Here's something most business owners don't realize until it's too late: if you sell, distribute, or manufacture a product—any product—you can be sued if that product hurts someone or damages their property. It doesn't matter if you made the product yourself or just sold it. It doesn't even matter if you did everything right. Welcome to the world of product liability, where a defective coffee maker, a poorly labeled supplement, or a faulty toy can put your entire business at risk.
Product liability insurance is your financial safety net when someone claims your product caused harm. Whether you're a manufacturer producing thousands of units or a small retailer selling handmade goods on Etsy, this coverage protects you from the legal and financial fallout of product-related claims. And with product liability lawsuits becoming more common and more expensive—nuclear verdicts over $10 million jumped 27% in 2023 alone—understanding this coverage isn't optional anymore.
What Is Product Liability Insurance?
Product liability insurance covers third-party claims alleging that a product you made, distributed, or sold caused bodily injury or property damage. This coverage is usually included as part of your general liability insurance policy under what's called products-completed operations coverage. That means you might already have it without realizing it.
The coverage protects you from three main types of product defects. Design defects exist before the product is even manufactured—there's something fundamentally unsafe about the design itself. Manufacturing defects happen during production when something goes wrong in the making of the product. And then there are warning defects, which occur when you fail to provide adequate instructions or warnings about proper use. If someone gets hurt and claims any of these defects caused their injury, your product liability insurance kicks in to cover legal defense costs, settlements, and court-awarded damages.
Who Needs Product Liability Insurance?
If you're involved with a product at any point before it reaches the consumer, you need this coverage. That includes manufacturers who design and create products, wholesalers and distributors who move products through the supply chain, and retailers who sell products directly to customers. Even if you just add packaging or labeling to someone else's product, you can be held liable.
Here's the tricky part: under strict liability laws, you can be held responsible even if you weren't negligent. Let's say you own a small shop and sell a blender from a reputable manufacturer. That blender has a hidden defect that causes it to overheat and start a fire in a customer's kitchen. Even though you didn't make the blender and had no way of knowing about the defect, the customer can sue you along with the manufacturer. Your product liability insurance protects you in exactly this scenario.
What Does Product Liability Insurance Cover?
When someone files a product liability claim against you, your insurance policy covers several critical expenses. First and foremost, it pays for your legal defense. The average cost of defending a liability claim in the U.S. is $75,000, and that's before you even get to settlements or judgments. Your policy covers attorney fees, court costs, and expert witness fees.
If the case settles or goes to trial and you lose, your insurance pays the settlement amount or court-awarded damages up to your policy limits. Most small businesses choose coverage with a $1 million per-occurrence limit and a $2 million aggregate limit. That means the insurance will pay up to $1 million for any single claim and up to $2 million total for all claims during the policy period.
However, there's a critical gap in coverage that catches many businesses off guard: product recalls. If you discover a defect and need to recall your product, your standard product liability insurance won't cover the costs of notifying customers, collecting the products, or disposing of them. Those expenses can be devastating for a small business. You'll need to purchase product recall coverage as a separate endorsement if you want that protection.
How Much Does Product Liability Insurance Cost?
The average small business pays around $1,192 per year for product liability insurance, though costs typically range from $500 to $3,000 annually depending on your specific situation. About 70% of small businesses pay $60 per month or less for coverage that includes product liability protection as part of a general liability policy.
Several factors determine what you'll pay. The type of product matters most—selling clothing or packaged goods is considered lower risk and might cost $500 to $1,500 annually, while selling electronics, supplements, or children's toys will cost more because the potential for injury is higher. Your annual revenue and sales volume also affect pricing. The more products you sell, the greater your exposure to claims, and insurers price accordingly. Your claims history plays a role too. If you've had previous product liability claims, expect to pay higher premiums.
You can lower your premiums by choosing higher deductibles, implementing strong quality control processes, and maintaining detailed documentation of your safety procedures. Some insurers offer discounts if you can demonstrate robust product testing and quality assurance programs.
The Rising Cost of Product Liability Claims
Product liability claims are getting more expensive, and it's happening fast. Defective products have been the most costly cause of liability claims over the past five years, accounting for more than 40% of liability claim value. Between 2017 and 2021, insurers paid out $90.4 billion across more than 530,000 product liability claims.
The really scary trend is the rise in nuclear verdicts—jury awards exceeding $10 million. These massive verdicts nearly tripled since 2020, while median verdict values more than doubled. In 2023 alone, nuclear verdicts increased by 27%, and thermonuclear verdicts over $100 million jumped by 35%. This isn't just a problem for big corporations. Small and medium-sized businesses can find themselves facing these enormous judgments too, which is why having adequate coverage limits is more important than ever.
How to Get Product Liability Insurance
Start by checking your current insurance. If you already have a general liability policy, there's a good chance it includes product liability coverage under products-completed operations. Pull out your policy and look for this coverage, or call your insurance agent to confirm what you have.
If you don't have coverage or need to increase your limits, get quotes from multiple insurers. Be prepared to provide detailed information about your products, sales volume, manufacturing processes, quality control procedures, and where you sell your products. The more documentation you can provide about your safety practices, the better rates you'll get.
Consider whether you need additional coverages like product recall insurance or higher liability limits. If you're manufacturing products, distributing high-risk items, or selling internationally, you might need coverage beyond the standard $1 million per occurrence. Talk to an insurance professional who specializes in commercial insurance to make sure you're adequately protected. The peace of mind is worth far more than the modest cost of coverage—especially in today's litigation environment where one product defect claim could otherwise put you out of business.
