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Products liability insurance

This article was last updated by the author in October 2016.

A brief introduction to products liability insurance.

Contents

Overview

Everyone has a legal duty to behave in a reasonable manner towards others. Those who fail to do so will be legally obliged to pay compensation to anyone who is injured, or whose property is damaged, as a result of their actions. All sellers of goods, whether they are manufacturers, intermediaries or retailers, may incur liability to their customers and others for death, injury, illness or damage to their property. This be the result of inadequate design, faulty manufacture, inadequate instructions, contamination or damage prior to supply.

The liability of manufacturers and suppliers can arise under the normal laws of contract and tort (most commonly negligence) but has also been amended by a statute. One significant piece of legislation is the Consumer Protection Act 1987. Under this, businesses can be held liable for faulty products even if they did not manufacture them. This only applies to products intended for private use and would arise, for example, if the business's name is on the product; the product was imported from outside the European Union; or if the product's manufacturer cannot be identified or the manufacturer has gone out of business. In these circumstances, strict liability applies meaning that the business is automatically liable for any harm caused by the defect, regardless of fault.

Products liability insurance is designed to cover the cost of compensation to anyone who is injured, or whose property is damaged by a faulty product; for example, a faulty hammer head which flies off when used, hitting a customer on the head or a convenience store supplies some pies which cause a customer to become ill. Cover is only included for the payment of compensation and any associated legal costs - it does not include the cost of replacing the defective product itself.

Products liability insurance is not compulsory by law. However, it is good practice for businesses to have cover as substantial claims can arise, particularly where the faulty products is one of a batch which may have got into circulation before the fault was discovered.

Typical cover provided

A standard policy covers legal liability for bodily injury or property damage, happening during the period of insurance, which arises out of goods or products manufactured, constructed, altered, repaired, serviced, treated, sold, supplied or distributed by the insured.

The injury or damage sustained must be accidental; cover is only intended to cover unexpected events. If the word accidental is not used when specifying the policy cover, there is usually an exclusion for injury or damage which results from a deliberate act or omission of the insured.

The injury or damage must have been caused in connection with the trade or business stated in the policy wording. However, it is usual to extend cover to include any ancillary activities of the insured; for example, first-aid facilities, canteens, private fire brigade and ambulance services and any private work carried out for any director, partner or employee of the company.

In addition, cover is included for:

  • the claimant's costs and expenses associated with a claim
  • the insured's legal costs. Even if the business was not the cause of alleged injury or damage, the costs and expenses incurred in taking legal advice and defending an action in court can be substantial
  • legal costs and expenses in defending prosecutions under relevant legislation (such as Health and Safety legislation, the Consumer Protection Act 1987 and the Food Safety Act 1990)

Other features of products liability cover are:

  • a yearly aggregate limit of indemnity applies, the usual limit being £2 million for any one occurrence and during any one period of insurance. The insured may select a higher limit of indemnity if required.
  • consequential losses flowing directly from accidents resulting in injury to persons or damage to their property are covered. For example, if a faulty tyre causes a customer's car to run into a wall, the insured's products liability policy will cover the cost of repairs to the vehicle. If the customer needs to hire another car whilst their own is being repaired, the insured's products liability policy will also cover the hire costs
  • the injury or damage must occur during the period of insurance, not necessarily the supply of goods or services.

Optional extensions

Common extensions to a products liability policy are

  • higher limits of indemnity
  • advertising liability
  • financial loss

Key exclusions

A products policy is subject to a number of exclusions, including:

  • contractual liability
  • the cost of recalling, replacing or repairing products supplied
  • the cost of rectifying defective work
  • unsuitability or failure to perform
  • loss or damage to property in the custody or control of the insured
  • professional negligence
  • liability arising from the ownership possession or use of a motor vehicle, aircraft or water craft
  • gradually occurring pollution
  • penalties, fines or punitive damages
  • liability for products knowingly exported to the USA or Canada (this exclusion is not applied by all insurers and can often deleted once insurers have assessed the risk subject to an additional premium)

Rating factors

Premiums for product liability policies are usually based on the turnover of the business. Details of any exports to North America will be required as this presents a higher risk.

Product providers

Products liability insurance usually arranged as part of a combined liability policy, which includes public and products liabilities within one policy document, sometimes with the addition of employers' liability cover.

Most composite insurers, as well as a number of specialist insurers and Lloyd's syndicates, offer employers', public and products liability cover. Cover is often arranged through an insurance intermediary, although small businesses can purchase cover by telephone or on line as part of a commercial package policy.

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