Products-completed Operation Coverage: What it Is and Who Needs It

Products-completed operation coverage is part of a general insurance policy. It covers injuries and property damage that are caused by products or business operations. This coverage is vital for service providers and contractors who manufacture, distribute or sell goods.

general liability policy covers products-completed operations and costs around $400 to $600 annually for small businesses. A standalone policy will usually cost a business $1 to $2 for every $1,000 of revenue, and more for high-risk products.

What is Product-completed Operation Coverage?

Products-completed operation coverage is a subset in general liability insurance. It covers your business if third parties are injured or suffer property damage due to your product. Businesses can choose to have coverage for general liability through their general insurance policy or through a standalone policy.

When there is a loss from products-completed hazards, claims may cover medical costs, repairs costs, and legal fees. Although most claims are covered, there may be an endorsement that excludes certain types of claims. It is a good idea to carefully read your policy to fully understand what is covered.

Products-completed Operations vs. Standalone Product Liability insurance

Small business owners generally find that the coverage for products-completed operations in their general liability is sufficient. Some businesses, like manufacturers and product designers, may face greater product liability risks. They may require a separate product liability insurance.

 

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This product liability insurance is intended to address this increased demand and is usually sold through specialty insurers. Product liability insurance can be purchased separately and works the same as general liability. It covers your legal defense in the event that your product or service causes injury or damage. However, it does not cover damages that occur outside your business premises.

Products liability policies may have greater limits than general liability policies. Manufacturers can pay $1 to $2 per 1,000 product for policies that cover products that are less risky. A retailer or distributor might pay between $1,500 and $2,500 annually for product liability insurance. High-risk companies can pay significantly more, paying between $6,000 and $12,000 annually.

Because product liability suits often involve multiple plaintiffs and incidents, manufacturers frequently purchase product liability insurance. These costs can quickly add up and manufacturers could be held liable for large amounts if they did not have general liability coverage with products-completed operation coverage.

How products-completed operations coverage works

A general liability policy that covers products-completed operations typically works on an occurrence basis. This means that the policy must be in force when injury or property damage occur. The occurrence that triggers coverage must occur away from business premises. These criteria could cause confusion for policyholders when it comes time to file a claim.

These situations are not typical for products-completed operations coverage.

  • Claims that occur after you have dropped your coverage: Let’s say a contractor finishes a job and then cancels their General Liability one month later. Their insurer won’t cover any claim for injuries sustained by a client if the date of injury is after the cancellation.
  • Claims that occur on your business premises: If a retailer sells a product to a customer who has been injured by it, an insurer will likely deny the retailer’s claim. The policy’s general liability may be activated to cover third-party injuries or property damage.

These situations allow the business owner to still be sued but will not pay their legal fees or court costs.

The business owner can be sued for many years after they have sold the product, even after they close. Extended completed-operations coverage endorsement can help with this. It covers claims relating to products that were sold within the policy’s terms for up to 10 year after expiration.

What products-completed operations are covered?

There is always a chance that a product could cause harm to other people if it is distributed by a business. This is called a products-completed operation hazard. Products-completed operations coverage covers small business owners who are claiming that they have been injured or damaged by a product of their business. Products-completed operations coverage usually covers defects due to accidents or intentional behavior.

Some claims are covered under the products-completed operations coverage.

  • Unintentional contamination: E.coli can end up in pharmaceuticals, for example.
  • Mistakes in labeling: An example is a label that misidentifies a product as lead-free.
  • Unintentional defects: This could be a defect in a battery that causes spontaneous combustion while being charged.
  • Malicious Tampering: An example of this is a hostile worker on an assembly line interfering in ingredients

A business owner may be sued for product liability if their products-completed operation coverage kicks in. This covers their legal fees, court costs and any other legal expenses. The policy may include legal fees as part of the total liability policy. To ensure that you are fully informed about legal fees, check your policy.

What Products-Completed Operations Doesn’t Cover

Four standard exclusions apply to coverage for products-completed operations. Exclusions refer to situations that your insurance policy doesn’t cover, and are clearly stated in the contract.

These are the four exclusions that are standard in coverage for completed operations:

  • Product damage: The product-completed operations coverage does not cover property that is not your product. Imagine that you sell appliances and that a customer gets a broken dishwasher. Because no other property was damaged, your insurer will not cover the claim. Your insurer may cover flooding if the hose breaks.
  • Damage to your finished work: Products completed operations coverage does not cover damage to your finished work. Imagine a carpenter building a staircase that falls under the client’s weight. The client may only sue for damages to the stairway. The insurance company will not pay because it is the carpenter’s responsibility. The client may still be able to sue for any other damage that the broken staircase caused.

This exclusion does not apply to subcontractors. The insurer will usually pay the claim if the carpenter hired a subcontractor for the construction of the stairway.

  • Damage to defective products: Claims arising from property that is defective because it contains your product or work are also exempt. If a defective widget in a manufacturer’s laptop causes it to explode, the insurer won’t likely pay for damages or injuries. However, they will cover any claims for property damage and injury that result from an exploding laptop.
  • Recall expenses Products-completed operations coverage does not cover recall costs. A business will need product recall insurance to fully protect itself. This covers the costs of getting defective products off the shelves.

Limits on Products-completed Operations

General liability insurance covers products-completed operations. This coverage has an aggregate limit which is separate from the general aggregate limits. An aggregate limit is the amount insurers pay to cover claims during a policy term. While most claims are counted against the aggregate limit, products-completed operation claims will only affect the aggregate limit for products-completed. You could have a general liability case that exceeds the policy aggregate limit, but also have a product-completed operations claim against its limit.

Your overall premium can be reduced by selecting a lower limit for your products-completed operations aggregate limit. This could mean that you won’t have enough coverage in the event you are taken to court. It is important to weigh the cost of a product liability suit against what you are willing to pay.

Example of Products-completed Operation Coverage

Imagine a retailer selling toys for children. Its primary concern as a retailer is its customers so it has chosen a general liability policy with products-completed operations coverage. The retailer is covered for injuries to customers that happen in its store as well as injuries it causes outside the store.

When a customer claims that their child was hurt by a defective product, the retailer’s products-completed operation coverage might seem redundant. In the case, the customer’s lawyer will likely name all those involved in bringing the toy to market. This includes the retailer. The defense can be covered by the products-completed operations coverage of the retailer.

This situation could be different for the manufacturer. The manufacturer is more likely to be held liable for defective products. It may also face multiple lawsuits for the same defective product. Each lawsuit reduces its aggregate limit for products-completed operations and its per-occurrence limit under its general liability policy.

A standalone policy reduces the likelihood of a toy manufacturer exceeding its coverage limit. This could be a risk if it has only product liability coverage.

Who needs products-completed operations coverage?

A business with a finished product must ensure that it has sufficient products-completed operations coverage. A general liability policy covers a business up to $100,000, but businesses with greater risk will need more coverage. You need some product-completed operations coverage if a consumer walks away with a product in their hands. This is because there is a risk that the product could cause injury or property damage.

Bottom line

Small business owners are subject to product liability. Standard general liability insurance covers products-completed operations. High-risk individuals may require specialty insurance such as a separate product liability policy. To determine the right coverage limits for their business, owners must assess their risk.

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