Product Liability- Coverage, Exclusions, Add-ons




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    Product Liability

    Product Liability Product liability insurance provides legal protection to its insured in case they face claims brought by third parties for bodily injuries caused by products manufactured or supplied by the insured. Under such policies, an insurance provider would reimburse all expenses related to defending claims made against an insured party. Assuming you own a company which produces chocolates or food products sold directly to customers. Say, for instance, one of your customers becomes sick after taking your product and files a claim against it for deficiency; now legally obliged to make good the loss caused to that customer due to consumption, legally you are obliged to do so. Your customers could demand huge compensation amounts in response to irreparable loss suffered; such claims would likely run into millions and would not be possible to settle from your pocket alone; to cover this legal liability effectively you might purchase product liability insurance that protects against such claims from products sold by your business.

    Product liability insurance would cover legal expenses and compensation payments related to claims for bodily injuries or property damages arising from third-party injuries or damage claims. Accident-induced property and bodily damage should occur for product liability insurance claims to apply. Consider mobile phones: they're manufactured and sold at such scale that every manufacturer would ideally possess product liability coverage in place, since claims could arise at any moment for any number of reasons. So many cases involve mobile phones exploding while speaking or being carried in pockets, leading to injuries and property damages, with accidents defined as events which happen abruptly and without prior warning, often with unexpected and adverse results, leading to bodily injuries of product users and consequent property damages.


    • Bodily injury or disease to any person, including death and disability.
    • Physical damage to the property, which is tangible, is caused due to the product or service of the insured.
    • Pollution or contamination of atmosphere or water or any other tangible property.
    • Damages due to product defects, including manufacturing defects, faulty packaging, insufficient instruction to use the product, delivery specifications, etc.
    • Design and manufacturing defects result in bodily injury or property damage to third parties.


    • The main exclusion of product liability insurance is the product recall expenses incurred by the insured due to defects in the products sold to customers. The costs involved in recalling the product sold would not be covered under the product liability insurance. Still, the claims arising out of the usage of products would be covered under it.
    • Deliberate, willful, or intentional non-compliance of any statutory provision. For instance, if the user has not followed the mentioned guidelines and suffered bodily injury, it would not be covered under the product liability policy.
    • Claims arise from the product needing to live up to market standards.
    • Any financial losses arising from fines, penalties, and punitive damages/ exemplary damages are not covered. For example, if the government or any competent authority has decided to impose fines or penalties on the insured for not following certain rules and regulations, then the same would not be covered under the product liability insurance.
    • The policy doesn’t cover the cost of repair, reconditioning or modification, or replacement of any part of a product that is allegedly defective.
    • Any claims arising before the retroactive date mentioned in the policy.
    • Claims arising out of contractual liability would not have existed in the absence of a specific contract.
    • Claims arise from the failure of goods or products to fulfill their intended purpose.
    • Losses arise due to war, riots, political disturbances, fear, hoax, strikes, bandhs, civil commotions or unrest, and malicious activities unless covered under the add-ons.
    • Nuclear exclusions.
    • It arises from pure financial loss such as but not limited to loss of goodwill, loss of market, etc.
    • Any loss or damage caused or resulting from natural aging, normal wear and tear of the insured’s products.


    • Vendor’s Liability Extension is designed to cover liability for vendors who sell or distribute your product. For instance, your vendor might also be included in the legal case against your product for selling or distributing it and would be liable to share the damages with the insured. Extending the product liability coverage to include the vendors would help them fight such legal cases. This add-on eliminates the need for the vendor to purchase a separate product liability coverage.
    • Cover for exports add-on intends to cover the liability claims arising from exports to a foreign country. The add-on would be applicable only if the domestic product liability is covered under the policy. It also works out easier for the customer to have a single policy for sale in the domestic country and for exports instead of taking separate policies.
    • Coverage for defense cost add-on includes the cost incurred to defend claims against the insured. The add-on would be applicable only if prior consent is taken from the insured while engaging in defense related to the claims against the insured.
    • The retroactive date intends to cover the claims that have occurred in the past before the current policy start date. However, any claims arising before the retroactive date would not be covered under this add-on in the product liability policy. The insured could select the retroactive date in agreement with the insurance company. The importance of retroactive data is that certain incidents could have happened before but were not reported then and are reported during the current policy period.

