Product liability insurance

In the eyes of the law, responsibility for a faulty product is not always limited to the person who physically made it. You are generally considered responsible for a product if:

• You are the producer: This includes anyone who manufactured the product or any component part.
• Your branding is used: If you put your business name, trademark, or logo on a product, you are effectively taking responsibility for its quality.
• You are an importer: If you import goods into the UK from any country (including the EU), you take on the same legal responsibilities as the original manufacturer.
• The manufacturer is untraceable: If a consumer asks who supplied the product and you cannot identify the source within a reasonable timeframe, you could be held liable.
• You have refurbished or altered the product: If your business makes changes to a product that then fails, you could be held responsible for the consequences of those alterations.

The extent of your cover will depend on your individual policy. However, most product liability insurance policies are designed to protect you against the financial fallout of physical harm or damage caused by your products to third parties.

• Personal injury and medical expenses: This handles compensation costs if someone suffers bodily harm, illness, or death because of your product. It also covers any associated medical expenses the claimant may incur as a result of your product.
• Property damage: This covers the cost of repairs or replacements if a product damages someone else’s property – for instance, a faulty appliance causing a house fire.
• Legal defence costs: Defending your business against a liability claim can be expensive, regardless of who is at fault. Your policy provides cover for legal expenses and the cost to settle claims, allowing you to continue your normal operations while dealing with claims against your products.

Crucially, this insurance also steps in to protect you if you have sold products sourced from outside the UK or if the original manufacturer has since gone out of business. In these cases, legal responsibility often shifts to you as the supplier.

What is not covered?

While product liability provides essential protection, there are specific exclusions that you should be aware of to ensure your business is fully protected by other policies:

• Injury to your own employees: This cover is purely for third parties. To protect your staff, you are legally required to have employers’ liability insurance.
• Damage to your own property: This insurance protects other people’s property, not your own assets. You will need separate property insurance for your premises and stock.
• Logistical recall costs: While your policy covers the damage caused by a faulty product, it typically does not cover the cost of physically recalling a batch of goods from the market unless you have a specific extension. A separate standalone policy can also be purchased.
• Digital and software failures: Purely digital losses or data theft fall under cyber and data insurance, but physical damage caused by a digital product defect may still involve your product liability cover.
• Poor workmanship: This insurance covers the product itself. If a claim arises from a service you provided, such as an incorrect installation, this is usually a matter for public liability.

To ensure you understand the specific breadth of your cover, you should always read your policy wording. Our expert brokers will be able to help provide professional guidance. They will answer any questions you may have and ensure you have the right protection in place for your business.

Deciding on a limit of indemnity is one of the most important parts of arranging your cover. Most policies offer limits between £1 million and £5 million, but the right amount for your business depends on your specific risks and contractual needs.

Product liability typically uses an aggregate limit. This means the limit you choose is the maximum your insurer will pay for all claims combined during the entire policy year. If a single faulty batch of products leads to ten different claims, they all come out of that one total pot.

Factors to consider when setting your limit

Once you understand the aggregate limit, you should decide on a value, taking into consideration:

• North American exports: If you sell to the USA or Canada, you'll likely need a higher limit. This region is historically more litigious, and claims tend to be significantly larger.
• Contractual requirements: Many distributors, retailers, or local authorities will refuse to work with you unless you hold a minimum level of cover.
• Supply chain risk: If you rely on external partners for design or raw materials, their risk management becomes your risk. If they have a history of liability claims, you should consider a higher limit. You should also keep in mind that if parts of the supply chain are untraceable or based outside the UK, you may bear the brunt of any claim.
• Worst-case scenarios: Think about the maximum potential damage your product could cause. If a faulty component could lead to a large fire or a serious long-term injury, a lower limit may not be enough to protect your business's future.

Insurance is your financial safety net, but proactive risk management is the best way to protect your reputation. Following these steps can help avoid potential issues:

• Quality control programmes: Develop a rigorous programme to test and check all products for potential faults or damage before they reach consumers.
• Traceability and recall plans: Use serial or batch numbers on all products and establish a comprehensive product recall plan so you can act quickly if a defect is identified.
• Diligent record-keeping: Maintain accurate documentation of your suppliers, manufacturers, testing results, and customer complaints.
• Instruction and label audits: Regularly review warning labels and assembly instructions to ensure they are explanatory enough to reduce consumer risk.
• Monitor feedback: Review customer complaints closely; hearing about a potential defect early can allow you to act before the product causes widespread harm.