What is Product Liability?

Many small businesses in New Zealand supply or sell products to their customers. No matter the quality of your products, accidents can and do happen. There is always the potential for a defective product to slip through the cracks. Consumers these days are more aware of their rights than ever, which also means that your company is more vulnerable to lawsuits. It doesn’t matter if you’re a manufacturer, exporter or retailer. Whether you produce the product yourself or not, you may be vulnerable to Product liability claims.

Another likely scenario that can result in a Product Liability claim is a customer receiving a perfectly functional product without the correct safety manual. This could result in them using the product dangerouly and incurring injury or harm, for which you could be liable.

Many kiwi small business owners take out the most common forms of insurance – Public Liability and Professional Indemnity. But did you know that Product Liability insurance can be equally as important for your business if you sell or distribute products? Keep on reading to see if this insurance product is right for you.

Product Liability insurance* protects your businesses against claims by third parties relating to property damage or personal injury caused by your products. Product Liability insurance usually forms part of a Public Liability policy and the word ‘product’ will be a defined term in the policy wording.

A common policy definition of ‘Product’ includes anything that has been manufactured, constructed, erected, assembled, installed, grown, extracted, produced, processed, treated, altered, modified, repaired, serviced, bottled, labelled, handled, sold, supplied, re-supplied, distributed, imported or exported by you, or on your behalf.

Product Liability insurance is designed to assist you when your products cause a third party to sustain personal injury or property damage. Product Liability insurance is intended to cover any compensation payable to a third party, and your defence costs (these are the reasonable costs incurred while investigating and defending a covered claim including legal fees, experts’ fees, and court costs).
Product Liability insurance is there to help you from the moment an allegation of negligence relating to your product is made. Of course, it is always important to check the limit of cover offered by your policy, as well as any exclusions or geographical limitations.

Am I liable for the products I manufacture or sell?

In Australia, if you manufacture or make products available to the public (i.e. sell or give away), you are responsible for ensuring those products are safe; comply with Australian Standards; and that they meet the statutory requirements set out in the Australian Consumer Law (ACL).

If the products you sell or make available have a defect that causes personal injury (which includes illness and even death) or property damage, a consumer or, in some cases, their family can seek compensation from the manufacturer or supplier. While your business may not physically manufacture the products, it may be considered to be the manufacturer if your business assembles, imports, uses its brand on the product or holds itself out to the public as the manufacturer.

For more information on your responsibilities as a manufacturer, please refer to the Australian Competition and Consumer Commission website.

Do I need Product Liability Insurance?

Product Liability insurance is an important consideration for any business that supplies or distributes products in Australia. Even with the highest attention to safety, there is always the potential for something to go wrong.

Claims arising from personal injury or property damage as a result of a product defect can be expensive, and without the right Product Liability insurance you could find yourself in hot water. You may be liable for court costs and damages. You may also find yourself missing valuable work time as you spend time with lawyers or in court, defending your claim. With the added expense of a Product liability claim, how would you afford to pay your ongoing business expenses including bills, rent and wages? Would you be able to put food on the table for your family?

If you operate as a sole trader, you will potentially be exposed to personal liability for personal injury or property damage claims, meaning a Product Liability claim could seriously affect your personal assets.

A Product Liability claim could arise from:

• A fault in the manufacturing or production of a product
  • For example, the plastic casing of a power adapter is not put together tightly enough, electrical wires become exposed, causing electric shock.
• A defect in the design of the product
  • For example, clothing manufactured using dye that contains a hazardous chemical causing illness.

Defective warnings, instructions or labeling of the product

• For example, a specialist work machine is sold without adequate instructions for use, or a warning about the dangers if used incorrectly.