Firms that need protection against liability arising from defective products include:
- Repairers of goods and products.
A typical products liability policy protects the policyholder against their legal liability to pay compensation (damages) to third parties and claimants costs, arising from bodily injury or damage to property arising out of any product:
by the policyholder.
The policy is a legal liability policy, not a moral liability policy.
Usually products liability cover is provided in conjunction with public liability insurance. It is available as a standalone policy for larger, more complex risks.
The operative clause
Otherwise known as the ‘insuring clause’ this clause sets out how the policy operates.
The cover is subject to the policy:
‘The insurers will, subject to the terms, exceptions and conditions of the policy, indemnify the insured against all sums which the insured shall become legally liable to pay as damages in respect of accidental:
- Bodily injury to any person
- Loss of or damage to property
occurring anywhere in the world during the period of insurance and caused by any goods sold, supplied, repaired, altered, treated or serviced by or on behalf of the insured from or in Great Britain, Northern Ireland, the Channel Islands and the Isle of Man in connection with the business.’
Policies use definitions to attach a specific legal meaning to certain words. Insurers may use capital letters or other methods such as bold or italics to identify these defined words.
BREAKING DOWN THE OPERATIVE CLAUSE
To assist in understanding the operative clause insurers will break it down into its significant parts.
‘The insurers will indemnify the insured’
The policy provides indemnity – it puts the insured in the same financial position after the loss as they were in before it occurred.
The policy is about indemnifying the insured, not about compensating the claimant (the third party).
The insured and the nature of the business are defined in the policy schedule.
‘Against all sums which the insured shall become legally liable to pay as damages’
The policy pays:
- The damages awarded by a court
- The claimant’s legal costs or
- The amounts agreed between the parties in an out of court settlement.
The liability is ‘legal’ and not ‘moral’.
The policy may refer to ‘compensation’ rather than ‘damages’.
- ‘Damages’ is wider because ‘compensation’ does not include punitive damages, but many insurers using the damages wording specifically exclude punitive damages
- ‘Compensation’ is wider as it could include compensation awarded by tribunals and adjudication.
In practice, the difference, if any, is unlikely to be significant.
‘In respect of accidental bodily injury to any person’
The definition of ‘bodily injury’, in the policy is usually wide enough to cover:
- Nervous shock
Bodily injury must be accidental as insurers do not cover injury knowingly caused. Insurers are not excluding deliberate actions, which to everyone’s surprise cause injury but are excluding deliberate acts where injury is to be expected.
This includes employees, but the policy excludes bodily injury to employees arising out of their employment by the policyholder. This is covered by employers’ liability insurance.
Products liability insurance protects the policyholder against claims by employees who use their products outside the course of their employment in the same way as any other customer.
‘Accidental loss of or damage to property’
‘Property’ is defined as ‘material property’ to exclude intellectual property such as trademarks, copyrights or product patents.
TERRITORIAL LIMITS AND CUSTODY/CONTROL
The typical operative clause includes
‘happening anywhere in the world … and caused by any goods sold, supplied, repaired, altered, treated or serviced by or on behalf of the insured from or in Great Britain, Northern Ireland, the Channel Islands and the Isle of Man’.
Products may be sold with the intention that they be used within the UK but could be subsequently exported and cause injury or damage abroad.
Wordings may vary but the intention is usually to cover injury or damage occurring anywhere in the world provided the products or services were supplied from Great Britain, Northern Ireland, the Channel Islands, and the Isle of Man.
Insurers typically exclude products knowingly exported to North America and/or include a UK jurisdiction clause (only legal actions brought in the UK are covered).
The legal situation in North America (USA and Canada) is difficult for insurers due to:
- Higher damages
- Higher legal costs
- People being more likely to claim
North American exports cover
Insurance against liability arising out of North American exports is available subject to an additional premium and cover restrictions such as an increased excess.
Custody and control
The policy covers liability arising from the products once they have left the policyholder’s custody or control. Injury or damage caused by products that have not left the policyholder’s custody or control would be public liability claims.
