If you are a business owner or a self employed individual, odds are you make your living by providing goods and services to people in exchange for money. You could be providing products to end users, such as in a retail store, or you are using products to fulfil your service, such as a plumber installing bathtubs.
Product liability insurance will make sure you are protected if the products you sell directly or indirectly cause harm to anyone.
If you are conducting business in New Zealand and either provide products to your customers or use products to fulfil your service, the odds are that you probably do.
Many people make the mistake of thinking that since they do not sell goods or manufacture anything that they do not need to have product liability insurance.
If you import the goods, assemble the goods, install the goods, or associate your brand name with the goods, you need to have the protection that comes from product liability insurance.
Example: How it works
If you are a furniture installation company and purchase furniture from another company which you deliver to your customer, you could be held responsible for the defects in the items that you installed.
Case study: Can this happen to you?
Many people understand the risks associated with not having product liability insurance but think it cannot happen to them. In 2013, there was a case of a caterer at the Melbourne Cup serving mayonnaise containing salmonella that ended up killing one of the guests at the event. This is a prime example of how a company can be held responsible for a product they sold that they arguably have very little control over. While the fault might make more sense to put on the supplier of the contaminated food, since the caterer served it, they could be held responsible in a court of law.
Is product liability insurance the same as public liability insurance?
The short answer is no, it’s not.
Product liability insurance protects you against any lawsuits that may arise from the products that you either sell directly to your customers or use to provide goods and services to your customers.
Public liability on the other hand protects you from lawsuits that may not necessarily be related to the products you provide. For example, if you are a store owner and someone comes in to use the bathroom and slips, public liability would protect you in case of a lawsuit.
Why is it confusing?
These two different types of coverage are typically included in the same insurance policy but have different types of claims and different coverage limits. For example, your public liability policy may have an unlimited number of claims per year that it will cover while your product liability may be capped at a certain dollar amount.
Product liability vs product liability insurance
Product liability insurance covers one facet of liability. Another key type of liability protection is public liability insurance. The differences lie in how these injuries/damages happen. Here’s a simple breakdown.
The damage happens because of a product you made or sold. Example: You’re a bicycle shop owner and you sell someone a bike with an overinflated tyre that pops and causes them to crash.
The damage happens on your premises and is unrelated to your products or direct service offerings. Example: You’re a bicycle shop owner and someone slips on some gear grease that had been spilt on the shop floor.
Both types of insurances are related to each other in the sense that they protect the manufacturers and the other people in the commerce chain against lawsuits filed by users.
Can product liability and public liability insurance be taken out together?
Product liability insurance is often covered under a public liability insurance policy or bundled together. In some cases you can get standalone cover. Be sure to check with the insurer before making any assumptions.
Product liability insurance vs professional indemnity insurance
While both public liability and professional indemnity insurance are designed to protect professionals and/or business owner, both types of cover have some key differences to be aware of.
Professional Indemnity Insurance
Provides coverage for claims against business owners against alleged or actual breach of professional duty.
Professional indemnity insurance covers the risk that is linked to professional duty when providing advice, design or a service for a fee.
This type of cover is often taken out by a whole range of professionals including computer consultants, marketing and PR agencies, consulting engineers, architects, project managers, accountants and photographers.
Product Liability Insurance
Provides the business owners with funds to compensate a third party that may have suffered injury or property damage arising from use of products or through an occurrence related to the insured’s business activities.
Product liability cover does not usually recognise claims where for professional services.
Do I need product liability insurance if I’m not a manufacturer?
Designers, manufacturers, parts suppliers and even installers might be responsible for damages. After all, any one of those businesses is capable of physically building fault into a product.
What about New Zealand businesses that only sell those products? Here are some situations where businesses such as distributors and retailers could be implicated:
The product came from overseas. Investigators might not have jurisdiction to hold an overseas manufacturer responsible, in which case the fault can then be blamed on the importer in New Zealand.
The manufacturer at fault went out of business. If you’re a distributor or wholesaler, you can be dragged in to court even if you’re not at fault, if the manufacturer who was at fault is now out of business.
You give incorrect product instructions. If you’re a retailer and you give a customer incorrect instructions on how to use a product, you could be held responsible for damages if the customer uses the product incorrectly.
