Myths abound among small-to-medium-sized businesses about the need for product liability insurance and its coverage.

But it’s not just for mistakes or products that break or malfunction. An insurance industry report has found almost half of business owners surveyed said law changes about product changes were complex. That’s just one part of the product liability picture.

Here’s your refresher guide to this important policy.

What is product liability insurance?

Product liability insurance offers protection to manufacturers, wholesalers, retailers, and even sole traders and importers, should a third party allege negligence about your product(s). Third parties may have suffered personal injury or property damage, so would claim for compensation under Australian Consumer Law.

A product liability policy could cover that compensation amount, plus legal fees and court costs even yours and the claimant’s if you lost.

Each product liability policy may define the term ‘product’ slightly differently. Typically, it means anything that you or someone on your behalf has:

• Sold, supplied, re-supplied, or distributed
• Imported, exported, installed, or assembled,
• Manufactured, produced, built, extracted, processed, or grown
• Modified, altered, such as by quality, usability, performance, or safety adding new features, simplifying it, changing the colour/shape/material
• Serviced or repaired, or
• Bottled, labelled, or handled.

Options for this cover include:

• Scope of cover depending on your risk exposure, industry/sector, business size, premises location, and type of work you do, etc.
• Policy limits, which set a maximum the insurer will pay for a single claim or claims during the policy period
• The amount of the deductible, which is the amount that you will contribute to each claim. This may assist in managing your premium.
• Exclusions – ensure you know what these are for your policy.

What doesn’t product liability cover?

However, each product liability insurance policy is different as the policy wording will detail. For example, some may exclude coverage for particular product types or incidents. As well, you could forfeit coverage for:

• Lack of warnings, such as not disclosing nuts or other allergens that may be in a food product you make/sell
• Outright deception such as through misleading marketing
• Design issues, including undocumented changes
• Product recall costs that you incur
• Products that include or produce the hazardous material, asbestos
• Inadequate or inaccurate instructions.

Here are common myths among SMEs about product liability:

• It’s just for big business
• Only manufacturers need it
• General liability insurance has you covered for product liability
• It covers any claim against a business
• It’s expensive
• Coverage is one size fits all
• Only needed for businesses selling physical products (software is a ‘product’)
• Covers trademark infringement or copyright infringement, and
• It will protect a business sued for an accident that happens on its premises.

Public v product liability insurance

Often, a public liability policy is packaged with a product liability But it pays to check the policy, as they are separate coverages:

• Product liability covers your business when your product damages or causes harm to a third party or their property, while
• Public liability is about your liability to the public and other third parties who are not your employees, such as if a visitor trips and hurts themselves at your business premises or shelving breaks in your shop and destroys someone’s belongings.

Do I need product liability insurance?

The law does not require your business to have product liability insurance, although some contracts with major retailers may require you to take out cover.

However, consider if your business can afford not to have this essential cover – do you have a nest egg, a ‘just in case’ fund? The problem is it is difficult to gauge how much you’ll need to cover a claim and keep your business operating. Legal costs can quickly escalate.

Ensure you invest time and expertise in assessing your risks. We can help you develop and refine your product risk strategy. Keep us posted about planned business changes, such as expanding your product lines. It’s in your interest not to leave insurance as an afterthought.