Food and drink
Some wordings treat claims arising from food or drink consumed on the premises as public liability; others treat them as products liability.
It is not a significant difference unless a major claim is possible. It would then be necessary to determine which limit of indemnity (public or products) applies.
Typically indemnity limits apply:
- Public liability - any one incident
- Products liability - in the aggregate, over the policy period
THE PERIOD OF INSURANCE AND NATURE OF THE BUSINESS
The typical products liability operative clause covers injury or damage:
‘Occurring during the period of insurance’
Some policies use the word ‘happening’ rather than occurring. The intention is the same.
The period of insurance is shown on the policy schedule. It is typically 12 months from the start date of the policy. Products liability policies cover injury or damage that happens during the period of insurance.
The claim trigger is the date of the actual injury or damage, not the date:
- Of the error that causes the injury or damage
- The product is sold
- The claim is made against the policyholder
‘Caused by any goods sold, supplied, repaired, altered, treated or serviced by or on behalf of the insured’
Products liability policies can apply to many different businesses.
The key risk with products insurance relates to the sale of goods, but most policies provide cover in wider situations.
|Example||Nature of Claim|
|A hairdresser uses a faulty shampoo on a customer whilst styling their hair, causing injury.||This is a products liability claim even though the hairdresser has sold his/her services, rather than a teaspoon of shampoo.|
|A hairdresser in error applies bleach rather than the desired shampoo, causing injury.||This is a public liability risk.|
In practice, the same insurer covers both risks and the distinction will only become relevant if there is an issue with policy cover.
Many hairdressers’ policies offer a specialist ‘treatment’ extension to cover such losses.
Who needs products liability cover?
Any business that supplies products as part of their service, not just those selling them in isolation, needs products liability cover.
Businesses where the supply of products is only incidental to the main business also need products liability cover. For example, accountants who give their clients promotional gifts (such as diaries or golf umbrellas) or sell their used office furniture and/or equipment.
‘In connection with the business’
The schedule of insurance will define the insured ‘business’.
The definition should include all of the activities of all the insured companies that make up a group and all the insured’s past activities, even if now discontinued, as a claim could arise from a defective product supplied in the past.
LEGAL COSTS AND FEES
A significant part of products liability claims are the legal costs and expenses that both sides incur in pursuing or defending the action or negotiating a settlement.
The cover for legal costs and fees includes:
The policy covers claimant’s costs and expenses (legal, medical and other costs) awarded by a court or agreed in ‘out-of-court’ settlements.
The claimants’ costs may be a separate insured item or included in the definition of the ‘damages’ or ‘compensation’ covered by the policy.
The policy covers defence costs (legal, medical and other costs). Insurers:
- Only pay costs that have been incurred with their written consent
- Seek to handle claims using their own legal advisers
- Provide for a realistic defence with a reasonable chance of success
- Will not take a case to court merely to protect the insured’s commercial reputation.
Often the most ‘successful’ outcome is a negotiated settlement avoiding court costs.
Policies will also typically cover the cost of representation at a coroner’s inquest or fatal accident inquiry and for certain criminal proceedings related to the claim, such as a prosecution under the Consumer Protection Act 1987.
Avoiding prosecution in such cases could help the defence of a civil liability case that may follow against the insured.
The policy does not pay any fines or penalties imposed as this is against public policy.
DAMAGES AND LIMITS OF INDEMNITY
Damages awarded in cases of serious injury can run into many millions of pounds.
There are three main categories of damages:
- Special damages
- General damages
- Exemplary (punitive) damages
Special damages are compensation for financial loss already incurred. This could be:
- Loss of earnings
- The cost of travelling to hospital
- Treatment such as physiotherapy
- Damage to clothing worn at the time of the accident.
These losses can be accurately assessed and supported by documentary evidence.
General damages are compensation for injury or damage and future financial loss. This includes:
- Pain, suffering
- Loss of amenities, the permanent effects of an injury sustained
- Loss of future earnings.
These damages cannot be assessed precisely and are largely estimated.
