Article Reviewed by a licensed insurance professional: Sam Meenasian (CA dept of insurance license #0F75955).
Estimated reading time: 9 minutes
This article is for general information and not legal advice. Laws vary by state. Consider speaking with a qualified attorney and licensed insurance professional.
When creating or reselling a product, you anticipate helping people or fueling satisfaction, not hurting them. You put careful care into designing or picking a product, with both quality and safety in mind. Maybe you even purposely choose low-risk products with the intent of limiting your legal risk.
The truth is, any product has the potential to cause harm, not just pharmaceuticals, supplements, and prepared food products. Even children’s clothing, a pet toy, a small lamp, or basic consumer electronics can pose a risk.
If someone gets sick or injured from your product, it could potentially hurt your entire business.
Liability is Still There When Selling Online
A misconception is that e-commerce sellers are protected from product liability. Small resellers and inexperienced dropshippers often think that because they didn’t make or design the product, they’re not responsible if something goes wrong, until they find out the hard way.
The U.S. law on product liability has a different perspective.
In many situations, parties across the distribution chain—including sellers—can face product liability claims, though rules and defenses vary by state and case.
Are defective products really that common, you might ask? Statistics tell you all you need to know. According to the National Safety Council, total product injuries in the United States were 15,068,979 in 2024. These injuries also jumped by nearly 18% in 2024 from 2023.
The point is, defective products are more common than you think. To top it off, even if you’re just reselling an item, you can still be pulled into an injured consumer’s claim.
How Does Product Liability Work?
There are three main types of defective product claims:
-
-
- Design defects: Something wrong with the product’s design that could be potentially harmful, like a poorly-designed battery that overheats and risks fire
-
- Manufacturing defects: An error occurred during production, such as a poorly sealed can of soup
- Marketing or labeling defects: Missing or false information on a product’s label, like incorrect instructions or claiming a food product is organic when it isn’t
-
As a seller, you don’t have to be involved with the design or manufacturing aspects of a product to be held liable for a marketing or labeling defect.
It’s as simple as marketing a supplement as all natural when it contains one ingredient that isn’t. Or claiming a toy is for ages three and up when it has small parts, posing a choking hazard for an infant
Even if it wasn’t intentional, your liability doesn’t go away.
Trust me, going to court for something like this is not affordable for the average small business owner. You can end up spending thousands of dollars in legal fees before your first court appearance, that is, if you lack the proper insurance.
A Real-Life Example of Product Liability
Looking at an actual scenario to understand how detrimental product liability can be.
Jenna makes decorative candle holders and strictly sells them online. She’s been making these holders for several years and has been quite successful.
One day, she decides to use a different material to make candle holders out of. This new material hardens faster and is cheaper, allowing her to keep up with her heavy demand while earning more per sale.
Shortly after she sold a couple of her candle holders to a customer, Jenna was hit with a lawsuit. The customer claimed Jenna’s homemade candle holders were flammable. Not long after lighting, the holders themselves caught on fire. This resulted in the customer’s custom wooden table catching on fire. It also caused smoke damage to an adjacent wall, which had to be replaced.
The damages ended up being over $10,000. Since Jenna created the entire product herself, she was liable for the full damages. Even if she was simply reselling the item, she’d still be a part of the lawsuit for selling a defective product that doesn’t function as intended, is dangerous, and was poorly marketed (no mention of flammability).
Jenna filed a claim with her homeowner’s insurance. Unfortunately, they denied it. Even though her business is licensed to operate inside her home, her insurer doesn’t cover business-related damages.
That left Jenna paying all of the damages out of pocket. On the other hand, product liability insurance would have protected her financially.
The Troubles with Selling Products Online
Online sellers who never physically touch the products they sell can still be liable for a defective product. This holds in cases where another company ships out orders on their behalf.
Even if the major platforms a seller sells on won’t help. Take Amazon as an example. As of 2021, they put liability back on their third-party sellers for any defective products they sell.
While Amazon offers an A-to-Z Guarantee for certain purchase issues, it has also expanded processes to address personal injury or property damage claims related to defective products. The exact eligibility and limits depend on the program and transaction type.
This makes selling products online, whether they’re your own homemade goods or you’re dropshipping from another country, risky without liability insurance.
What’s Covered Under Product Liability Insurance?
Product liability insurance protects sellers if their product causes injury, illness, or property damage to a consumer. Coverage usually involves:
-
-
- Legal fees
-
- Medical costs
-
- Product liability
- Settlements if you lose
-
Not only can product liability insurance safeguard you from major costs, but it can also be required in some cases.
Many online platforms require their sellers to have product liability insurance if they make a certain amount of monthly sales.
How Much Does Product Liability Really Cost?
Defective products, both small and large, can lead to great costs.
Product liability cases can be expensive to defend, and costs can escalate quickly—especially in serious injury or when there is a class-action lawsuit.
As an uninsured small business owner, that would most likely put you out of business. Even after selling all of your equipment, materials, and inventory, it may still take you months or years to pay off your dues.
