Product Liability and Your Business
Do you manufacture a product? If so, do you have adequate insurance to protect you from the risk of a defective product? If not, you may face an increasingly troubling peril: massive liability for a defective product. That’s what Japanese company Takata discovered when the airbags it supplied turned out to be faulty and dangerous, leading to the largest safety recall in U.S. history. The recall affected over 41 million vehicles globally and cost Takata over $24 billion, according to the law firm Schiffman Firm.
Not surprisingly, this recall led to Takata’s demise. In addition, many of Takata’s partners have been affected. These are some of the largest automotive companies in the world.
How can you defend your business from a similar catastrophe? Consider general liability, product liability and product recall insurance. Let’s review the differences among these three coverage options.
Commercial general liability insurance
Liability insurance covers damages and legal costs that occur when your business is found liable for injuries or property damage. Liability can arise from various sources, so different types of liability coverage may be required.
A commercial general liability (CGL) policy will cover you if your products, services or operations cause bodily injury or property damage. However, CGL is limited. A standard CGL policy includes a separate aggregate coverage limit for “products and completed operations.” If your main business operations include designing, manufacturing, assembling, distributing, installing or selling products, a liability claim could easily exceed your coverage limit. Because of this, you may also need a product liability policy.
Product liability insurance
If your product is faulty, the fallout could bankrupt your company. Even if your company’s involvement in a product is limited, you could be found liable in a lawsuit. In fact, you may be liable even if all your company does is repackage and distribute a product manufactured elsewhere. You could also face a liability risk if your marketing materials, labels or promotions lead to the misuse of your product.
Product liability insurance protects manufacturers, distributors and sellers from legal liability if a dangerous or defective product results in personal injury.
Having dedicated product liability insurance could also create more business opportunities. Other companies, like retailers and dealers, may stipulate that you have product liability insurance before entering into a contract with them. And investors often require proof of coverage before they will commit to a joint venture.
Be mindful of the sistership exclusion
Standard general and product liability policies have a “sistership” or “product recall” exclusion. This provision excludes any losses related to the withdrawal, inspection, repair, replacement, adjustment or loss of use of your product. Essentially, if you recall a product that could cause damage or injury, your standard CGL or product liability policy will not apply.
However, you can obtain separate product recall coverage. This can offset many of the operational costs of a recall, as well as the costs of reestablishing your company’s brand.
Product recall coverage
As supply chains become more complex, consumer protection regulations become more stringent. And with social media placing companies under a microscope, the way you handle a product recall could mean the difference between survival and bankruptcy. No matter how strong your reputation and safety record, you are never immune to this risk.
Product recalls are logistically complex, expensive and damaging to your reputation. You could face the cost of investigating the defective product, advertising and promoting the recall, and paying fees and compensation to distributors and retailers. Then there is the logistical nightmare of arranging the return, repair, and replacement of the defective products or components. You may also have to pay to dispose of the unsafe product. You will likely have substantial legal and professional fees and may face business interruption costs, in addition to decreased consumer confidence and company credibility.
Failure to act decisively when you discover a product defect could prove extremely damaging to your business.
Manufacturers, suppliers and distributors often erroneously think that their general or product liability insurance policies will cover a product recall. If your company has substantial business interests in the manufacturing, supply or distribution of products, speak with us. We can help you determine whether you have sufficient coverage and make any necessary changes.