Product Liability Insurance for Small Manufacturers

Your customers and other consumers have a legal right to expect that your product is safe which means that it will not cause them harm. Consequently, they can sue you, the manufacturer or seller when they suffer injury. This type of legal action falls under tort law, which is interested in awarding compensation aka 'damages' to persons who have suffered as a consequence of wrongdoing by another. To be clear, the complaint may relate to harm suffered by any end user. In that case, the buyer of a car may sue on the basis of harm caused to his or her child as a passenger (even if the child was not a driver or the paying customer).

This type of liability can be established based on the following two conditions.

1. the manufacturer operates a business. (A manufacturer's liability exists only on the basis of proof of harm, while a hobbyist's liability requires other forms of proof, like unsafe production conditions)

2.   the product has not been changed before reaching the consumer.

Additionally, complaints must be based on at least one of the following three 'product defects', as contrasted against the standard of safe competing products.

1. Design Defect. This would apply if, even before making the product, some planned element has an inherent flaw that can cause harm. Every unit made is therefore potentially harmful. Consequently, multiple parties (not just the odd one or two) are likely affected.
2. Manufacturing Defect. Manufacturing defects usually affect only one or a few units of the product, often because of one-off or temporary challenges like errors made by a new employee that has been poorly trained or if a natural disaster causes production line errors. 
3. Warning (aka Marketing) Defect. This defect refers to non-disclosure of and or inadequate instructions for avoiding foreseeable harm. This applies when risks are inherently potential during use or when there are limits to which protection should be expected. Examples: hand sanitizer that is responsibly sold should warn consumers of the hazards of combustion with the use of the globally recognized symbol #3 (for flammable products); matching tyres to different weights and types of motor vehicle. Just to clarify however, rest assured that not all injury gives consumers legal right as in cases in which consumers sustain injury while inappropriately using your product or modify your product in a way that contributed to their injury. Furthermore, injury can be claimed for only physical products. Consequently, electronic products that render undesirable results do not count. 

DO's

• Get product liability insurance coverage. Even if you design the best possible product, consider that the risks are too great if members of the public with rare, unforeseen circumstances can be adversely affected by your product. While many of your colleagues will likely confess to not having insurance coverage as claims are rare to none, insurance provides peace of mind against that one-in-a-thousand-cases complaint that costs you your entire business and life savings. To be clear, you should also consider insurance once persons other than you use your soap. This even includes if you make soap only for the sake of giving them away soap free of cost as Christmas gifts. After all, even someone suffering from an allergy against ingredient X can end up with steep medical bills they find unbearable as their justification to demand your financial assistance. 
• Consider specific ways in which your product type can potentially harm consumers. This will be your guide for taking preventive action. For instance, if you sell cosmetic products you make, like most other such serious (cottage industry) manufacters, you may feel complacent because you likely already ensured that your formulations are safe for your target market, ie your product design is safe. Do not stop there. Tackle the other 2 types of product defect. For instance, consider all the ways you can improve your communication to manage the risk of 'warning defects' on product pages and labels. If there are known allergens, they should be stated. Do you use utensils for other formulations that contains allergens like nuts, gluten and so on? Do not hide ingredients, especially those with the potential to cause allergic reactions in some people. Have you even noticed YouTube videos with very technical information suggesting that the information is only for educational purposes and that the consumer of the information should seek professional advice? Such producers are protecting themselves. Similarly, even product manufactures often provide infomercials in a similar way. 
• For no additional cost to you or other key stakeholders acting on your behalf like authorized retailers, you can offer to name their business as an 'Additional Insured' on your General and Product Liability policy. It relieves the other parties of the burden of product liability claims involving your product. Ideal for B2B customer relationship building!
• If possible / applicable to your work, transfer risk to suppliers. Needless to say, whenever possible, do business with those suppliers that can name your business as an 'additional insured' on their 'ACORD Certificate of Liability Insurance' aka Certificate of Insurance (COI). This offers protection in the event that their product is responsible for a product liability claim. However, this is rare in manufacturing because most manufacturers alter their supplier's product. However, this may work if your process does not alter your supplier's product. If possible, include a 'Hold Harmless' clause in your contract that can absolve you of legal liability for any injuries or damage suffered by your counterparty. Hold harmless clauses are also rare and rightfully approached with much caution.
• Find options for insurance coverage that work with small manufacturers, particularly if they specialize in your type of industry. Here are some examples.
• RLI provides coverage for home-based manufacturers with craft-oriented categories that include bath and body that earn relatively low gross profits. For instance, if your business earns under roughly USD 8,000 yearly, you may be eligbile for coverage up to roughly USD 1 million and need to pay premiums at roughly USD 300 yearly. RLI is therefore ideal for new, small-scale manufacturers. However, your physical manufacturing primary home base must be the mainland US, Canada or Puerto Rico.
• Industry trade groups aka trade associations provide the advantage of offering members highly customized insurance options.
• The Handcrafted Soap & Cosmetic Guild /  HSCG is a highly specialized trade association that can provide from the most basic formulation instruction to the more advanced support that in addition to insurance, includes discounted rates for operational costs (like postage & supplies), business advertising and supports legislative advocacy. In addition to different tiered costs of membership, insurance costs roughly  USD 275 to 380 yearly, with the second option providing property coverage. As per usual for US-based trade associations, membership is restricted to US-based persons. However, there are free resources that include website-based classes, YouTube videos and other useful soap business documentation. 
• Although Indie Business Network aka IBN exists for general life and business planning, it offers insurance as an optional complementary service to members based in North America and selling in North America or internationally. Despite being a complementary service, there are even specialized areas like food & beverage, handcrafted soap & cosmetics (& jewelry), infused products and so on. Outside of the cost of the pre-requisite IBN membership of USD 195/year, the insurance policy typically costs USD 275 to 330 / year. If you are new to this network and need more insight or consideration time, sample some of its free resources like podcasts that often feature interviews of fellow members. Otherwise, the school offers short courses for a relatively small fee.
• Other option(s): The HandMadeInsurance company /  https://www.handmadeinsurance.com/

• When seeking a policy, consider the following. Some brands provide relevant 'fine print' information in very digestible lists like 'what is covered', 'what is NOT covered', 'schedule of costs' and so on (like IBN regarding insurance coverage for handcrafted soap and cosmetics). 
• Whenever possible, liability insurance should cover legal fees. After all, legals fees are often enough to severely hurt a business.
• The policy should naturally cover the damages / cost of the judgment, thereby protecting your (personal) assets up to the policy limits.

CONTENT RELATED TO PRODUCT LIABILITY

• Figuring out insurance is necessary, even while you prepare to launch your new product.
• See how to create a risk management plan. Risk management can eliminate or at least mitigate the tedium of facing product liability claims at all.
• Avoid 'warning' / 'marketing' product defects. Know about hazards management.
• Ensure your product labels avoid 'warning defect'. Learn about multilingual product labels.
• Another way of protecting your personal assets is by separating the operations and assets of your business and personal assets. One key way of doing this is by registering the business as a limited liability corporation (LLC).
• Do not be surprised if farmers' markets ask to be named as 'additional insureds' on your insurance policy.
• Just to be clear; do not confuse product liability insurance with other forms. For instance, it will not cover employees. If you wish to have coverage for employees, you will need a different policy outside of product liability. Recognize the distinction between you and anyone working on your behalf and the public that comes into contact with your business and or product. Consequently, if a customer walked through your establishment or that of an 'additional insured' retailer and had an accident like tripping over boxes on the floor, your insurance might also cover the case, even though the accident does not directly relate to the final intended use of product.