Businesses that manufacture, distribute, or sell goods face significant exposure to liability claims stemming from product defects or misuse. Understanding the scope of insurance coverage is paramount for protecting a company’s financial stability from lawsuits related to bodily injury or property damage. General Liability (GL) insurance is the standard foundational policy for most businesses, yet its relationship to Product Liability (PL) coverage is often misunderstood. This article clarifies how standard Commercial General Liability policies address product risk and when dedicated coverage becomes necessary.
The Relationship Between General and Product Liability Coverage
Product Liability coverage is not a separate, automatically included policy. A standard Commercial General Liability (CGL) policy does, however, incorporate a limited form of product-related protection within its structure. This inclusion is generally found under the provisions addressing the Products-Completed Operations Hazard. While this built-in coverage provides a baseline of protection, businesses with significant product exposure often find the limits and scope insufficient to cover their entire risk profile. This partial inclusion ensures that some product-related incidents are covered, but it does not equate to the broad protection of a dedicated policy.
Understanding Commercial General Liability Insurance
Commercial General Liability insurance is designed to cover third-party liability exposures arising from a business’s premises and its ongoing operations. This policy protects the business when a non-employee is injured while on the business’s property or when damage occurs during the performance of a service. CGL policies typically operate on an occurrence basis, meaning they cover incidents that happen during the policy period, regardless of when the claim is filed.
The policy structure is typically divided into three primary sections. Coverage A addresses Bodily Injury and Property Damage that result from the business’s negligence. This is the section where the limited product liability protection is housed, though its main focus is on non-product-related accidents that happen on site or during active work.
Coverage B provides protection against claims of Personal and Advertising Injury, which includes offenses such as libel, slander, or copyright infringement. Coverage C provides Medical Payments coverage, which pays for medical expenses for injuries sustained by a person on the insured’s premises or as a result of the insured’s operations, regardless of fault.
The Products-Completed Operations Hazard
The Products-Completed Operations Hazard (PCOH) is the specific mechanism within Coverage A of the CGL policy that extends protection to product-related claims. This hazard is defined as bodily injury or property damage that occurs after the business has relinquished physical possession of the product or after the work has been completed. The timing and location of the incident are the defining factors for activating this coverage.
For example, if a consumer buys a defective appliance and it malfunctions, causing a fire in their home a week later, the resulting property damage and any injuries would fall under the PCOH definition. The injury or damage must happen away from the business’s premises and after the product has been sold, distributed, or delivered. This distinction is important because CGL otherwise covers only incidents occurring during the ongoing operation or on the premises.
The inclusion of the PCOH is meant to provide protection for the downstream consequences of manufacturing or assembly errors once the product is in the stream of commerce. However, the coverage is generally limited to the costs of defending against the claim and the payment of damages awarded to the injured third party.
Key Differences and Limitations of CGL Product Coverage
Despite the inclusion of the Products-Completed Operations Hazard, the coverage it provides is often insufficient for businesses with substantial product exposure due to various structural limitations and exclusions. A significant gap in CGL coverage is the exclusion for the cost of recalling a faulty product from the market. Expenses related to notifying customers, shipping, and disposing of the defective goods are generally not covered, leaving the business to absorb potentially massive recall costs.
The CGL policy also provides no coverage for damage to the product itself, even if the product is the source of the loss. This is often referred to as the “your product” exclusion, which stipulates that coverage is limited to bodily injury or property damage to a third party’s property, not the replacement or repair of the item that caused the accident. Furthermore, the defense costs associated with product liability lawsuits can quickly erode the policy’s aggregate limits, even if the case is successfully defended.
CGL policies are typically limited to covering physical injury or tangible damage, meaning they generally exclude pure financial loss or economic damages. Claims arising from a product’s failure to perform as expected, which results in a customer losing profit or incurring business interruption expenses, are typically outside the scope of the standard CGL form. While dedicated product liability policies can sometimes be endorsed to cover these economic losses, the CGL is not structured for this purpose.
When to Purchase Standalone Product Liability Insurance
Identifying the point at which a business requires dedicated, standalone Product Liability insurance involves a careful assessment of its risk profile and distribution network. Companies that deal in high-risk products, such as medical devices, nutritional supplements, machinery, or items intended for children, should secure a separate policy. The potential for severe injury or illness associated with these goods necessitates higher limits and broader coverage than a CGL policy can provide.
A business experiencing high sales volume or wide distribution, particularly when entering international markets, also faces increased exposure that outstrips CGL limits. Standard CGL policies often contain territorial restrictions that exclude claims arising outside of the United States, Canada, or Puerto Rico. When a product is highly complex, such as integrated electronics or aerospace components, the potential for catastrophic failure and resulting financial loss demands specialized coverage.
Many large retailers, distributors, or manufacturers require their suppliers to carry specific Product Liability limits as a contractual condition of sale. Purchasing a standalone policy allows the business to tailor the limits and defense provisions specifically to the product-related risks it faces.