With product liability insurance, however, business owners can stay in business and maintain their reputation.
But What If You Sell from a Foreign Supplier?
So, you’re a dropshipper selling products from overseas. Sure, you didn’t create the products. In fact, you played zero role in their invention, design, or manufacturing process.
Since you’re selling it on U.S. grounds, however, that means the United States’ product liability law still applies to you. In fact, if a customer gets injured, their lawyer is going to come to you first, not the foreign manufacturer.
That said, your supplier can be from anywhere around the world, but if you sell it, you could still be liable if something goes wrong. Getting insured is ultimately the safest route.
Even Social Media Sellers are at Risk
How about Facebook Marketplace, TikTok Shop, or Instagram Shops?
These are still eCommerce platforms, and as mentioned, even eCommerce sellers can be legally liable for a defective item.
This is true even if they’re selling items on a personal, non-business account.
A Defective Product Leads to More Than a Lawsuit
As if a lawsuit wasn’t already bad enough, the situation gets worse.
In many cases, customers who purchase a defective product end up leaving a bad review on the seller’s e-commerce page.
If a product causes visible physical injury, such as a rash or burn, or property damage, reviewers are highly likely to include photo evidence. Negative feedback of this nature can significantly impact your sales volume.
According to Spiegel Research Center, almost 95% of online shoppers read reviews before committing to a purchase. Seeing a scathing review about the dangers of a product you sell can surely turn many prospective buyers away.
The key to avoiding these reviews and risking your business’s reputation is to hold yourself accountable, be proactive, and get insured just in case.
How to Protect Yourself Beyond Insurance
Liability insurance is a great backup tool, but there’s more that you can do to protect yourself.
-
-
- Don’t work with suppliers you can’t trust. Some products may need to meet specific safety standards or testing expectations.
-
- Ensure products are labeled clearly and accurately. This includes instructions for usage, a list of ingredients/allergens, as well as safety warnings, as applicable.
-
- Keep records of every batch. This way, you know where the items came from. These records can come in handy in the event of a product recall.
-
- Test your products. No matter how confident you are in making your products, they should always be tested before placing them on the market
- Get the proper insurance. General liability and product liability are highly recommended for both in-person and online-only sellers. Commercial property coverage and professional liability may also be needed.
-
Small Business Products Recalls Are on the Rise
Large companies aren’t the only ones at risk of product liability. Small businesses, including brand new ones, can be at risk.
In fact, Consumer product recalls occur regularly across many categories.
Worst of all? The size of your business or the length of time you’ve been open doesn’t bring down the fees you pay if a recall occurs. You can still owe thousands, whether you’re drowning in debt from recently launching your business or making hundreds of sales a week after years of hard work and dedication.
This makes having liability coverage more of a dire necessity than ever before.
Insurance Doesn’t Just Protect, It Helps You Scale
Product liability insurance can be a great thing financially. What many don’t mention, though, is that it can actually be used to help you grow your business.
When covered under a liability policy, you’re not only able to sell through certain e-commerce stores, but you also feel a greater level of confidence in selling riskier products. You might go from merely selling a low-risk product like knitted blankets to expanding your horizons to riskier ones, such as loungewear, tea sets, candles, or space heaters.
The point is, being isn’t just about being protected and prepared. It’s also about proving you’re professional and committed, which can lead to more opportunities and more sales.
The Legality Behind Product Safety is Getting Stricter
Consumer protection laws aren’t staying stagnant. They surely aren’t getting more lenient.
From California to New York, many states have recently made laws for products sold online even stronger. Compared to before, they require stricter labeling, listing transparency, and refund policies. Many digital platforms are also banning sellers not covered under product liability.
These days, online sellers aren’t getting away from the challenges of physical store owners. If anything, the digital market poses greater challenges.
Failure to adhere to product safety laws can result in financial penalties, lawsuits, loss of business certificates, and/or business suspension.
5 Key Takeaways
-
-
- Even if you didn’t play a role in making the product, you can still be liable for product defects if you’re selling it.
-
- Product liability insurance can cover the unexpected costs associated with a defective item, from injuries to property damage.
-
- A single claim can easily cost over $10,000, which can cause a business without product liability insurance to permanently close.
-
- Having an insured status improves your credibility in consumers’ eyes.
- Regulations across the board are getting stricter.
-
Getting Product Liability Insurance
As an insurance agent, I’ve helped many small business owners navigate product liability and get the coverage they needed. I’ve heard one too many stories. It’s not the claims themselves that are scary; it’s the ones where the business owner didn’t have liability insurance when an incident occurred.
No, product liability insurance isn’t some sort of useless, optional upcharge you pay for and then never use. It’s also not something that only big sellers need. Many first-time dropshippers and small startups, too, can benefit from this type of protection.
Whether you’re in Ohio or New York, and regardless of your industry, we help you find the right liability insurance. Don’t wait for a letter in the mail to wish you had protection—get peace of mind today.
Contact USA Business Insurance today to get a quote on an affordable policy.