    Key Features

    • The Limit of Indemnity under the product liability policy is the maximum amount the Insurer would pay in case of a claim. The limit of liability is based on two limits to be mentioned when taking the policy. These limits are ANY ONE YEAR (AOY) and ANY ONE ACCIDENT (AOA). Any one accident limit is the maximum sum payable for an accident based on various factors such as the nature of the accident, the number of people involved, the type of damage that occurred, etc. AOY is normally in multiples of AOA.
    • Claims Made basis means that the accident should occur during the policy period, and the reporting should also be done during the policy period in which the accident had happened. Only claims reported to have occurred during the same policy period would be covered under the claims-made basis.
    • The retroactive date is the date of commencement of the first “claims made product liability” policy. This date would remain unaltered as long as there is no break in the policy renewal and no substantial material change in the risk under the policy.
    • The period of Insurance commences from the retroactive date and expires on the date shown in the current policy. This period of insurance could be more than 1 year and would start with the retroactive date mentioned in the policy.
    • Policy Period is the period commencing from the midnight of the policy's inception date and expiring on the midnight of the mentioned date. The policy period would be 1 year from the date of issuance and would fall in the period of insurance.
    • Product recall add-on in the product liability policy compensates the insured for recalling defective products from the market, which may pose an imminent threat to the customers resulting in bodily injury or property damage. Product recall is done when the company realizes that products produced in a particular batch are defective and may cause harm to the users. The trigger for product recall is the same as that of product liability insurance, which includes bodily injury and property damage. Product recall cover is famous in the automobile industry, where we frequently recall particular models due to certain issues such as brake failure, clutch failure, etc.

    Importance of product liability for businesses

    Product Liability Product liability insurance is crucial for both small and big businesses alike as it provides peace of mind and resources needed to fight liability claims that might arise from customers using their product accidentally; especially as small companies often don't have sufficient resources dedicated to fighting these liability suits that might include bodily injuries as well as property damages sustained as a result of these accidents. Unfortunately, small companies with restricted finances find managing product liability claims challenging as it makes managing legal cases while improving business difficult at once.

    The importance of product liability insurance for business is explained below:-

    • Financial Security

      Product liability policies provide financial security to their insured customers, particularly since liability claims tend to be awarded by courts and other authorities and its quantity cannot easily be estimated. Liability claims can take many forms; an excellent example would be third party death claims in motor insurance policies that vary significantly based on various variables and consideration by courts in making their determination of claimant quantities in cases involving liability policies. One cannot predict with precision the potential amount of liability claims that might arise and set aside an appropriate sum accordingly. Companies could save themselves the expense and financial strain associated with setting aside an uncertain sum for claims which have yet to materialize by purchasing product liability policies that would cover them on behalf of insured customers and cover claims on their behalf. This also gives insureds peace of mind as claims would be settled quickly on their behalf by third parties who provide coverage, making your money go further with every dollar saved and reduced financial strain on you as they grow your business.

    • Save the reputation

      As part of your business operations, maintaining an impeccable reputation with both clients and customers is of vital importance. If they believe you cannot settle their claims promptly and satisfactorily, no one may transact business with you and this could significantly diminish sales volumes and profitability levels - which in turn would impact profitability levels as a whole. As part of your efforts to protect yourself from such situations, purchasing a product liability policy that reimburses victims on your behalf is vitally important. Imagine owning and operating a soap manufacturing business selling and distributing their wares throughout the market place. Due to an unfortunate event, one customer experienced complications after using your soap and filed suit in court against you. Now, as legally mandated, it is your legal duty to compensate customers who experienced inadequacies in service; failing to do so properly could endanger both your reputation and investors' perception of investing in your business. With product liability policies in place, however, claims would be settled by insurers on our behalf, protecting both us and them - saving time, effort, money, and our professional standing simultaneously.

    • Customer centric

      Product liability policies provide customers with peace of mind when using your product fully, knowing they would be protected should complications arise in the future via product liability coverage. Customers would feel much more at ease using it knowing you will cover for any complications through insurance policies if any arise. Customers would feel encouraged to buy products knowing that any claims would be covered through product liability insurance coverage. Experienced businesses will utilize product liability coverage to settle customer claims more effectively, leading to improved customer satisfaction and retention rates. Smaller organizations could experience serious setbacks if a single catastrophic event ensuing from lack of protection results in product liability claims that must be covered without having insurance in place.

    Claim Settlement Process in Product Liability Insurance

    The claim settlement process in product liability insurance policy is similar to the other liability insurance plans and is mentioned below:

    Step 1: First step of product liability claim settlement involves notifying an accident or event to an insurance company. As product liability involves third-party claims, information about them typically first reached the insured and then provided directly by aggrieved customers using their product, leading them to file legal cases or give notice directly. Once this notification has been provided to their insurers they should inform them in order to secure prior approval to fight legal battles legally on behalf of themselves and have costs covered by them as part of settlement of product liability claim expenses.
    Step 2: In the next step, the insurance company may even opt for out-of-court settlements or arbitrations on a case-to-case basis. For every claim, the insured should duly fill and sign the claim settlement form, which has to be submitted to the insurance company to process the claim. The claim is paid based on any one accident, which is the maximum limit for a claim, and Any one year, which is the maximum limit for the year.
    Step 3: The next step is to submit all the required documents on time for the claim to be processed regularly.


    Any company manufacturing products or providing services may opt to take out product liability insurance policies, with distributors and vendors as well as manufacturers taking out policies by paying an appropriate premium. When applying for such policies, specific details regarding both the product or service being produced need to be provided as proposals when taking them out.

    For more information regarding product liability insurance, please visit Ethika insurance broking and book a call to discuss with our liability insurance experts.