When operating a manufacturing or e-commerce business, the financial repercussions of a product liability lawsuit can be severe. A product defect can lead to costly claims, including compensation for victims, material or immaterial damages, and the logistics of a product recall. This is why having the right international product liability insurance is essential for protecting your business. However, selecting the right policy requires careful consideration, especially when dealing with global operations or exports. Here’s what to look for when choosing an international product liability insurance plan for your business.
1. The Role of Subcontracting in Product Liability Insurance
If your company outsources part of the manufacturing process, you must ensure that your product liability insurance adequately covers the risks associated with subcontractors. While most policies do provide coverage for risks related to subcontractors, it’s important to inform the insurer about any subcontracting arrangements. In some cases, subcontractors may be required to have their own insurance coverage. Keep in mind that while the manufacturer’s policy may cover liabilities caused by subcontractors, it generally won’t extend to cover the subcontractors themselves. It’s crucial to avoid contractually limiting your ability to pursue legal action against subcontractors in case of a defect in their portion of the product.
2. Coverage for Series of Similar Claims
Product liability insurance can be complicated when dealing with a series of similar claims arising from the same product defect. If multiple damages occur from one product defect, they may trigger several claims either simultaneously or over time. When manufacturing products in batches, you need to ensure that your policy handles claims arising from a series of similar issues. It’s important to confirm that the policy deductible is not applied to each individual claim and that the coverage limits—set annually or per claim—are sufficient to handle multiple claims for the same issue. In insurance law, such claims are typically considered as one event, triggered by the delivery date of the defective products.
3. Policy Limits and Extensions
Given that a series of claims can quickly escalate the financial loss, understanding the policy limits is crucial. Insurers often share the risk by splitting coverage across multiple layers, so once the first layer is used up, the next one will be available. It’s important to understand how these layers work and ensure that your policy limits are high enough to cover potential losses arising from product defects or liability claims.
4. Exclusions to Watch Out For
Exclusions in product liability insurance policies can significantly impact coverage. While exclusions for criminal behavior or the insured’s negligence are standard, there are several specific exclusions to be aware of:
- Defective Products: Typically, the insurance does not cover the defective product itself but only the damages caused by it. Costs related to the replacement or repair of the defective product will not be covered under product liability insurance. To cover these risks, a separate product guarantee policy is needed, although this can be difficult to arrange in certain regions like Asia.
- Product Recall Costs: Product liability insurance does not cover the costs associated with a product recall. If your business needs to recall a defective product, you’ll need a separate product recall insurance policy. This policy covers the costs of recalling the product, including communication efforts, locating the products, removal or disposal costs, and storage fees. It can be purchased as an extension to your product liability insurance or as a standalone policy.
5. International Considerations for Product Liability Insurance
When selling products overseas or exporting components, it’s essential to consider the international scope of your product liability insurance. If your company’s products are sold globally or exported indirectly, it’s important to extend coverage worldwide. Companies with multiple subsidiaries overseas need to explore global insurance programs that include local coverage for each location.
There are two main types of international insurance programs:
- Non-integrated International Program: This approach involves the parent company setting up an umbrella policy that covers all the local policies of subsidiaries. The local policy handles claims, but the umbrella policy can cover any gaps or differences in coverage or limits between the local and global policies.
- Integrated International Program: In this model, the parent company’s insurer directly handles the global risk and issues local policies for each subsidiary. This approach provides more consistency across all locations.
In the event of a claim in one of the subsidiaries, a non-integrated program will have the local policy manage the claim, but the umbrella policy will step in to cover any differences in conditions (DIC) or limits (DIL). DIC ensures that the umbrella policy complements any extensions or wording differences between the local and global policies, while DIL ensures that the umbrella policy takes over if the local policy’s limits are exhausted.
6. Final Thoughts
Choosing the right international product liability insurance involves understanding the potential risks your business faces, especially if you operate on a global scale. It’s important to consider factors such as subcontracting, coverage for series of similar claims, policy limits, exclusions, and the international impact of your insurance. Speak to a professional to ensure your policy meets your specific needs and that your business is adequately protected from the financial risks associated with product liability.
