might cause harm because of defects.
In many industries, having both public and products liability insurance is considered a standard part of doing business. Retailers, manufacturers, suppliers — everyone is susceptible to product-related claims, whether you produce the items yourself or source them from other vendors.
Without product liability insurance, you run the risk of being hit with huge financial claims that could result in bankruptcy or long-term reputational damage. Like another type of policy – public liability insurance — it’s a key part of risk management for businesses that engage with the public.
How does product liability insurance work?
Whereas public liability insurance covers you against negligence that causes injury or damage, such as on your business premises, products liability insurance covers you financially when a claim arises because of defects or issues with the products your business manufactures or supplies.
If a product you’re associated with causes harm to a customer, product liability insurance will cover the legal costs and any settlements or compensation required by the claimant. In other words, your business can handle these issues without becoming financially crippled by legal fees and payouts.
The cover extends to everything from manufacturing defects to design flaws and inadequate warnings that contribute to improper use. Say you manufacture children’s toys. If one is found to have a choking hazard thanks to a faulty design, you (the manufacturer), the supplier, and the retailer could all be implicated in a product liability claim.
Even if your business isn’t directly involved in the creation of the product, you could still be held responsible, so it’s definitely worth considering the inherent value of having product liability insurance.
What does product liability insurance cover?
Here are a few different scenarios where having product liability insurance could be helpful if a product is sold, supplied or manufactured by your business and causes harm or damage:
● Personal injury: If a product causes bodily harm to one of your customers, your insurance will cover legal and medical costs
● Property damage: Covers claims about damages your product causes to a customer’s property
● Product defects: Insurance applies to manufacturing, design or labelling defects that cause harm
● Legal expenses: Financial assistance for your legal defence costs in the event of a claim
● Compensation payouts: Covers settlements or court-ordered compensation payments to affected parties (note that this is not related to workers’ compensation)
What doesn’t product liability insurance cover?
Although product liability insurance covers many risks, it’s not an all-around fix for every issue. The following are usually excluded:
● Intentional harm or damage: Claims resulting from deliberate actions
● Product recalls: Costs associated with recalling a defective product
● Faulty workmanship: Claims related to poor quality or improper installation
● Warranties: Issues related to product warranties are not covered by product liability insurance
For negligence claims that cause personal injury or property damage, you’ll need to look into taking out a separate public liability insurance policy. Depending on your business type, you might also need professional indemnity insurance.
Who needs product liability insurance?
Whether running a large manufacturing plant or operating a small online store, you’ll be exposed to many risks of selling physical goods. If a product you provide is found to be defective and causes harm to one of your customers, you could be held legally responsible. This includes businesses that sell products through retail channels or wholesalers.
Businesses relying on outsourced manufacturers or suppliers should also consider taking out product liability insurance. Even if you didn’t directly create the product yourself, as a retailer or distributor, you are still part of the supply chain — and can, therefore, still be held liable if a claim is made. If, for example, you sell a kitchen appliance that another company defectively manufactured, you could still foot some of the legal responsibility if that product ends up causing damage.
Product liability insurance is usually required for industries like retail, manufacturing, and hospitality, even when doing business. Even if that’s not the case, some contracts — especially with large distributors and retailers — may require that your company holds a set level of coverage. If nothing else, it shows everyone that you take your responsibilities seriously.
How much does product liability insurance cost?
How much business insurance costs will depend on the size of your business, your industry, how much cover you want to take out, and the level (and type) of risk associated with the products you sell. However, be aware that those in high-risk industries, such as food production or electronics businesses, are more liable to pay higher premiums for added protection.
It’s best to shop around and compare quotes from different insurance providers to find the best policy for your business.