Aggravated or exemplary damages (called punitive damages in America)
These damages are:
- Awarded in addition to real damages
- Intended to punish the defendant and discourage future malicious conduct
- Awarded to the claimant only in aggravated circumstances
- Typically excluded from products liability policies
The policyholder chooses the limit of indemnity.
The limit of indemnity required by organisations with a large products liability exposure could be beyond the capacity of any one insurer and will need to be shared.
Property insurers usually share risks proportionately ‘from the ground up’ whereas products liability risks are usually ‘layered’.
- One insurer (the primary insurer) takes the first £5 million of liability
- A second company takes the next £10 million
- A third company takes the next £25 million
- Giving protection up to £40 million in total
Aggregated (any one period of insurance)
The limit of indemnity for products liability insurance:
- Is an aggregate limit for any one period of insurance
- Applies to the total of all claims in that period of insurance
- Is not a limit of indemnity for any one incident, as is the case for public liability
The aggregate limit protects the insurer where the insured supplies a batch of faulty products that cause a large number of injuries to people or cases of damage to their property.
If a product is mass-produced for many years, insurers could face enormous compensation bills arising from a single error.
Defence costs in addition
This limit will typically apply to damages and claimants’ costs.
The expenses of defending a claim are often covered in addition, without any specific limit, other than the requirement that they have to be agreed in advance by the insurers.
Proportionate defence costs clause
Insurers can protect themselves by incorporating this clause. It states that if there is claim for more than the limit of indemnity, insurers will only pay their proportionate share of the total defence costs.
USA and/or Canada
The defence costs for claims arising in these countries are usually covered within the indemnity limit, known as a ‘costs inclusive’ basis.
Standard market exclusions
Two standard market exclusions, applicable to most forms of insurance, apply:
- War risks - the degree of loss would be too large for a commercial company to carry. The government carries this risk
- Radioactive contamination - the user of such materials is responsible for any damage caused and should have access to specific insurance arrangements.
Product liability exclusions
More specific exclusions include:
Injury to an employee arising out of their work
Employers’ liability insurance covers this risk.
Damage to property in the custody or control of the insured
Material damage insurance must be affected to cover this risk.
Loss arising directly or indirectly from the design, plan, formula or specification of any goods for a fee
The manufacturing process may be satisfactory, with the real fault lying in the design or specification.
A manufacturing fault in a single product can produce a sizeable claim, but as a single product, it may only affect one party. If the same manufacturing fault affects a whole batch of products, the possible cost is significantly increased.
If the fault is in the basic design of the product, the cost implications can be even greater.
If the insured designs or specifies their own products, this will be reflected in the premium and terms offered for the risk.
The products liability policy will usually exclude the design risk if the insured provides this service for a fee. Cover may be available under a professional indemnity policy.
Advice for a fee
Instructions supplied with a product or as a part of the packaging, can represent advice.
Insurers regard the provision of all advice in connection with the supply of products in the same way that they treat the actual product itself, the packaging or the instructions supplied with it.
If they cause injury or damage, the policy will provide indemnity for the insured’s legal liability.
If the insured does not sell a product and merely enters into a contract to give professional advice, this is regarded as a professional risk which products liability insurers will exclude. A professional indemnity policy can cover this type of risk.
Damage to or the cost of repair, alteration, replacement or recall of any goods
The policy protects the insured against their legal liability to pay damages for injury to third parties or damage to their property caused by the defective goods themselves.
It does not pay for the costs of repairing, replacing recalling or altering faulty goods.
There is a specialist market providing products recall and/or products guarantee insurance that will provide such cover, but for most organisations these are trade risks, carried by the insured.
Pollution worries insurers greatly because of the very large costs that could be involved.
Insurers restrict the cover they provide to ‘sudden identifiable unintended and unexpected incidents which take place in their entirety at a specific time and place’.
Wider cover is available in environmental impairment liability policies.
Actions for damages brought in courts outside Great Britain, Northern Ireland, the Channel Islands and the Isle of Man
The policy usually covers injury or damage occurring anywhere in the world. An action brought in a foreign court could significantly increase the likelihood of the insured losing and the level of damages awarded against them.
