One of the most common types of personal lawsuits involves defective products—and the number of cases filed continues to grow.

In September 2021, the number of civil lawsuits filed in federal court ticked upward to more than 32,000, the highest number since December 2020, according to the Transactional Records Access Clearinghouse (TRACs), a data gathering, data research and distribution organization at Syracuse University. This number was driven largely by the number of personal injury product liability cases, TRACs said.

But why would a small business or a home-based business need product liability or product recall insurance?

“Small business doesn't mean small exposure," says Darryl Holmes, vice president, corporate underwriting, Selective Insurance. “A lot of people look at a small business and compare them to larger businesses but do not understand the level of exposure. Every business producing a product needs product liability, even small businesses."

Half a million new businesses started in January 2021 alone, according to Salesforce.com. The majority of these new small businesses were business-to-consumer (B2C) endeavors selling everything from physical products, such as retail goods, face masks, and Etsy-style crafts and clothing, to software apps and in-person and remote services.

When it comes to “home-based businesses, the discussion becomes even more complex because a lot of them may be going bare—they may not have any product liability insurance," Holmes says. “For agents, it is really important to try to educate a startup business about the importance of product liability, about the importance of having the right literature that provides labels and warnings and how to use the product because small businesses are extremely vulnerable."

Despite the hard work and the good intentions that small businesses put in to manufacturing high-quality products, there is always the chance that products could fail to work properly and cause harm to a consumer. 

Additionally, if an insured is buying product liability coverage, they should be buying product recall coverage as well—“the two go hand in hand," says Alex Marti, product recall focus group leader - U.S., Beazley.

“The product liability is going to pick up the bodily injury and property damages a product causes, while a recall policy is also going to pick up an insured's financial loss from having to remove a product from the stream of commerce, which is a costly endeavor," Marti says. “Without a recall policy they are going to be on the hook for those costs on their own." 

The impact of social media influencers can be hugely beneficial for a small business operating on tight margins. However, “if they have a relationship with the business and it's contractual, then that is a bigger issue than if they're just trying to influence on their own," Holmes says. “If an influencer is connected with the company, there's some vulnerability in terms of the representation. That's a verbal representation that someone can actually use against them."

“One of the craziest things about product liability is a business has to anticipate how someone might misuse the product," Holmes continues. “As a product manufacturer, you have to anticipate, for example, that a detergent pod could be an attraction to children—it makes the product liability space very complex for business owners, insurers and for manufacturers as a result."

Of course, when it comes to growth, an influencer can have a positive or negative impact on a business, bringing with it additional considerations for business owners. “If an insured looks like they could scale very quickly, they could see a very large additional premium charge at the time of audit," says TJ Collins, senior vice president, Amwins Brokerage of the Midwest. “I would suggest agents address this while negotiating terms with carriers, asking for free growth and tiered rating structures to help soften the blow of large growth."

Selling a defective product can cause big trouble for businesses, whether big or small.

Olivia Overman is IA content editor.