Product Liability vs. General Liability Insurance

If you are in the business of producing products, then you probably know that there is always a risk for a recall. Even the biggest and most regimented manufacturers have had product recalls. A product recall can happen for any number of reasons from tampering, contamination whether intentional or not, or a design flaw. Often, having to do a product recall not only will cost your business a ton of money, but it can also hurt your reputation depending on the reason for the recall. It can ultimately destroy your business if you are not prepared.

Your business is probably not in a position to do a full product recall, replacing all the products with a new and improved version, while also working on your public relations. Not to mention that if the issue with your product is traced back to you, you could potentially lose vendors as well. Product Liability insurance, also called Product Recall insurance, is designed to help you do all of those things. Product Liability insurance offers a few different coverage options and availability. Work with an experienced insurance advisor to make sure the policy is a good fit for your business.

There are a plethora of different Product Liability claims involving recalls that you should be aware of. All of these things can happen within your business and you should be prepared for them, and know what the insurance is going to cover. The list below is just a few examples of the things that can go wrong with your products, causing a claim and possible financial harm to your business.

• Product Defect – If the product you have produced is deemed to be defective because of a mistake in manufacturing, or even bad or missed testing of the product, this could turn into a huge claim. An example of a product defect is when auto dealers have to recall a specific car part because it is not working properly. Another popular claim for product defect is items made for children which cause choking hazards.
• Extortion – Some products can be damaged on purpose which will cause harm to someone or something. This can happen by a disgruntled employee who wants some money, whether one of your own or an employee of the company that is selling your products. Unfortunately, once the products leave your facility the control you have over them is over, unless you invest in tamper-proof packaging which is not always cost-effective.
• Malicious Tampering – Tampering can be a real issue, most often with the food service industry. Although an old story, the "Swill Milk" issue in the 1850s is a great example because of the amount of tragedy. The milk was tampered with maliciously, and it ended up actually killing 8,000 children. Regardless of the type of controls, you have in your manufacturing business, you cannot always guarantee that your employees are happy and won't do something to try to damage your reputation out of retaliation.
  
• Contamination – Accidental contamination can happen. It is not as common these days but we still can see it in the news. Often, it is because either a production line worker is ill, or an extra ingredient is accidentally added. There was even a case where razor blades from a production plant accidentally fell into stuffed animals made for dogs. A consumer bought one and the dog chewed on the stuffed animals, and then the razor blades were found. Luckily it did not harm the dog but the public fallout from it was detrimental to this local business, even though it was an accident.
• Mislabeling – Mislabeling can be a huge claim due to people with allergies more than anything. If all ingredients are not listed on a product and a consumer has an allergic reaction, that can turn into a claim that could cost tens of thousands of dollars if not more. Plus, then you would have to pull all of the remaining products off the shelves and reprint new labels for the products that will replace the mislabeled ones. You can see how quickly one small mistake can add up.
• Marketing Flaws – Some companies will use deceptive marketing practices to be able to sell products. While your manufacturing business may not do that, one of your vendors may. And because it is ultimately your product, you will be held liable if something goes wrong from the use of your product.

In addition to all of these possible claim scenarios, don't forget about the cost of hiring an attorney and paying court fees. It is not just about paying for the replacement product and public relations. Defense costs can add up quickly, especially if the claim ends up going to court. Lawyer fees are not cheap these days and can bankrupt a business within a small amount of time. If you are on the fence about purchasing a Product Liability insurance policy, for this reason alone it is an intelligent move on your part as a business owner.

General Liability insurance will probably be the first insurance policy that you purchase for your business. It is a great starting point when it comes to protecting your business liability. It gives you coverage for bodily injury and property damage claims that are so common. This includes slips and falls, personal advertising injuries like slander, and damage to others' property. For example, if a customer is touring your manufacturing facility and slips on the floor and hits their head. Or, if you are delivering a product to a vendor and run into their mailbox that would be covered under property damage.

While it may seem like General Liability would cover Product Liability since it says bodily injury, it is not quite designed for product recall type claims. Because Product Liability insurance is so specialized, it is a good idea to purchase the extra coverage as there will be a lot of possible things that can happen that will be excluded from your General Liability policy. Additionally, most General Liability insurance policies have a per-occurrence limit of $1,000,000 and the average cost for a product recall claim as of today is $1,500,000. You should save your General Liability insurance policy for the smaller, more common premises claims.

The short answer to whether you need Product Liability if you already have a General Liability insurance policy is absolutely. If you are in the business of manufacturing and selling products, you must have both insurance policies to ensure that you are properly insured with no gaps in coverage. Each policy will supplement the other. Making the investment upfront in turn for peace of mind of protection from all sorts of claims is wise. There are times when Product Liability can be endorsed onto a General Liability policy, so be sure to check with your insurance agent for all of your options.

General Liability and Product Liability are essential for your business to continue to operate smoothly and make money. If you decide to only have General Liability and take the risk, will you be able to reach into your pocket if someone tragically died as a result of your product being contaminated or even tampered with? All it takes is one denial of a day off to an employee to cause them to be so angry they will tamper with your product. While it may sound silly, it is an unfortunate reality that employers like you face daily. With the average claim costing over a million dollars, why wouldn't you invest in the coverage to keep your business safe?

Of course, the cost of insurance will be a very big factor in your decision of whether or not you purchase it. The good news is that Product Liability insurance is often very affordable. A manufacturer will certainly pay more than a vendor as their risk is higher, but it is still affordable when compared to the amount one product issue could cause your business. There will be some factors that the insurance company will take into consideration when pricing your policy.

1. The type of product you are selling, with food and medicine, certainly being riskier
2. If you import or export
3. Coverage limits including deductibles
4. Claims history
5. Your experience

Now that you understand how important Product Liability insurance is even if you have a General Liability policy, our team of experienced advisors is standing by to offer a hassle-free quote. We can discuss all of your options, whether that means adding it as an endorsement to your existing General Liability policy, or if it makes more sense coverage wise and financially to purchase a completely separate policy. Give yourself, your vendors, and possible investors peace of mind knowing that if something untoward happens with one of your products, you will have the financial backing to overcome it.