Insurers are particularly concerned with North America where the judicial system is unpredictable and costly (in legal fees and damages awarded).
Many insurers exclude legal actions brought outside the UK. Some insurers restrict this exclusion to actions brought in courts in the USA or Canada or in other countries following the legal procedure and practice of the USA and Canada.
Cover usually provided for contractual liability is limited. Often it does not add anything beyond the liability that exists without a contract.
Some products liability policies do cover contractual liability for injury or damage (not claims arising from non-performance of the contract), provided the insurer is able to conduct and control the defence of the claim.
Care is required as some combined public and products liability policies do provide this cover, but only in relation to the public liability risk.
Inefficacy (failure to fulfil intended function)
Insurers may wish to exclude claims for injury or damage arising out of the product failing to perform its intended function. This is the inefficacy exclusion.
The inefficacy risk is not automatically excluded from products liability policies.
The exclusion is typically added as an underwriting term for certain products, such an alarm system. Specialist policies may be available to include the inefficacy risk.
These extensions are automatically included or available free on request by the insured:
Indemnity to other persons
Products liability policies indemnify the insured. Most policies automatically, at the request of the insured, provide indemnity to:
for liabilities which would attach to the insured were the action to be brought against the insured itself.
Indemnity to principals
Liability insurance policies often provide cover for principals for whom the insured is working and whose contract with the insured requires them to indemnify the principal.
This extension may, but does not always, apply to the products liability cover.
Where the insured is not a single entity but comprises several linked or subsidiary companies, they all have legal responsibilities, including legal responsibilities to each other.
This clause provides each of them with cover under the policy as if each had a separate policy.
One subsidiary would be able to claim as a third party against another subsidiary where a legal liability exists. The overall limit of indemnity applies to claims submitted by all the insured companies.
Compensation for court attendance
This is a common extension within all classes of general liability insurance. It pays the insured a flat rate daily compensation fee for staff attending court as witnesses.
The fee is payable to the insured (rather than to the witness) to compensate for lost productivity or the need to hire temporary staff.
EXTENSIONS – OPTIONAL EXTRAS
These optional extras are often subject to payment of an additional premium.
Liability under contract
It is possible to extend the policy to cover specific contractual liabilities. Insurers require full details of the contract so they can assess the risk and the premium and terms required.
|The cost of renting alternative premises following fire damage to the third party’s premises caused by an electrical fault in the product supplied by the policyholder||This is consequential loss and covered by the products liability policy|
Often insurers are reluctant to provide this cover as they consider many contractual liabilities to be commercial trading risks and therefore uninsurable.
Products liability insurance protects a company against their legal liability for injury or damage.
If the third party incurs consequential loss because of the damage, insurers treat it as part of the damage.
There are situations where a legal liability for pure financial loss without injury or damage can arise under:
- Statute such as Sale of Goods legislation
- Occasionally in tort
Financial loss terms
A demand has arisen for insurers to extend products liability policies to provide cover for pure financial loss. Special terms will apply, such as:
- A lower sub-limit of liability
- A significant degree of self-insurance (insured bearing part of the risk)
- An additional premium
In the UK it is very difficult to recover pure financial losses under tort (common law) and claims are usually brought under contract. Many financial loss wordings however, exclude claims made under contract.
Product guarantee and/or product recall
Product guarantee and/or product recall policies can offer financial loss cover.
This cover is usually only available from specialist insurers as a separate policy and is designed to pay for the cost of repairing or replacing the faulty product itself and/or recalling defective products before they can cause injury. Sometimes cover excludes deliberate contamination of the products.
The General Product Safety (GPS) Regulations 2005
The regulations place a general duty on all suppliers of products (new and second-hand) used by consumers (whether the products were intended for them or not) to supply products that are safe in normal or reasonably foreseeable use.
The regulations define a safe product as any product, which under normal or reasonably foreseeable conditions of use, presents only those minimum risks considered acceptable and consistent with a high level of consumer protection.
Safety takes into account factors such as:
- The product’s characteristics
- Instructions and warnings
- The categories of consumers at serious risk when using the product, particularly children
Products guarantee and products recall cover has historically been quite difficult to place and expensive, with lower limits of liability and higher excesses.
