Product Liability: Because One Bad Review Is the Least of Your Worries

A product failure can hit your business hard, costing you millions—not just in lawsuits but also from all the fallout that follows. There’s the reputational damage, the time spent dealing with court proceedings and the potential loss of future contracts. The financial impact of a product liability claim can be devastating, especially for smaller businesses unprepared for such events. Yet many business owners don’t realize they have significant exposure until they face a claim.

Most business owners focus on growing sales and improving products, not on what could go wrong. While optimism drives success, preparing for potential problems is equally important. Product liability insurance comes in here—providing critical protection when things don’t go as planned.

What is product liability insurance?

Product liability insurance is a specialized form of business coverage designed to protect companies from financial loss if a product they create, distribute or sell causes harm. This harm can be bodily injury, property damage or even adverse health effects that manifest over time.

This coverage typically addresses three main areas of product liability claims:

1. Manufacturing defects—Flaws in production that make a product unsafe
2. Design defects—Inherent issues in a product’s design leading to injury or damage
3. Failure to warn or appropriately label—Inadequate safety instructions, improper labeling or missing warnings that result in harm

It’s important to note that product liability insurance doesn’t serve as a catch-all. It typically excludes intentional negligence, product recalls (which requires its own coverage) and damage caused by obvious product misuse. By understanding these nuances, you can better tailor your policy to match the specific risks of your operation.

The biggest misconceptions about product liability insurance

“If my product fails, I’m automatically covered.” This is the most dangerous misconception small business owners can have. In reality, product liability insurance is quite specific in what it covers. Your policy may contain exclusions for certain types of products or uses, so understanding precisely what your policy covers is crucial.

“If I don’t manufacture it, I’m not liable.” Many businesses purchase products from overseas manufacturers and simply add their branding. Some retailers and distributors think they’re off the hook and liability only applies to the original manufacturer. Even if you don’t physically make the product, attaching your name to it makes you legally responsible in the eyes of consumers and courts.

“If my product is defective, insurance will cover everything.” There’s often confusion between product liability insurance and product recall insurance and the misconception that they are the same type of coverage but serve different purposes. Product recall insurance typically covers the expense of pulling a faulty product from shelves and shipping it back for destruction or repairs. But it doesn’t reimburse you for lost revenue or the cost of refunding customers.

The high cost of a product liability lawsuit

The financial fallout from a product liability claim can be shocking. Consider major cases like Monsanto’s Roundup and Johnson & Johnson’s talcum powder lawsuits, which resulted in billions of dollars in settlements and judgments.

Monsanto (now Bayer) faced allegations that its weed killer caused cancer and failed to warn the public about glyphosate’s health risks. In 2020, the company agreed to pay nearly $11 billion to settle most Roundup cancer claims, yet new claims are still being filed. 

Another high-profile example involves Johnson & Johnson’s talc-based products. Thousands of plaintiffs contend that using Baby Powder led to cancer diagnoses, prompting an $8 billion settlement proposal. In September 2024, a subsidiary filed for bankruptcy to move the settlement forward. More than 57,000 cases remain pending in federal court.

While these are extreme examples, they illustrate how product liability claims can threaten a company’s existence.

Legal costs and defense fees often come as the biggest shock. Even lawsuits that go nowhere can drain resources because you still need legal representation. Beyond monetary costs, a lengthy lawsuit can damage your brand’s reputation. Public perception can shift quickly, and consumers might doubt the quality or safety of your products. Regaining trust can take months or even years, and the damage to your bottom line could be permanent.

Another hidden cost is the time drain on your leadership and staff. Lawsuits require depositions, interviews and document reviews. Your team may need to attend court hearings or provide statements. This focus on legal matters shifts attention away from daily business operations and strategic initiatives. When every hour spent in legal meetings is one you can’t invest in product development or sales growth, your entire organization feels the impact.

Who needs product liability insurance?

If you manufacture and sell products yourself, the need for product liability insurance is obvious. Manufacturers bear the most apparent risk since they design and create the product. But the need extends beyond manufacturers. Wholesalers and distributors can be named in lawsuits even if they didn’t produce the product. Retailers face similar risks—selling a product puts you in the liability chain.

Even service businesses that recommend or sell third-party products need protection. For instance, you could face a professional liability claim if you recommend a specific piece of equipment or software that fails. Although that falls under errors and omissions coverage, product liability issues sometimes intertwine with professional liability.

