Insurance Advisory Newsletter: Product Liability Insurance – December 2022
What Is Product Liability?
A manufacturer or supplier of a hardware component, equipment or product (“Product”) bears the risk of legal liability if the Product causes bodily injury or property damage to a third party arising from the use of the Product. ‘Product liability’ is commonly defined as the responsibility of the manufacturer, seller, distributor or vendor, of any Product, to compensate for any loss or harm that may be caused to the user by a defective Product. Product Liability Insurance (“PLI”) can shield the manufacturer against a lawsuit, alleging that a Product manufactured or sold has caused bodily injury or property damage to a third party.
Illustration: Company ‘A’ manufactures various auto-comp parts and supplies component ‘X’ to Company ‘B’. Company B manufactures cars and uses Company A’s component X as part of one of their cars. Company B exports the units to different countries, Company B U.S.A. is sent a legal notice by a customer for grievous bodily injury and death of 3 family members due to a fatal accident. Upon thorough investigation, it was confirmed that the Accident took place due to a faulty component X. Component X was tracked to a batch supplied by Company A. PLI will help Company A in India to pay the legal cost and judgments passed by the courts in the claims against Company A.
The Product liability insurance policy coverages are offered by the insurance company (“Insurer”) for claims made against the Insured entity (“Insured”).
Who Needs Product Liability Insurance?
Any entity which is engaged in the manufacturing, supply, trading, distribution and reselling of products should seek protection under a PLI. A claim for Product liability may be instituted by the party ultimately using the Products (“End User”) against the parties involved in the product’s supply chain, including the manufacturer, supplier, trader, distributor and resellers of the Product.
What Is The Trigger Event For A Product Liability Policy?
PLI is triggered when the End User of a Product suffers from bodily injury or property damage as a result of the use/misuse of the Product. The physical harm or damage caused by the Product can be the result of design flaws, product defects, inadequate instructions, labels, and warnings. The PLI policy comes into action in the event of a claim on Insured made by or on behalf of the third party/End User.
What Are The Key Coverages And Exclusions?
| KEY COVERAGES | KEY EXCLUSIONS |
| Legal liabilities on account of Injuries, accidents, and damage occurring due to the use of the Product | Injuries brought on by mental distress, reputational damage, slander, and other similar situations. |
| Defence costs for claims covered by PLI. | The liability assumed under the contract |
| Any expense incurred by the End User to cover medical costs of such injury | Non-compliance with statutory law |
| Costs associated with a product recall (can be availed by payment of the additional premium) | Cost incurred on reconditioning or repairing or modifying the defective product or product parts. |
| Sales turnover of the insured company, both exports and domestic (can be availed by payment of the additional premium) | Intentional, unlawful and dishonest acts. |
