Product liability insurance

Product liability insurance indemnifies a manufacturer, importer, supplier or distributor against legal liability to third parties for accidental bodily injury or property damage caused by a defect in a product that the insured has designed, manufactured, sold or supplied.

Definition §

Product liability insurance is a third-party liability cover that responds where the insured becomes legally liable to pay damages for bodily injury, death, illness or accidental loss of or damage to property caused by a "product" supplied by the insured. "Product" is normally defined widely to include goods manufactured, sold, supplied, distributed, installed, repaired, treated, serviced or tested by the insured after they have left the insured's physical custody and control ^[4][5].

Product liability is distinct from public liability (which addresses risks arising from the insured's premises and operations) and from professional indemnity (which addresses economic loss from negligent advice or services). In commercial combined policies, public and products liability are frequently underwritten in a single liability section but with separate aggregate limits for products ^[4][6].

The trigger for cover is normally the occurrence of injury or damage during the period of insurance, regardless of when the product was supplied. Some specialist wordings - particularly for pharmaceutical, medical device and high-risk industrial products - are written on a claims-made basis with a defined retroactive date ^[5].

Legal / Regulatory basis §

Three principal sources of legal liability engage product liability insurance.

First, the common law of negligence. The foundational decision Donoghue v Stevenson [1932] AC 562 established that a manufacturer owes a duty of care to the ultimate consumer of its product, irrespective of any contractual relationship ^[3]. A claimant must prove the existence of the duty, breach, causation and damage.

Second, statutory strict liability under Part I of the Consumer Protection Act 1987, which implements the European Product Liability Directive ^[1]. Section 2 of the Act provides that where damage is caused wholly or partly by a defect in a product, the producer, own-brander or first EU/UK importer is liable, without the need to prove negligence. A product is defective for the purposes of the Act if its safety is not such as persons generally are entitled to expect, taking into account all the circumstances ^[1]. The Act preserves the right to sue in negligence and contract concurrently.

Third, contractual liability under the Sale of Goods Act 1979 and the Supply of Goods and Services Act 1982, which imply terms as to satisfactory quality and fitness for purpose into business-to-business sales ^[2]. Consumer transactions are now principally governed by the Consumer Rights Act 2015.

The contract of insurance itself is governed by the Insurance Act 2015, including the duty of fair presentation of the risk and the section 13A duty on insurers to pay sums due within a reasonable time ^[7]. Producers and importers should be aware that the Consumer Protection Act 1987 imposes a long-stop limitation period of 10 years from the date the product was first supplied, beyond which strict liability claims under Part I cannot be brought.

How it works in practice §

Product liability cover is normally arranged alongside public liability and is rated on turnover, the type of products supplied, target markets, and territorial scope. Lower-risk consumer goods (clothing, books, stationery) attract relatively modest rates; higher-risk products (electrical goods, machinery, food and drink, cosmetics, toys, automotive parts, medical devices and pharmaceuticals) attract significantly higher rates and tighter terms ^[5][6].

Territorial limits are crucial. UK and EU cover is standard; worldwide cover excluding USA and Canada is common; full worldwide cover including USA and Canada is available but at substantially higher premium reflecting the litigation environment, large jury awards and class actions in those territories. Jurisdiction clauses normally restrict cover to claims brought in named jurisdictions.

Standard exclusions include: liability for the cost of recalling, repairing, replacing or making refunds for the defective product itself (typically covered, if at all, under a separate product recall and product guarantee policy); liability for pure financial loss not consequent on injury or property damage; deliberate non-compliance with safety regulations; products supplied for use in aircraft, marine craft and certain other high-risk applications without specific endorsement; and asbestos, war and nuclear risks ^[5][6].

Claims handling typically involves investigation of causation by engineers or technical experts. Defending product claims is often expensive because of the need to demonstrate that the product was not defective, or that any defect did not cause the damage, or that the limitation or "development risks" defence under section 4(1)(e) of the 1987 Act applies (the state of scientific knowledge at the relevant time was not such that a producer might be expected to have discovered the defect) ^[1].

Common variations §

For higher-exposure businesses, additional related covers are available. Product recall insurance pays the costs of recalling defective products from the market. Product guarantee insurance responds where the product fails to perform as warranted and the insured has to repair, replace or refund. Product contamination insurance covers malicious tampering and accidental contamination, principally in the food and pharmaceutical sectors ^[5].

Efficacy and financial loss extensions can be added for businesses where pure financial loss is a material exposure, although such extensions are heavily underwritten. Specific wordings are used for clinical trial liability, pharmaceutical and medical device manufacturers, and life sciences businesses, often placed in the Lloyd's market or with specialist insurers ^[5][6].

Following the UK's departure from the European Union, businesses placing products on the UK market and the EU market must consider parallel product safety regimes and the implications for their position as "producer" or "importer" under the Consumer Protection Act 1987 and analogous EU member state legislation.

Example §

A UK importer brings a batch of electrical heaters from a manufacturer in Asia and sells them through retailers across the UK. A defect in the thermostat causes a number of heaters to overheat, resulting in one minor house fire and two cases of burns. Several injured consumers and one homeowner whose property was damaged bring claims. The importer, as the first UK importer of the product, is strictly liable under section 2 of the Consumer Protection Act 1987 ^[1]. The importer notifies its insurer under the products section of its combined liability policy. The insurer instructs solicitors and engineers, settles the personal injury and property damage claims, and pays defence costs. The cost of recalling unsold stock and replacing units already sold is not covered under the standard products section but is covered under a separately purchased product recall policy.

See also §

• /wiki/public-liability-insurance/ — companion third-party cover
• /wiki/commercial-insurance/ — broader family of business covers
• /wiki/combined-commercial-policy/ — packaged product including products liability
• /wiki/professional-indemnity-insurance/ — distinct cover for advice and services
• /wiki/insurance-act-2015/ — governing contract statute
• /wiki/business-interruption-insurance/ — for trading losses following a product event

References §

1. ↑ Consumer Protection Act 1987 — https://www.legislation.gov.uk/ukpga/1987/43
2. ↑ Sale of Goods Act 1979 — https://www.legislation.gov.uk/ukpga/1979/54
3. ↑ *Donoghue v Stevenson* [1932] AC 562 (HL)
4. ↑ Association of British Insurers — https://www.abi.org.uk/
5. ↑ Lloyd's Market Association — https://www.lmalloyds.com/
6. ↑ British Insurance Brokers' Association — https://www.biba.org.uk/
7. ↑ Insurance Act 2015 — https://www.legislation.gov.uk/ukpga/2015/4