The Cost of Recalls, Lawsuits, and Lost Trust
Why Product Liability Insurance Matters
Quick Takeaways
✅ Think You’re Covered? Think Again. – Many businesses assume their general liability insurance protects them from product-related lawsuits—it often doesn’t.
✅ Lawsuits Can Cripple a Business. – Even well-known brands have been sued for millions over defective products. Without insurance, a single claim could sink your company.
✅ It’s Not Just About the Courts. – A product liability issue can destroy consumer trust, trigger costly recalls, and damage your brand beyond repair.
✅ Not All Policies Are Created Equal. – Understanding the fine print is critical—some policies exclude design flaws, third-party manufacturing issues, or even products sold internationally.
✅ Prevention is Just as Important as Protection. – Smart businesses don’t just buy insurance; they implement quality control, crisis management, and supplier agreements to avoid lawsuits in the first place.
Why Product Liability Insurance Matters
Bringing a product to market isn’t just about innovation and sales—it carries legal and financial risks. A single defective product could lead to customer injuries, lawsuits, or product recalls that could cripple your business.
Take the case of the Fisher-Price Baby Biceps Gift Set recall in 2023. This popular children’s toy, sold at major retailers like Target and Toyworld across Australia, was found to have a serious safety defect. The grey caps on the dumbbell toy could detach, posing a choking hazard to infants. This led to an urgent recall, with authorities warning that ingestion of the caps could result in severe injury or death. The incident not only highlighted the dangers of inadequate product testing but also resulted in significant reputational damage for the retailers involved.
Then there’s Johnson & Johnson, a household name. The pharmaceutical giant has been battling talcum powder lawsuits for years, with allegations that its baby powder contained asbestos, leading to cancer cases. The result? Billions in settlements, massive reputational damage, and a global product pullback.
Or consider Samsung’s Galaxy Note 7 debacle—one of the most infamous product recalls in tech history. When multiple phones caught fire due to battery defects, airlines banned them, lawsuits rolled in, and Samsung had to halt production entirely, costing an estimated $17 billion in losses.
These cases have one thing in common: product liability risk isn’t just about legal costs. It’s about brand survival.
Even if a lawsuit never reaches court, a poorly handled product crisis can destroy consumer trust, lead to regulatory bans, and cripple cash flow. That’s why smart businesses don’t just rely on insurance—they build robust risk management strategies into their operations.
Key Risks Facing Manufacturers and Retailers
Product liability claims typically fall into three categories:
1. Defective Product Claims
A defect—whether in design, manufacturing, or marketing—can lead to massive financial fallout.
🚨 Case Study: Takata Airbags & the Australian Car Industry
One of the largest recalls in Australian history, the Takata airbag scandal impacted multiple car manufacturers, including Toyota, Honda, Mazda, and Subaru. The airbags, found to explode upon deployment, resulted in at least one fatality in Australia and multiple serious injuries worldwide. The Australian Competition and Consumer Commission (ACCC) mandated a nationwide recall, forcing automakers to replace millions of faulty airbags at their own cost.
💡 Key Takeaway: Product issues don’t just create lawsuits—they can permanently stain your brand and lead to government-mandated recalls.
2. Product Recalls
Think your product liability insurance covers recalls? Think again. Most standard policies don’t cover the costs of replacing faulty products, compensating customers, or handling PR fallout.
🚨 Case Study: Little Infants AU Car Seat Recall (2023)
In late 2023, Little Infants AU faced an urgent recall of their children’s car seats sold online between November 2023 and December 2024. The Australian Competition and Consumer Commission (ACCC) found that these car seats failed to meet mandatory safety standards due to the absence of upper tether straps and a five-point harness—critical features for child safety in vehicles. This oversight posed a significant risk of serious injury or death in the event of an accident. The recall not only led to financial losses but also severely damaged the brand’s reputation, highlighting the importance of strict adherence to safety regulations.
💡 Key Takeaway: A product recall can be more financially devastating than a lawsuit.
