Product Liability Insurance Cost

Last Updated on December 27, 2023
Written by CPA Alec Pow | Content Reviewed by CFA Alexander Popinker

In carrying out its activity, any company can cause damages to third parties: material damages, bodily injuries, or financial losses. Liability insurance helps you deal with unforeseen situations, ensuring business continuity.

Product liability insurance is designed especially for small businesses which sell, manufacture or install any type of product. This insurance is absolutely necessary taking into consideration the fact that it happened at least once in your lifetime to buy a product that wasn’t as described.

How Much Does Product Liability Insurance Cost?

The risk that comes with each type of product will affect the characteristics of every product liability insurance. This risk is determined by the safety measures that are in place, the type of product, how much it is marketed to consumers and the amount of revenue derived. For example, items such as guns or fireworks have a considerably higher risk factor than bedding or clothes.

In the case of products from the low-risk category, the average cost of product liability insurance is around $0.30 per each $100 in revenue. For instance, if you sell $700,000 worth of goods every year, your costs for the product liability insurance would be $2,100 (or 0.0030*$700,000). Obviously, your actual costs may be significantly lower or higher depending on the annual revenue generated for your business and the type of product you sell, manufacture, or design.

You might also like our articles on the cost of general liability insurance, business insurance, or small business insurance.

Below you will find some product liability insurance cost examples for the products in the low-, medium-, and high-risk categories. We used an annual revenue of $150,000 with a liability limit of $1 million:

• Custom Motorcycle Builder/Designer: $12,000
• Health Supplement Manufacturer: $7,600
• Spice Distributor or Retailer: $1,300

Can your business be affected by a product liability lawsuit?

Sometimes, even the safest products can lead to the end of your business. For instance, in 2012 Blitz company was accused of producing gas cans that would explode when used to pour gas to start a fire. There were filled more than 30 cases of this product’s liability lawsuit which ended up costing the company around $4 million per case. One year later Blitz went bankrupt.

Another example is the case of Francisco Garcia of the Sacramento Kings with the Ledraplastic balancing ball. He fractured his right forearm during a workout because a balancing ball ruptured. Because of this, he wasn’t able to play the first four months of his first-year contract. He received $29.6 million in damages and $4 million in lost damages.

We presented these examples to show you how wrong things can go in any industry if the manufacture, design, or sale of a product will lead to property damage or injury. But if your business has a comprehensive product liability policy in place you will go through any lawsuit intended by consumers much easier and survive the financial losses.

Product Liability Insurance overview

Product liability insurance is specially made to financially protect a business against actions or claims which may arise from the manufacture, design, or sale of products to clients. This policy offers coverage for the seller’s or manufacturer’s liability, which can result from property damage or bodily injury sustained by a third party resulting from a malefaction or defective product or the lack of warnings and clear instructions regarding the usage of the product.

This insurance offers coverage for product manufacturers and for those responsible for selling these products such as resellers, distributors, retailers, wholesalers, and even the product installers.

It is very important to know that your business’ general liability does not offer product liability protection, except for law firms, churches, and other professional service companies.

What Does Product Liability Cover?

Product liability insurance will cover your business if any claims out of manufacture, design, or sale of a product arise, producing property damage or bodily injuries. Also, the policy covers your defense costs, if a lawsuit is intended against you.

What Does Product Liability Insurance Not Cover?

Product liability insurance does not offer coverage found under any other type of insurance policy.

Also, the majority of the product liability policies do not provide coverage for faulty workmanship, hazards that involve asbestos, mold, or lead paint, and intentional acts.

What are the Most Popular Endorsements?

The most popular endorsement among the product liability insurances is Vendors Coverage. With this endorsement the product liability coverage is extended to include specified vendors, that may distribute or sell products for the insured.

By purchasing this endorsement, the vendor will not have to buy a separate product liability policy for those certain items produced by the insured. Depending on the insurance company you choose, you will have to pay another $100 as a flat rate for this endorsement.