If you manufacture anything—from industrial components to consumer electronics to food products—you're in the business of managing risk. Every product that leaves your facility carries the potential for a defect claim, and the financial consequences can be devastating. Product liability insurance is your safety net when something goes wrong with your products after they leave your control.
Here's what surprises most manufacturers: you don't legally need product liability insurance. Unlike workers' compensation or commercial auto insurance, no state mandates it. But here's the catch—nearly every commercial client, vendor, or property manager will require proof of coverage before doing business with you. Without it, you're essentially locked out of most B2B relationships.
What Product Liability Insurance Actually Covers
Product liability insurance covers bodily injury and property damage arising from products you manufactured, sold, handled, distributed, or disposed of. This includes three main types of defects: design flaws (the product was poorly designed from the start), manufacturing defects (something went wrong during production), and failure to warn (you didn't provide adequate instructions or safety warnings).
The coverage typically comes as part of a Comprehensive General Liability (CGL) policy under the "products hazard" provision. When a claim is filed against you, the policy covers legal defense costs, settlements, and judgments. In 2025, the average product liability claim payout sits at $35,000, while defense costs alone average $75,000 per case—even if you win. Those numbers have climbed steadily due to inflation and increasingly complex litigation.
What it doesn't cover: employee injuries (that's workers' compensation), service mistakes (that's professional liability), or your own business interruption losses. And here's a big one—standard product liability policies specifically exclude product recall expenses. We'll get to that shortly.
Product Liability vs. Completed Operations: Know the Difference
This distinction trips up a lot of business owners, so let's clear it up. Product liability specifically covers claims from defects in products you manufactured or sold. Completed operations coverage, on the other hand, protects service providers from claims arising after they've finished work—think contractors, plumbers, or pest control companies.
Here's the simple way to remember it: if you make cleaning products, you need product liability coverage. If you run a cleaning business that uses those products, you need completed operations coverage. Manufacturers fall squarely in the product liability camp. The coverage applies to incidents that occur while your product is in use or has caused direct harm, regardless of when the product was manufactured or sold.
The Product Recall Coverage Gap
Most general liability policies contain a specific exclusion for product recall expenses, and that's a problem because recalls are increasingly common. In 2024, more than 3,200 recall events were recorded in the United States—the second-highest annual total in six years. Whether it's a government-mandated recall from the FDA, CPSC, or NHTSA, or a voluntary recall to protect your brand, the costs add up fast.
Product recall insurance (available as an endorsement to your general liability policy) covers the expenses you face during a recall: notifying customers and media, shipping costs to retrieve products, disposal and replacement costs, extra storage space, overtime payroll for employees managing the recall, and reputation management efforts. What it won't cover is business interruption losses or compensate you for the lost revenue during the recall period.
For small to mid-size manufacturers, importers, and distributors of consumer goods—especially in high-risk sectors like agribusiness, life sciences, and general consumer products—recall coverage isn't optional. It's essential protection against an increasingly common risk.
How Much Coverage Do You Actually Need?
There's no one-size-fits-all answer, but your coverage limits should align with your worst-case recall or injury scenario. Ask yourself these questions: What's your product's risk level? A medical device manufacturer faces different exposure than someone making plastic storage bins. What's your sales volume? The more units you sell, the higher your potential exposure. What do your vendors require? Many contracts specify minimum coverage amounts, often $2 million or higher.
As a general guideline, manufacturers selling directly to consumers often need $5 million or more in coverage to protect against catastrophic claims. B2B component suppliers who sell to other manufacturers might manage with lower limits and reduced premium costs, since their exposure is typically more limited. Your insurance agent should run scenarios based on your specific products, distribution channels, and revenue to recommend appropriate limits.
Don't let cost alone drive your decision. Yes, premium costs vary widely based on your risk profile and claims history. But underinsuring to save a few thousand dollars on premiums is penny-wise and pound-foolish when you consider that legal defense costs alone climbed to $15 billion across the liability insurance industry in 2023, up 7% from the prior year.
What's Driving Costs in 2025 and Beyond
The product liability insurance market is experiencing a mix of rate stabilization and continued caution heading into 2026. Product liability claims globally grew 12% in 2023, driven largely by recalls in automotive and electronics sectors. High-profile verdicts continue to reshape the landscape—in 2025 alone, Real Water faced over $11 billion in total liability including a $3 billion punitive damages verdict, while 3M settled with New Jersey for up to $450 million over 25 years.
Interestingly, small and medium-sized manufacturers now account for 60% of new product liability policies, reflecting growing awareness in this segment. The U.S. remains the largest market globally, representing 45% of worldwide product liability premiums. That's partly because American courts tend to award higher damages than other jurisdictions, and partly because the regulatory environment here demands more robust coverage.
Getting the Coverage You Need
Start by reviewing your current vendor contracts and lease agreements to identify minimum insurance requirements. Those requirements aren't suggestions—they're conditions of doing business. Then evaluate your actual risk exposure by considering your product types, distribution channels, sales volume, and claims history. Be honest about your risk profile when talking to insurers; misrepresenting your operations can lead to denied claims later.
Work with an insurance agent or broker who specializes in manufacturing risks. They understand the nuances of product liability coverage and can help you navigate options like aggregate limits, per-occurrence limits, and endorsements for product recall. Don't just accept the first quote—compare coverage terms, not just premiums. A cheaper policy with significant exclusions can cost you far more in the long run.
Finally, remember that insurance is just one piece of your risk management strategy. Strong quality control processes, clear product documentation, proper warning labels, and rigorous testing protocols all help reduce your exposure. But when those preventive measures fail—and eventually something will slip through—product liability insurance protects your business from financial ruin. It's the difference between weathering a claim and closing your doors.