The one-question test: Do you need product liability coverage?

If your product caused harm today, could your business afford a lawsuit? This simple question cuts through the complexity and gets to the heart of the matter. If the answer is no—and for most businesses, it is—you need product liability coverage.

Product liability lawsuits are relatively rare, but they can be financially devastating when they happen. Few businesses have the financial resources to weather a major product liability claim without insurance protection.

Securing coverage is not just about playing defense against possible lawsuits. It also offers peace of mind to your clients and suppliers. Companies want to partner with businesses that can demonstrate financial stability and responsibility. Having the right insurance in place shows you’re proactive and prepared for unexpected issues. It can also accelerate contract negotiations and help you form better relationships with distribution channels that require proof of coverage.

The product liability insurance checklist

Product and general liability insurance policies aren’t one-size-fits-all. Businesses assume their general liability policy provides adequate protection, but product-specific exclusions may leave dangerous gaps in coverage. You should do a thorough risk assessment to ensure you’re selecting adequate coverage. Start by reviewing your current policy.

Does it specifically list the types of products you sell?

If so, confirm that your policy recognizes you as a manufacturer and provides the protection you need. Sometimes, companies discover that the product they focus on is actually excluded. Exclusions are often hidden in technical language, so a close read is essential.

Does your policy match your actual risks?

Supply chain vulnerability represents a significant blind spot for many businesses. If you outsource manufacturing or purchase components, especially overseas, do you know exactly what’s in your product? A supplier that cuts corners could introduce toxic chemicals or faulty parts, leaving you responsible. Companies like Apple specify exactly what they want and how it’s designed, but many businesses don’t exercise this level of control, increasing their product liability risks and exposure. A lack of knowledge doesn’t protect you from liability.

Unintended use is another sneaky danger. Suppose you manufacture tie-down straps for cargo. Someone decides to repurpose these straps to build a backyard zipline. If an accident happens, you could be named in the lawsuit. While your product liability insurance can help with the legal defense costs, the misuse might still drag you through months of litigation.

Contractual obligations often force businesses to obtain product liability insurance whether they think they need it or not. Big-box retailers like Walmart typically require suppliers to have substantial coverage before they do business with you. This requirement often comes as a surprise to growing companies that suddenly find themselves needing to secure coverage to fulfill a major contract.

Are you accounting for industry-specific risks?

Different industries face unique product liability challenges. Contamination and allergic reactions could lead to costly claims if you’re in the food and beverage sector. In pharmaceuticals or medical devices, the stakes are even higher—product failures can cause severe harm, leading to significant liability exposure.

Does your insurance reflect your industry’s risk level?

Your industry also heavily influences the cost and availability of product liability coverage. High-risk sectors often face stricter underwriting requirements or higher premiums. If you’re in one of these industries, working with an insurance broker who specializes in your field can help you secure appropriate coverage tailored to your risks.

Have you involved your legal and compliance teams?

Your attorney should review your policy language to ensure it aligns with your contracts, regulatory obligations and international requirements. A mismatch between your product liability coverage and your legal responsibilities could leave dangerous gaps. By coordinating with legal and insurance professionals early, you build a stronger safety net, reducing exposure to unexpected liabilities.

Do you have complementary policies?

Product liability insurance works best when paired with related coverages. Product recall insurance covers the cost of retrieving faulty products but not reimbursing customers. Errors and omissions insurance protects service providers and consultants who recommend products that lead to a product-related claim.

Protecting your business for the long run

Product liability lawsuits can be financially devastating for businesses of all sizes. Even if you don’t manufacture products yourself, you can still be held liable if you sell or distribute products that cause harm. The right insurance coverage provides financial protection and peace of mind that your business can survive a product liability claim.

Review your current insurance coverage at least once a year. As your business evolves—expanding product lines, entering new markets or shifting suppliers—your risk profile changes too. It’s easy to overlook something new in your production process or manufacturing plant that could affect your liability exposure. Regular communication with your broker can help align your policy with your evolving needs.

Don’t wait until a claim is looming to discover gaps in your coverage. By the time a lawsuit materializes, it’s too late to adjust your policy. Proactive planning ensures that if something goes wrong, you have the financial resources and support network to handle it. With a product liability insurance policy in place, you can focus on innovation, expansion and customer satisfaction without living in fear of a single flaw derailing your hard-earned success.Not sure if your product is fully protected? Reach out to Crane Agency to assess your product liability exposure and coverage options.