3. Regulatory Compliance
Consumer laws are getting stricter, and businesses can be held strictly liable for product issues—even if they didn’t directly cause them.
🚨 Case Study: Volkswagen’s Emissions Scandal
VW’s “Dieselgate” scandal—where the company deliberately cheated emissions tests—wasn’t just a US issue. In Australia, Volkswagen was ordered to pay $125 million in penalties for misleading consumers about vehicle emissions. Thousands of Australian customers joined a class-action lawsuit, leading to further payouts.
💡 Key Takeaway: Even if your product works as intended, misleading advertising or compliance failures can lead to devastating consequences.
Why Insurance Alone Isn’t Enough
Here’s where many businesses go wrong: they see product liability insurance as a safety net, not a strategy.
But insurance alone won’t protect your brand if a crisis erupts. To truly safeguard your business, you need a three-pronged approach:
1. Build a Stronger Product Liability Defence
🔹 Implement Rigorous Quality Control – Test products at every stage of production, especially if you outsource manufacturing overseas.
🔹 Create Detailed Product Labelling – Misuse is a major lawsuit trigger. Ensure clear warnings and disclaimers.
🔹 Audit Your Supply Chain – If you sell imported goods, ensure your suppliers meet legal and safety standards.
2. Crisis-Proof Your Brand
🔹 Have a Product Recall Plan – The faster you respond, the less damage your reputation takes.
🔹 Train Your Customer Service Team – They should know how to handle product complaints effectively before they escalate.
🔹 Monitor Social Media & Reviews – A single bad product experience can go viral overnight.
3. Get the Right Insurance (and Read the Fine Print!)
🔹 Understand Your Coverage Limits – Does your policy cover international sales, third-party manufacturers, and recalls?
🔹 Consider Additional Coverage – Some insurers offer endorsements for supply chain issues, recall costs, and crisis management.
🔹 Find a Broker Who Understands Your Business – Not all brokers are equal. A good broker will take the time to understand your industry, supply chain, and product risks, rather than selling a generic policy. Look for someone who asks the right questions, helps identify gaps in your coverage, and ensures your policy aligns with your actual risk exposure.
What’s Covered (and What’s Not)?
Product liability insurance isn’t a one-size-fits-all solution. While it offers critical financial protection, the fine print matters—and what’s excluded can be just as important as what’s included.
✅ Typically Covered:
✔ Injury or Property Damage – If a product causes harm to a customer or their belongings.
✔ Legal Defence Costs – Covers lawsuits, court fees, and settlements.
✔ Compensation Claims – Covers medical expenses, damages, and regulatory fines (where legally permissible).
✔ Third-Party Liability – If your product is sold through retailers or e-commerce platforms, your business may still be liable.
❌ Typically Not Covered:
🚫 Product Recalls – Insurance won’t pay to pull faulty products from the market unless you have specific recall coverage.
🚫 Intentional Misconduct – If you knowingly sell defective or unsafe products, you’re on your own.
🚫 Contractual Liabilities – Breaching a supply contract isn’t typically covered.
🚫 Poor Workmanship or Design Flaws – Some policies exclude faulty design issues, meaning you need separate coverage for professional liability.
💡 Pro Tip: Many businesses assume their policy automatically includes recall expenses—it doesn’t. If you manufacture or sell food, electronics, or children’s products, consider adding product recall insurance.
How Much Coverage Do You Need?
Determining the right level of coverage isn’t about guesswork—it’s about understanding your industry’s risks and assessing your business exposure.
Key Factors to Consider:
📌 Product Type & Risk Level – Are you selling something that could cause injury, illness, or major damage? If so, you need higher coverage limits.
📌 Sales Volume & Market Reach – The more units you sell, the greater your liability exposure. If you export products overseas, you may need global coverage.
📌 Regulatory Scrutiny – Sectors like food, cosmetics, and pharmaceuticals face stricter compliance laws, increasing insurance costs.
