Product Liability and Your Business

Do you operate in various markets? If so, you may face an increasingly troubling peril: liability for a defective product. That’s what Japanese company Takata discovered when the airbags it supplied were found to be faulty and dangerous, leading to a massive safety recall. 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 coverage options.

Commercial general liability insurance

Liability insurance covers damages and legal costs that occur when your company is found liable for injury or property damage. Liability can arise from various sources, so different types of liability coverage may be required.

With social media placing companies under a microscope, the way your company handles a product recall could mean the difference between survival and bankruptcy.

A commercial general liability 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 need a separate 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 or promotions lead to the misuse of your product.

Product liability (PL) insurance protects manufacturers, distributors and sellers from legal liability if a dangerous or defective product results in personal injury or property damage.

Having dedicated PL insurance could also create more business opportunities. Other companies, including retailers and dealers, may stipulate that you have PL 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 CGL and PL policies include 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 PL policy will not apply.

However, you can obtain 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 your company handles 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 costs 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.

Even if your company’s involvement in a product is limited, you could be found liable in a lawsuit.

A failure to act decisively when a defect is discovered could also prove extremely damaging to your business.

Manufacturers, suppliers and distributors often erroneously think their CGL or PL 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.