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What our Nerds say about product liability insurance

If you sell, design or manufacture products for customers, you may want to think about taking out product liability insurance.

If a product you make, supply, sell or give away for free turns out to be faulty and injures a customer, you could be liable and required to pay compensation. Equally, if one of your products malfunctions and causes damage to a customer’s property, you could be held responsible and required to cover the cost of repairs.

An unexpected claim like this could have a significant impact on your business’s finances – but product liability insurance could give you the peace of mind that these costs will be covered.

Kristina Fox Writer at NerdWallet

What is product liability insurance?

Product liability insurance is a type of business insurance that can cover you if someone makes a claim against you or your business for designing, making or supplying a faulty product, or even giving away items for free.

If someone was injured or their property was damaged as a result of faulty goods, your business could be held responsible and required to pay compensation. Product liability insurance could cover the cost if a customer did make a successful claim against you.

Do I need product liability insurance?

Product liability insurance isn’t a legal requirement, but if you design, make or supply products to customers, you may want to think about taking out cover.

According to the Association of British Insurers (ABI), you could be responsible for paying out compensation in the case of damage or injury if any of the following apply:

  • Your business name is on the product.
  • You changed the product before it was sold or given away.
  • You imported the goods from outside the European Union.
  • It is not possible to find the manufacturer (for instance, if they have gone out of business).

Other companies you work with, such as suppliers, merchants and manufacturers, could require you to have a certain level of product liability insurance before they agree to work with you.

Even if you hand out products for free, it is a good idea to consider product liability cover. Customers can still make a claim if they received a free product and it later causes damage or harm.

What does product liability insurance cover?

Product liability insurance can cover your business if a customer is injured or suffers loss or damage to their property because of a product you have sold, designed or manufactured. If they made a successful claim against you, you could be liable to pay compensation – but product liability insurance could cover the cost.

You can choose the level of cover that best suits your business needs. Common cover limits range from £1 million to £5 million, though this can vary by insurer.

If you sold a product made by another company to a customer and it turned out to be faulty, product liability insurance will likely cover you if you meet the following criteria:

  • You have strict quality assurance (QA) procedures.
  • You can prove that the product was faulty when you received it from the manufacturer.
  • Customers received instructions from you on how to use the product safely.
  • You informed the customer how to return a faulty product to the manufacturer.
  • Your contract with the supplier covers safety, QA and returns.

What doesn’t product liability insurance cover?

Product liability insurance may not cover faults that arise from poor workmanship or if a customer claims that they suffered financial loss because of faults in the product you designed, manufactured or supplied.

Your cover could also come with certain exceptions, which will be listed in the terms and conditions. You should check these carefully before taking out your insurance to help ensure that the cover is suitable for your business needs.

You will only be covered if you stick to the terms set by your insurer. This may include putting your products through quality assurance processes. If you fail to follow these processes and they are a requirement for your insurer, you risk losing your cover.

Product liability insurance won’t cover claims made against your business for injury or damage caused by something other than a faulty product. For example, if a customer visited your premises to pick up a product, tripped over a sign while collecting it and broke their ankle. This sort of event may be covered under public liability insurance.

How much does product liability insurance cost?

The cost of product liability insurance can depend on a number of factors, including:

  • the size of your business
  • the nature of your business
  • the type of products you sell, design or manufacture
  • where you sell or make your products
  • how much you sell your products for

The price of insurance can also vary between providers, so it is definitely worth shopping around to find the best fit for your business.

When should I get product liability insurance?

If you are considering product liability insurance, you may want to think about taking out cover when you start trading. Having cover in place for when you begin to manufacture or sell products can mean you’re protected against any potential claims straight away, which can give you peace of mind.

How to get product liability insurance

You can buy product liability insurance directly from a provider, through an insurance broker or via a price comparison website. You can usually buy it as part of a larger business insurance package that includes public liability insurance.

» COMPARE: Product liability insurance

Product Liability Insurance FAQs

How does product liability insurance work?

Product liability insurance works in a similar way to other business insurance products. You pay for cover on a monthly or yearly basis but that amount will depend on your individual business circumstances and requirements.

In the event of a claim being made against you, you could be covered up to the maximum level of cover you choose. This means your insurer could pay out any compensation owed to third parties because of a faulty product and any legal fees incurred, up to this pre-determined limit.

You may have to pay an excess when you make a claim on your insurance. This is the amount you have to pay up front before your insurer steps in to cover the rest. The excess amount is decided when you take out your policy. Choosing a higher excess can potentially lower the cost of your premium, but be sure to check you would be able to afford the excess if you did have to make a claim.

What is the difference between public liability and product liability insurance?

Public liability insurance is designed to cover you if a claim was brought against you for injury or death of a third party or loss or damage to property as a direct result of your work. For example, if you were selling your products at a market but left one of your storage boxes out by mistake and someone tripped over it, injuring themselves, public liability insurance could cover any compensation they were owed.

On the other hand, product liability insurance can cover you for injuries or damage caused specifically by faulty products that you made, sold or designed. For example, if someone bought one of your products at the market but it malfunctioned when they got it home and injured them, product liability insurance could cover compensation in this instance.

» MORE: What is public liability insurance?

Is product liability insurance the same as professional indemnity insurance?

No, product liability insurance is not the same as professional indemnity insurance.

Product liability insurance covers the cost of compensation if someone made a successful claim against you for a faulty product causing injury or damage to their property. But it may not cover financial losses suffered by a customer because of your product or work.

Professional indemnity insurance, on the other hand, might cover you if someone claimed to have suffered financial or reputational loss as a result of your professional services or advice. For example, if you designed a product that did not work due to errors you made in your calculations and a client lost money as a result.

» MORE: What is professional indemnity insurance?

Is product liability insurance a legal requirement?

You are not legally required to take out product liability insurance if you sell, make or supply goods. However, you may want to consider whether you could afford to pay out compensation if someone made a successful claim against you and you were not insured.

The only legal requirement when it comes to business insurance is employers’ liability insurance, which you must have if you employ anyone in the UK who’s not a member of your immediate family. You could face a £2,500 fine for each day you’re not properly covered.

What other types of business insurance should I consider?

If you are already considering product liability insurance, you may also want to consider public liability insurance, as these are often sold together under one policy. This can cover injury or death suffered by a third party or loss or damage to their property because of your work.

If you employ anyone working in the UK who isn’t a member of your immediate family, legally you must have an employers’ liability insurance policy worth at least £5 million. You could face a fine of £2,500 for each day you’re not correctly insured.

Although employers’ liability insurance is the only legal requirement in the UK, you may also want to look at other options, such as professional indemnity insurance and tools insurance. You can find out more about the different options you can include in a business insurance package by clicking the link below.

» COMPARE: Business insurance

About the author

Kristina Fox
Kristina is a writer at NerdWallet. A recent graduate trading French for finance, she has experience creating content for student newspaper Cherwell and an edtech company. Read more
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