📌 Your Supply Chain – If you import goods or use third-party manufacturers, your liability may extend beyond what you directly produce.
🚨 Case Study: The Kmart Portable Gas Cooker Recall (2022)
Kmart Australia was forced to recall thousands of portable gas cookers after the regulator found they could leak gas and cause fires. The recall applied to models sold for over two years, meaning thousands of customers were at risk.
💡 Key Takeaway: Even retailers face product liability risks if they sell faulty products—not just manufacturers. If your business sells imported or rebranded goods, you’re still liable.
How to Choose the Right Product Liability Insurance
Buying product liability insurance isn’t just about checking a box—it’s about customising a policy that actually protects your business.
1. Review Your Policy Limits & Exclusions
🔹 Does it cover international sales? Many policies don’t automatically extend beyond Australia.
🔹 Does it include supplier/manufacturer defects? If you don’t produce the product yourself, make sure your insurer covers liability tied to third-party manufacturers.
🔹 Do you need product recall coverage? If a recall isn’t covered, you’ll be paying out of pocket for replacement costs.
2. Work with an Industry Specialist
Insurance isn’t one-size-fits-all, and neither is the right broker. Look for someone who understands the nuances of your sector—whether that’s manufacturing, retail, or e-commerce. The right broker will go beyond just selling a policy; they’ll help you identify vulnerabilities in your supply chain, assess regulatory risks, and ensure your coverage aligns with your real-world exposure.
3. Stay Proactive with Regular Policy Reviews
Your business isn’t static, and neither should your insurance be. Reassess your coverage annually, especially if you:
🔹 Launch new products
🔹 Expand into new markets
🔹 Change suppliers or manufacturers
🚨 Common Mistake: Many businesses set and forget their insurance policy. But as your business grows and evolves, so does your risk exposure.
💡 Pro Tip: If you don’t update your coverage before a claim happens, you could be underinsured when it matters most.
How to Reduce Your Product Liability Risk (and Keep Premiums Low)
Insurance is your financial safety net, but the best businesses don’t rely on it alone. The more proactive risk management strategies you have in place, the less likely you are to face claims—and the lower your insurance premiums will be.
✅ Implement Strong Quality Control
Conduct routine safety tests on all products.
If you import goods, demand compliance documentation from suppliers.
Regularly audit your production and supply chain for quality control.
✅ Invest in Clear Labelling & Instructions
Many liability claims stem from unclear or missing warnings.
Make sure labels comply with Australian regulations and don’t overpromise performance.
Provide detailed usage instructions to prevent misuse-related injuries.
✅ Train Employees & Customer Support Teams
Staff should understand product risks and be able to handle complaints effectively.
Poor customer service can turn a small complaint into a legal battle.
Create a system to track customer feedback—early detection of product issues can prevent lawsuits.
✅ Develop a Crisis Management Plan
If something goes wrong, speed matters. Have a crisis response strategy in place before an issue arises.
Have legal and PR teams ready to handle negative press.
If a recall is necessary, act fast to minimise damage to your brand.
💡 Pro Tip: The best way to avoid product liability claims is to identify and fix issues before customers do.
The Real Cost of Not Being Prepared
Product liability isn’t just an insurance issue—it’s a business survival issue.
Without the right protection, one bad lawsuit can wipe out years of hard work. But beyond the financial risks, a product liability failure can shatter your brand’s credibility, drive customers away, and attract intense regulatory scrutiny.
💡 What Should You Do Next?
1️⃣ Review your current policy – Are you fully covered for all your product risks?
2️⃣ Audit your supply chain – Do your suppliers meet Australian safety standards?
3️⃣ Develop a recall and crisis plan – How would you respond if something went wrong tomorrow?
4️⃣ Consult an expert broker – Get tailored advice to ensure you’re not overpaying or underinsured.
🚀 Final Thought: Smart businesses don’t just react to risk—they prepare for it. A well-protected business is a resilient business.