You alter or damage the product, making it unsafe. Anyone in the product chain can damage the product either accidentally or by altering it in some way. This can place the liability on you if someone injures themselves as a result.
As an example, an electrician installing a power point in a home may not have created or imported the materials required but they are still liable for claims in the event that their work turns out to be faulty.
Why are retailers and distributors liable for product?
As a distributor or retailer you could be sued for a manufacturer’s product. Here are the circumstances where distributors can be hit with claims for compensation.
Strict Liability. Even though a distributor may have had no part in the design or manufacturing the product, the law may still impose liability on distributors. Here members in the distribution chain all benefit from the sale of the product, so each member should share the liability burden.
Negligence. A court can find a product defect originates with the distributor’s own negligence. Here the distributor will not be able to seek indemnification from the manufacturer.
Advice on Product Use. Distributors may also be liable for any statements they, or their sales team make about the product, and must be consistent with the manufacturer.
Faulty Installation. Distributors that participate in the installation of the product may also incur direct liability if that installation is alleged to contribute to any harm to a patient or user of the product or device.
Foreign Manufacturers. As outsourcing has become more widespread, the jurisdictional limits becomes increasingly problematic for distributors. This is because foreign manufacturers may be beyond the reach of New Zealand courts.
Joint and Several Liability. This is aimed at providing full compensation for tort plaintiffs, when there is more than one business or operation at fault. Here each co-defendant is liable for the entire amount of the award, regardless of their proportional fault.
Mistaken Identity. When a products liability claim arises due to a defect in a prosthetic, the patient and/or hospital will likely first file suit against the distributor. It then becomes the responsibility of the distributor to identify the manufacturer of the defective prosthesis and bring the relevant party into the suit.
Do I need my own product liability cover if my manufacturer has their own insurance?
Even if you sell a product manufactured by another company, and that company has their own product liability policy, you may still want to take out your own cover.
Here are some scenarios to consider.
Inadequacy of Limits. This is where companies share insurance coverage through a group policy. This is a single insurance policy for multiple businesses or distributors. Purchasing a policy as a group eases the cost of insurance but means you’re covered as a collective. This can be costly because you share the financial burden of your manufacturers fault.
Additional Insured Status. Most manufacturers’ insurance policies provide coverage to parties contractually involved, but this blanket endorsement doesn’t give distributors any right to be informed about a change or lapse in the policy. This can leave them vulnerable to catastrophic losses if a claim arises.
Manufacturer is Without Coverage. This is where a distributor believes it is covered under the manufacturer’s policy, but it’s not.
What if a customer just isn’t satisfied?
There is a big difference between a product harming someone and not living up to its expectations. If your product does not cause any harm but simply does not meet the needs of the consumer, you will be covered under the efficacy exclusion which does not take these issues and turn them into unjust product liability cases.
What isn’t covered by product liability insurance?
Situations where your policy won’t cover product damage are called exclusions and every policy has them. Below are some common exclusions you’ll find in most policies. Make sure to read the policies you are considering carefully in case there are any small differences that could have a big impact on you.
Some situations where you probably won’t be covered by product liability insurance:
The product contains asbestos
You’ve signed a contract with someone that holds you liable, where otherwise you wouldn’t be liable by law
The product has faults that you knew about before you got cover
The damage is to the faulty product itself
Your faulty product keeps someone from being able to use their undamaged property
For example, if your product malfunctions in someone’s house and damages the floor, you’ll be covered for damages to the floor but not for damages related to them not being able to use the house while the floor is being fixed.
The costs are related to you fixing a faulty product that someone returns
You own the damaged property or the damaged property is in your care
The cost is related to any guarantee or warranty you’ve offered on the product
The cost is related to recalling an item (unless you’ve added the special recall cover as an add-on)
The cost is related to the loss of electronic data
Do I need all three?
If you have a physical location, sell products and offer services, you will most likely need all three types of insurance. The good news, is that most business insurance providers will give you the opportunity to bundle and combine these policies to suit your circumstances.
Maurice Thach is a publisher at Finder who covers anything that sounds hard to compare. This includes life insurance policies, side hustle ideas and energy plans. Maurice has a Bachelor of Commerce from the University of New South Wales, a Tier 2 General Insurance certification and a Tier 1 Life Insurance certification. Outside of work, you'll probably find Maurice hitting up the nearest basketball court.
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