Policy conditions set out the rules and guidelines that form the basis of the insurance policy and the agreement between insurers and insured.
There are two types - general policy conditions and claims conditions. Policy conditions usually include:
Compliance with policy terms
The insurance policy is evidence of a legal contract. To obtain the benefit of their rights under the contract the policyholder has to comply with its terms. This includes other persons that are entitled to indemnity under the policy (for example, the indemnity to principals clause).
Duty to take reasonable precautions
The policyholder has a duty to take all reasonable precautions to prevent injury or damage occurring and to keep any resultant loss to a minimum.
This condition often also requires the policyholder to comply with any statutory requirements.
Duty to notify any alteration in risk
This usually requires the policyholder to notify the insurers if any feature of the risk or business changes to increase the risk for the insurers. If an insured fails to do this, the insurers may be able to avoid (invalidate) the insurance.
Information to adjust the premium
The premium is usually based on the turnover of the insured’s business.
Many premiums are based on an estimate of the turnover for the forthcoming policy year and are adjusted at the year-end on the actual turnover achieved.
The clause sets out when declarations are required from the policyholder and often gives the insurers the right to charge an additional premium if the insured fails to make the required declaration.
If the deposit premium is a ‘minimum’ premium, a refund will not be allowed if the insured fails to achieve the estimated turnover figure.
Cancellation of the policy
This sets out the terms under which the policyholder or the insurers may cancel the policy.
Usually, the period of notice required is a minimum of 7 days. Insurers may have to give 30 or more days notice. The notice should be in writing.
It is only in serious circumstances that an insurer will choose to cancel the policy before renewal date.
If the insured cancels they will usually receive a pro-rata refund (unless the premium was a minimum premium), provided that there have been no claims.
The clause may also cover monthly premium payments. Cover usually expires when the insured defaults on a payment, although insurers normally commit to giving 7 days written warning.
Claims conditions usually include:
The claims process
This condition guides the insured through the claims process, including the policyholder’s responsibilities to:
- Promptly notify a claim
- Provide supporting material/documentation
- Help the insurers investigate the circumstances of the loss
The policyholder must cooperate with insurers within a reasonable time. What is a reasonable time will depend on the facts in each case and whether the insurers’ position has been prejudiced.
It is important that insurers are involved immediately the insured becomes aware of a claim against them and that the policyholder does not do or say anything, which could compromise or prejudice the position of the insurers.
The conditions may include arrangements for referring disputes to:
- Arbitration if there is a dispute between the insured and their insurers over the size of any settlement
- An independent adjudicator, if they have a complaint about the way their insurers have treated them
These introduce or amend the rights of insurers and include those noted below.
This allows the insurers, after agreeing to pay a claim, to take over the rights of the insured to pursue recovery of their outlay from any other party who could be fully or partially liable for an incident. For example, against the manufacturer of a defective component in the policyholder’s product.
A significant element of liability claims is the cost of defending/representing the policyholder.
It is beneficial to involve any other parties considered responsible as soon as possible. This might involve the other party being drawn into the legal proceedings as a co-defendant or the claim being handled by the other party’s insurers under their indemnity to principles clause.
Liability policies are often subject to a non-contribution clause. It states that if there is another policy covering the policyholder’s liability then this policy will only provide cover in excess of the other policy’s indemnity limit.
When both policies are subject to non-contribution conditions then both policies have to contribute proportionately, calculated on an independent liabilities basis.
Discharge of liability
Where the limit of indemnity is likely to be exceeded and liability is accepted the insurer can pay the policyholder the full indemnity limit.
The insurer will be responsible for all defence costs incurred up to the time of payment, but not for any more.
In the event of the insured acting fraudulently, this condition permits insurers to withdraw any rights under the policy.
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If you’re in the business of manufacturing, supplying, selling or repairing products, you’re at risk if the product you have worked on or provided causes someone harm. With Product Liability Insurance, you can rest easy knowing that if your products let you down, your insurance coverage won’t.