Whether insureds sell through an Etsy store, a retailer selling products online or even at a farmers market, any parties involved in the product chain can be liable for a customer's injury.
New business statistics from 2022 show that over 3.8 million new business applications were filed in the first three quarters of the year. This marks a 7.6 % annual decrease from 2021, but is 17.9% more than the number of new business applications received in the same period in 2020, according to Oberlo. The surge of new businesses might explain why the share of e-commerce sales in the U.S. hit almost $266 billion in the third quarter of 2022, the highest quarterly revenue in history, according to data from Statista.
The bottom line is that people are shopping for products online or in brick-and-mortar stores from both well-established businesses and startups that are making a name for themselves on social media or Etsy. And, with a wave of recent product liability personal injury claims, product liability coverage is a must for any business that makes, sells and ships its product.
“Any business that is manufacturing, distributing or selling a product should carry product liability insurance," says T. J. Collins, senior vice president, casualty broker, Amwins. “You never know whose hands that product might end up in or if the product is being used for its intended use."
Companies of any size can find themselves in a situation where they need insurance to cover product liability far beyond the immediate point of sale, as well. “The risk of a simple product made up of small components falling apart or coming apart after years of use and a child putting that product in their mouth is real," Collins says. “Sure, that component wasn't intended to be consumed by humans, but, if it results in bodily injury, the insured may still be found liable."
Whether insureds sell through an Etsy store, a retailer selling products online or even at a farmers market, “any or all parties that are involved in the product chain of distribution, including the designing, manufacturing, marketing and distribution of the product, can be liable for an injury as claimants can legally sue all businesses that are part of this chain," says Peter Burns, head of large and complex casualty solutions, The Hartford. “In some cases, multiple parties could share responsibility for a defect."
"The farmer's market vendor that makes jelly in their home kitchen could be alleged to have made people sick or an Etsy shop owner could be sued if a child were to access one of their products and swallow all or part of it," says Scott Crump, assistant vice president, manufacturing and wholesalers strategic business unit, Selective Insurance. “Products liability coverage can help protect these small businesses in two ways—the first way is by indemnifying them for covered damages, and secondly, it also can protect against the cost of attorney's fees."
And “whether they realize it or not, anyone selling products online using Amazon or Etsy as a third-party seller enters into an agreement not only requiring them to carry products liability, but also to indemnify Amazon, Etsy or any other platform against any claims that may arise," says Hal Soden Jr., principal, Oliver L.E. Soden Agency.
Meanwhile, carriers and agents are increasingly aware that they need to understand where the risks lie as “any repackaging or relabeling of a good could cause an insured to be viewed as the manufacturer," Burns says. “Sometimes distributors or retailers wrongly assume that they will be covered under the manufacturers' insurance policies, and therefore do not purchase adequate coverage. It's important for distributors to know who they are contracting with, as smaller manufacturers sometimes can't afford the kind of insurance coverage required to insulate its large distributors from losses."
Here are three tips for agents to help ensure their clients have adequate product liability protection:
1) Understand your client's products. As emerging technologies continue to spur small businesses to innovate both their product and how they distribute it, the complexities are raising risks and liabilities that provide fertile ground for claims and increased litigation. Knowing your client's product list and where and how the goods are manufactured is essential.
For example, “businesses that import products may bear sole responsibility and be held accountable for safety requirements, industry or government standards, proper safety warnings and labels—understanding the legal theories of liability can help your client know the risks they face," Burns says.
Product liability coverage can ensure a client is “prepared to defend against strict product liability and negligence, including design defect, manufacturing defects, marketing defects and improper warnings," Burns explains.
“Agents can add significant service value by highlighting the importance of appropriate risk transfer documentation for their clients," Crump says. “For example, an account that uses a contract manufacturer to make its products or key components should focus on whether its contract contains appropriate risk transfer terms."
2) Put the best solution on the table. Agents have a wide array of products and programs available, including access to wholesale relationships. “Really investigate your wholesale relationships and be sure you've partnered with a broker who has your best interest in mind and has the experience and team around them to put the best possible solution—not just the cheapest—on the table," Collins says.
When dealing with complex risks, agents can secure the best coverage for clients by working together with other industry experts. “Your wholesale broker should be an extension of your team, and this means helping you navigate challenging classes of businesses by educating and not just quoting and binding business," Collins says.
3) Ensure legal services are available. In today's litigious society, the insurer must “ensure that proper defense counsel are appointed and to balance defense costs against the chance and frequency of nuclear verdicts," says Fred Fein, managing partner and U.S. head of product liability, Clyde & Co.
In protecting clients, agents can ensure the product liability coverage will “offer document retention and a written safety program that ensures legal requirements are met and creates a story of the development of the product to show evidence that a business took sufficient measures to make a product reasonably safe," Burns says.
Additionally, agents should “be aware of the contractual requirements and ensure hold harmless agreements are in place so that clients' suppliers and partners are responsible for their own negligence in the case of a claim," Burns says.
Ultimately, product liability insurance is a necessary precaution to take, no matter the size of a company or the complexity of the product. “Buying insurance protects distributors and others in the chain from the financial burden of not only paying claims, but also the cost to defend them," Burns says.
Olivia Overman is IA content editor.