Product liability insurance for makers: what it covers and who asks for it

What product liability insurance covers

Product liability insurance covers the claims that come from the product after it leaves your hands. The SBA describes it as coverage that protects against financial loss as a result of a defective product that causes injury or bodily harm. The NAIC glossary defines it as coverage protecting the manufacturer, distributor, seller, or lessor of a product against legal liability resulting from a defective condition.

That definition matters for small makers. It covers the person who made the product and also the person who sold it. A candle maker who pours and sells her own candles is both. The California Department of Insurance says a products liability hazard exists for any business that manufactures, sells, handles, or distributes goods or products.

Liability insurance also pays to defend you. New York's Department of Financial Services says it pays the damages, the attorney fees and other costs associated with your defense in a lawsuit, whether or not the lawsuit has merit. A lawsuit costs money to answer even when it fails, which fits the SBA's rule to insure against things you wouldn’t be able to pay for on your own.

Product and liability insurance: how product liability differs from general liability

People search for "product and liability insurance" because the two are usually sold together. The NAIC describes commercial general liability as having two major sub-lines: premises/operations sub-line and products/completed operations sub-line. The premises side covers someone who trips at your booth. The products side covers someone hurt later by what they bought from you.

The NAIC puts the general rule plainly: if a customer is hurt by a product you sell, you can be held responsible. So a general liability policy that includes the products and completed operations section is, in practice, product liability insurance for small business. Check the declarations page for a products and completed operations limit.

The products part usually has its own limit. California's guide says there is a separate aggregate limit of liability in force for products and completed operations liability claims. That limit is the most the policy pays for all product claims in the policy year, so it is the number a market or buyer will look at.

• Occurrence policies cover claims arising from injury or damage occurring while the policy is in force, regardless of when the claim is first made. Example: if a candle you sold causes a fire while this year's policy is in force, this year's policy responds even if the claim is filed years later.
• Claims-made policies cover claims that arise from injury or damage occurring during the policy period and reported to the insurer during the policy period. If the policy ends, an extended reporting period (tail coverage) pays for residual claims made after your policy expires.
• Products sit on shelves and in homes for years, so ask your agent which form you are buying.

What a product liability policy does not cover

A product liability policy pays for harm your product does to people and to other property. It does not pay to replace the product itself or to run a recall. The Texas Department of Insurance lists these common exclusions in a CGL policy:

• Your own product: CGL policies don't cover property damage to your product arising out of the product.
• Recalls: CGL policies will not pay the cost to recall faulty products. Texas says recall cover may be added to the policy by endorsement for an additional premium charge.
• Contract promises: policies exclude coverage for bodily injury or property damage that you are obligated to pay because you assumed liability in a contract, with exceptions. Read any wholesale agreement that asks you to hold the buyer harmless before you sign it.
• Business claims under a homeowner's policy: the NAIC says home policies tend to exclude business-related liability claims from persons injured on your property.

Premiums depend on the type of product or service provided and the perceived level of risk, so a maker of candles or skin care will be rated differently from a maker of greeting cards.

What markets, wholesale buyers and marketplaces require

Many makers first buy product liability insurance because someone asks for proof of it. The ask often comes as a certificate of insurance (COI) that names the organizer or buyer as an additional insured on your policy, as in the two examples below.

Craft fairs and farmers' markets. One example: Connecticut's state-run regional market required certificate of insurance showing the Connecticut Marketing Authority (CMA) and Capital Region Development Authority (CRDA) as additional insured. Its application set a minimum of $1,000,000 per occurrence and required 30 days written notice before cancellation. Other markets set their own terms, so read each vendor application.

Amazon. Amazon's Business Solutions Agreement requires liability insurance once gross proceeds exceed $10,000 in any month, or when Amazon asks. The seller then has within thirty (30) days to carry coverage of $1,000,000 per occurrence and in aggregate, including products, products/completed operations and bodily injury, with policy(ies) naming Amazon and its assignees as additional insureds. Amazon's definition of the limits also allows Other amounts that for specific products categories that Amazon may require.

Wholesale and retail buyers. Shops and distributors set their own terms, which may include a COI, a products and completed operations limit and their business named as an additional insured. Ask for the request in writing and send it to your agent, so the certificate matches it.

Candle insurance: what candle makers should know

Candle business insurance is product liability coverage for a product that carries a fire risk. Be ready to tell an insurer which wicks, waxes and containers you use and how you label the product.

Federal rules shape those answers. The CPSC says metal-cored wicks must not contain lead above 0.06% by weight, and that candles containing a hazardous substance under the FHSA must bear cautionary labeling. Makers of candles with metal-cored wicks certify them with a General Certificate of Compliance (GCC). There is no certification requirement for candlewicks that use nonmetal cores.

Keep wick supplier documents and your burn-test notes. They do not replace insurance, but they show an insurer or a buyer how you control the risk.

Food liability insurance, bakery and cottage food insurance

Food product liability insurance covers claims that a food you made caused illness or injury, for example an allergic reaction or a foreign object. Home bakery insurance and cottage food insurance are names for the same kind of coverage applied to food made in a home kitchen.

State cottage food laws decide what you may sell from home and how, and they differ by state. In Michigan, for example, the state Food Law exempts cottage food operations from licensing and inspection provisions. An exemption from licensing does not mean an exemption from liability, and a homeowner's policy may not cover a business claim.

Markets and cafes that buy baked goods may ask for the same COI as any other vendor. Read your state's cottage food rules first, then ask an agent for a policy that names the foods you make.

Cosmetic insurance for soap, skin care and bath products

Who regulates your product changes what an insurer asks. The FDA says that if a product meets its regulatory definition of soap, it is regulated by the Consumer Product Safety Commission (CPSC), not by FDA. If it is sold for purposes such as moisturizing the skin, making the user smell nice, or deodorizing the user’s body, it is a cosmetic.

For cosmetics, the FDA says that if you make or market them, you have a legal responsibility for the safety and labeling of your products. It’s not against the law to manufacture cosmetics in your home, and products do not need FDA approval except for color additives. With no approval step, insurance and good records are what stand between a maker and a claim over a skin reaction.

Before you ask for a cosmetic insurance quote, put your ingredient lists, labels and any safety testing in one folder, so you can answer an insurer's questions about the product.

How to get product liability insurance for a small business

The steps below follow the SBA's advice on buying business insurance. Laws requiring insurance vary by state, and so do the rules for what you sell, so check your state's insurance department.

1. List what you sell and where

   Write down each product line, the channels you sell through and any market or buyer that has asked for proof of insurance.

2. Collect the written requirements

   Copy each market's or buyer's requirement: the limit, the additional insured wording and any notice clause. The certificate has to match it.

3. Talk to a licensed agent

   The SBA says to find a licensed agent that’s interested in your needs as much as his or her own. Ask whether a business owner's policy or a general liability policy with products cover fits, and whether the form is occurrence or claims-made.

4. Read the products limit and exclusions

   Find the products and completed operations aggregate, the recall exclusion and any exclusion for your product type.

5. Request certificates

   Ask the agent for a COI for each market or buyer that needs one, naming them as additional insured where required.

Where Nation fits

Questions about product liability insurance