Does Your LLC Need Product Liability Insurance?

Collectively, businesses spend around $1.7 million on litigation fees and damages per year. Around 6% of these business court cases involve a product defect. This means that if your business manufactures, distributes, or sells products, you’re at risk of a lawsuit if the product malfunctions. Even if you own a business with liability protection—like an LLC—your business assets can still be seized if the company gets sued. Product liability insurance helps LLCs and other businesses pay for damages caused by faulty products. But what does product liability insurance cover, and how do you know if your LLC needs it? We’ll get into all that and more below.

What is Product Liability Insurance?

Product liability insurance (aka product defect insurance) is a type of business insurance that helps to cover a company’s expenses if a product is claimed to have harmed a person or damaged property. These expenses can include litigation fees, legal settlements and judgments, and medical bills for the injured person. The businesses that can benefit from product liability insurance are the ones that design, produce, distribute, or sell products—whether or not those products are typically considered dangerous.

Industries that benefit the most from having product liability coverage include:

• Manufacturers
• Contractors
• Retailers
• Distributors
• Wholesalers
• Cosmetologists or estheticians
• Restaurants/food handlers
• Cannabis growers/retailers
• Online sellers

What does product liability insurance cover?

Product liability insurance covers your business against defects and damages related to marketing, design, manufacturing, or handling products, including food contamination, allergens that are not properly labeled, or faulty instructions. Product liability coverage helps your business pay for legal fees and damages around:

• Injuries caused by one of your products
• Sickness, illness, or death caused by your products
• Property damages caused by any of your products

While it’s not a universal requirement, depending on your industry you may need to buy product liability insurance to contract with other businesses or rent commercial real estate.

What doesn’t product liability insurance cover?

Product liability insurance covers your business against damages and repairs related to your products, but it doesn’t cover you against:

• Recall costs
• Stolen or damaged goods
• Employee injuries
• Interruption events, like having to close or relocate for a short time due to technical issues or weather conditions
• Coding or technology issues

For many of these issues, you can purchase other types of insurance, like errors and omissions insurance for coding or tech errors or workers’ compensation insurance (often legally required) for workplace injuries. You can also purchase a general business owner’s policy, which typically includes liability insurance, commercial property insurance, and business income insurance but can be customized to meet the specific insurance needs of your business.

What’s the difference between product liability and general liability insurance?

Product liability insurance and general liability insurance both serve to cover a business’ costs in the case of a lawsuit by a customer or member of the public, but they’re not exactly the same. General liability insurance typically includes some product liability coverage, but it also covers other types of liability. For example, if a customer sues you after tripping and injuring himself in your store, that would be covered by general liability insurance. Ditto if your business is sued for copyright infringement. Product liability insurance, on the other hand, is specifically for damages related to product malfunction.

A business owner’s policy will usually include general liability insurance. However, if your industry has high product liability (for example, if you sell kitchen knives, cars, or other potentially risky items) the coverage from general liability insurance may not pay for all the expenses incurred from lawsuits. In that case, it might be worthwhile to add product liability insurance to your business insurance policy.

Why Do LLCs Need Liability Insurance?

While it isn’t usually required, getting some kind of liability insurance is a good idea for almost every LLC. Product liability insurance specifically can protect your business financially in case of a product malfunction. If your LLC sells, produces, manufactures, or transports products, there is a chance that one day a customer or client will suffer an injury, and your business may be found to be at fault. For example, if you own a vending machine business and someone cuts their lip on a can, you could be held liable for injuries suffered by that customer. Without product liability insurance, you may have to pay out of pocket for court fees and damages.

A limited liability company, by its structure, provides business owners liability protection, creating a legal separation between the owner’s personal assets and the business’ assets. However, the LLC structure only protects the business owners (called members) from personal liability; it doesn’t protect the business itself. So even though LLC owners are usually not at risk of losing their personal savings if their business is sued, the LLC itself could lose all of its assets paying for legal fees and damages. If you want to minimize risk as an LLC owner, it’s a good idea to have general liability insurance to protect your business from potential lawsuits. Depending on the type of business you own and the level of risk you anticipate, it might be smart to get product liability insurance as well.

How to Get Product Liability Insurance for an LLC

Most business insurance providers offer product liability insurance as an endorsement, but some providers also offer it as a stand-alone insurance policy for high-risk businesses like machinery manufacturers. LLCs that do not already have business insurance should shop around for a policy that offers affordable coverage.

If your LLC already has general liability insurance, you can contact your provider to see if they offer product liability insurance as an endorsement or add-on. How much insurance you need will depend on your risk potential. For example, an online seller of candles probably won’t need as much product liability insurance as a retail seller of knives or guns.

How much does product liability insurance cost?

The cost of your product liability insurance will depend on your:

• Risk factors
• Location
• Business size
• Claim history

If you have general liability insurance, adding product liability coverage will affect your overall premium. General liability insurance policies range in price but average around $40 a month. Product liability coverage, on the other hand, costs an average of $100 a month. However, insurance premiums can vary widely between companies, so it’s a good idea to shop around and get multiple quotes before choosing a provider.

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