For e-commerce companies, product liability insurance can be a confusing product. In this article, we explain what it is, what it covers, and when it's needed.
In today’s litigious society, e-commerce companies need foresight to see potential risks before they occur. One example of this is product liability risks. If a product fails or causes injury to a buyer, then the manufacturer is usually at fault. However, what about e-commerce companies? Countless online companies sell products every day. If these products fail, is online retailer potentially at fault in addition to the product manufacturers? The short answer is yes. Therefore, product liability insurance is a necessary consideration depending on the type of e-commerce business being operated. Below, we explore the potential benefits and limitations of product liability insurance for e-commerce companies.
E-commerce companies could potentially be liable for a manufacturing defect in a product, for a design defect in a product, or if the company fails to warn the consumer about the dangers of a product through something like labeling. Typically, a company is not liable for uncommon and unintended uses of products or common knowledge of product dangers. Below are three examples of typical product liability insurance claims.
- Manufacturing Defect
A food product accidentally contained a poisonous substance.
- Design Defect
A piece of furniture collapses and someone is injured as a result of not being properly designed.
- Failure to Warn
Company inadequately labeled a product, failing to show the associated hazards, which led to an accident.
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Product liability insurance provides coverage for the legal fees associated with defending a product defect lawsuit. This insurance also covers losses such as medical costs and compensatory and business damages related to product defects. Typical exclusions in product liability insurance policies include the cost of product recalls, lost inventory, professional negligence, slip and falls on business property, and employee injuries.
Below are three examples of e-commerce companies and product liability insurance considerations for each.
1. Direct to Consumer Manufacturers
A direct to consumer manufacturer is a type of e-commerce business that manufactures a product and then sells it to the end-user online. This business model inherently has a higher product liability risk since it controls the supply chain from manufacturing through selling. Since no other intermediaries are involved in the manufacturing or distribution processes, the direct to consumer manufacturer holds all of the risks in terms of product failure. Therefore, direct to consumer manufacturers must maintain adequate product liability insurance.
2. Private Label Sellers
Private label sellers are at risk of product liability due to their key position in the supply chain. Private label companies often have production, labeling, and distribution responsibility that keeps their risk high in terms of potential product liability claims. In the event the private label company uses a third party for manufacturing, the company should require the third-party manufacturer to maintain adequate product liability insurance and name the private label company as an additional insured under that policy. Either way, a private label seller should consider product liability insurance.
At first glance, dropshipping may seem to be risk-free given that online retailers do not manufacture or private label their products. However, in the event of a product liability lawsuit, the plaintiff attorney will normally name each entity in the supply chain, including the dropshipper. Therefore, the dropshipper needs to consider the value of product liability insurance.
Many insurance companies offer small business package policies that provide general liability, business property, and business interruption coverage in addition to product liability coverage. This package policy, commonly called a business owners policy or BOP, usually provides broader and more economical coverage than a standalone policy. E-commerce sellers in particular must understand the risks associated with selling products online, even if they do not manufacture the products. By understanding these risks, your business can make a better decision in terms of managing its product liability risks.