PRODUCT LIABILITY INSURANCE

Product liability insurance protects the manufacturer, distributor or seller of a product from legal liability resulting from a defective condition that caused personal injury or damage associated with the use of the product. Product recall insurance, a specialty product designed to cover the costs associated with recalls, is also available from some insurers.

According to a February 2015 report from the advocacy group Kids in Danger, recalls of children’s products declined 34 percent in 2014 to 75, the lowest number in the 14 years of data collected by the organization. In 2014 there were 338 incidents reported prior to recall of the 75 children’s products, for an average of 5 incidents per recalled product.  The 2014 average represents an improvement from 2013, when the average was 14 incidents per recalled product. Injuries related to the recalls were down 85 percent, and deaths fell from 11 in 2013 to three in 2014. Children’s product recalls in 2014 totaled almost 17 million units.

INSURERS’ LEGAL DEFENSE COSTS

Most lawsuits are settled out of court. Of those that are tried and proceed to verdict, Jury Verdict Research data show that in 2013 the median, or midpoint, plaintiff award in personal injury cases was $68,218, down 9 percent from $75,000 in 2012.

Travelers Insurance 2015 Business Risk Index showed that legal liability was the fourth-highest rated worry for business leaders in the United States, down from No. 3 a year earlier. Of 1,210 business leaders surveyed, 56 percent indicated they worry about it somewhat or a great deal.

Businesses address their liability concerns through many types of risk management, of which insurance is an important component. A Swiss Re study indicated that in 2013 the United States had the largest commercial liability insurance market in the world both in premium volume ($84 billion) and as a percentage of Gross Domestic Product (0.50 percent). More than half of all global liability premiums were written in the United States.

Insurers are required to defend their policyholders against lawsuits. The costs of settling a claim are reported on insurers’ financial statements as defense and cost containment expenses incurred. These expenses include defense, litigation and medical cost containment. Expenditures for surveillance, litigation management and fees for appraisers, private investigators, hearing representatives and fraud investigators are included. In addition, attorney legal fees may be incurred owing to a duty to defend, even when coverage does not exist, because attorneys must be hired to issue opinions about coverage. Insurers’ defense costs as a percentage of incurred losses are relatively high in some lines such as product liability and medical malpractice, reflecting the high cost of defending certain types of lawsuits, such as medical injury cases and class actions against pharmaceutical companies. For example, in addition to $1.2 billion in product liability incurred losses in 2014, insurers spent $953 million on settlement expenses, equivalent to 77.4 percent of the losses.

Product Liability

If your company designs, manufactures, distributes or sells a physical product—anything from toys to building supplies to macaroni and cheese—you’ll want to strongly consider purchasing product liability coverage. This coverage helps provide financial protection in the event that the use of your product results in property damage, personal injury or death. Product liability coverage can be added to your general liability insurance policy or purchased as a stand-alone policy and can be tailored to the types of risks to which your business may be exposed.

What Could Go Wrong?

As you weigh the option of purchasing product liability coverage, it’s worth considering the ways in which your company could be found at fault for damages resulting from the use of your product. You might think that your product—or your role in a product’s “stream of commerce”—is at little risk of causing damage, but you may be exposed to a range of less visible risks. Consider these factors:

• Product Design, Manufacturing, Assembly and Packaging—Although your company’s role in the life of a product may be limited, you may still be liable in a product lawsuit. For instance, you might provide a single small part of a larger product; or your design might be safe, but a contract manufacturer produces a flawed product; or your company simply repackages and distributes products manufactured elsewhere. In all of these instances, your company could be liable—or at least will have to pay to legally defend itself—in the event of a product lawsuit.
• Directions, Warnings and Flawed Marketing—How you communicate about your product can result in product liability risk. For instance, if instructions, warnings or promotions lead to misuse of your product resulting in property damage or injury, your company could be found liable.
• Partner, Investor and Affiliate Relations—Partner or affiliate companies may also require that you have product liability insurance. For instance, a retailer may not sell your product unless you have product liability coverage. Financial backers might also require this coverage before making an investment. Ultimately, failure to carry product liability insurance can result in missed business opportunities.

Covering the Costs of a Product Recall

Product recalls can be costly and logistically complex, as well as damaging to your company’s reputation so you may want to include—or purchase separately—product recall coverage. Product recall insurance can help defray the operational costs of a recall as well as the costs of re-establishing your company’s brand.

While product recalls may be relatively rare, their frequency is on the rise, driven in part by stronger consumer protection regulations. Product safety problems can also be caused by the globalization of supply chains and manufacturing overseas in countries that do not have the same standards and enforcement policies as the European Union or the United States. Product recalls can be financially devastating and can even put a company out of business. No organization is immune to the risk of a product recall—even those with the best safety records, operational controls and manufacturing oversight.

Product recall insurance will help you cover a wide range of costs, including:

• Advertising and promotional costs to launch the recall.
• Shipping costs to collect recalled products.
• Product destruction and disposal costs.
• Product replacement, repair and distribution costs.
• Fees to wholesalers, distributors and retailers.
• Business interruption costs.
• Reputation repair and management costs.

Contamination Insurance

If your product might be accidentally or maliciously contaminated—for instance food, cosmetics or pharmaceuticals—you may also want to consider adding contamination coverage along with product liability and recall insurance.

Contamination, whether the result of criminal activity or simple human error, is occurring with alarming frequency in the U.S. and around the world. Companies that fall victim to these incidents often incur staggering costs in damage control and in the restoration of profits and brand reputation. When a contamination incident occurs, it can attract media attention that has a disastrous impact on the public’s confidence in the affected product or brand.

Product contamination insurance will generally provide coverage for the following:

• Recall costs, including laboratory analysis and product transportation.
• Announcement costs, such as radio, television and Internet placements.
• Third-party recall expenses.
• Loss of gross profits, typically up to 18 months.
• Rehabilitation expenses.
• The value of contaminated products.
• Crisis response and consulting expenses, including public relations and recall consultants.
• Increased cost of operations.
• Extortion costs.

Coverage for adverse publicity and government recall may be included or added to a contamination policy as an extension.

Your insurance professional can help you identify your product liability risks and weigh your coverage options.

 

Source: U.S. Department of Transportation, “Product Liability, Recall and Contamination Insurance” http://www.iii.org/ website. Accessed March 1, 2016. http://www.iii.org/article/product-liability-recall-and-contamination-insurance

© Copyright 2016. All rights reserved. This content is strictly for informational purposes and although experts have prepared it, the reader should not substitute this information for professional insurance advice. If you have any questions, please consult your insurance professional before acting on any information presented. Read more.

Dear Valued Customer,

Product liability insurance helps provide financial protection in the event that the use of your product results in property damage, personal injury or death. This issue of “———————-“ focuses on protecting your business from liability issues.

If you’re asking yourself what could possibly go wrong? It could be product design, manufacturing, assembly and packaging, directions, warnings and flawed marketing. Product recalls can be costly and logistically complex, as well as damaging to your company’s reputation so you may want to include—or purchase separately—product recall coverage. Please connect with us for more information.

We appreciate your continued business and look forward to serving you.

Kind regards,