Products-completed Operations Coverage: What It Is & Who Needs It
This article is part of a larger series on General Liability Insurance.
Products-completed operations coverage is a part of a general liability policy that pays for injuries or property damage caused by a business’s products or operations. It is essential for contractors, service providers, and businesses that manufacture, distribute, or sell goods.
Typically, a small business can get a general liability policy that covers products-completed operations for around $400 to $600 per year. If a business needs a standalone policy, it will typically cost them $1 to $2 per $1,000 in revenue and more for high-risk products.
What is Products-completed Operations Coverage?
Products-completed operations coverage is a subset of general liability insurance that specifically covers your business if a third party―usually the consumer―is injured or has property damage as the result of your distributed product. As coverage of general liability, businesses can either get the coverage through their general liability policy, through a business owners policy (BOP) or standalone policy.
Claims may include medical costs, repair costs, and legal fees when there is a loss due to products-completed hazards. Claims are typically covered, although there can be an endorsement that excludes them specifically in some policies. As with any insurance policy, it is best to read through your policy in detail to understand what is and isn’t covered fully.
Products-completed Operations vs Standalone Product Liability Insurance
Most small business owners find the products-completed operations coverage in their general liability sufficient for their needs. However, some businesses, such as manufacturers and product designers, face greater product liability risks and may need a standalone product liability policy.
Product liability insurance is designed to meet that increased need and is typically sold through specialty insurers. Standalone product liability insurance works in much the same way as the coverage found in general liability. It pays for your legal defense if your product or service causes injuries or damages and only kicks in when damages occur away from your business premises.
Product liability policies can have higher limits than what’s available in general liability policies. As a rule of thumb, manufacturers can pay between $1 and $2 per $1,000 of product sold for a policy with products that are deemed less risky. This means that a low-risk business, like a retailer or distributor, might pay $1,500 to $2,500 per year for product liability insurance. High-risk businesses can pay substantially more—between $6,000 to $12,000 or more annually.
Manufacturers often buy product liability insurance for the added protection because the product liability suits they face usually involve multiple incidents and plaintiffs. The costs can add up quickly, and manufacturers would be on the hook for large portions of it if they only carried general liability insurance with products-completed operations coverage.
How Products-completed Operations Coverage Works
The products-completed operations coverage in a general liability policy is typically written on an occurrence basis, which means the policy must be in effect when the injury or property damage occurs. Additionally, the occurrence that triggers coverage has to happen away from the business premises. These criteria can confuse policyholders when it’s time to file a claim.
Products-completed operations coverage typically won’t pay in these situations:
- Claims occurring after you’ve dropped your coverage: Say a contractor completes a job and cancels their general liability a month later; their insurer will not cover a claim for injuries a client suffers if the date of the injury occurs after the cancellation.
- Claims occurring on your business’s premises: An insurer will most likely deny a retailer’s claims if they sell a product to a customer who is hurt using it in the store. However, the general liability portion of the policy may kick in to pay for a third-party injury or property damage.
In these situations, the business owner can still be sued, but their legal fees and court costs will come out of their own pocket.
A business owner could be sued for years after they have distributed the product—even after they close. This is where having an extended completed-operations coverage endorsement helps. It pays claims related to products sold during the policy’s term for up to 10 years after the policy expires.
What Products-completed Operations Covers
When a business distributes a product, there is a risk that the product can create harm or damage to others. This risk is known as a products-completed operations hazard. In general, products-completed operations coverage protects small business owners when someone claims they suffered bodily injury or property damage as a result of a business’s product. The types of claims that products-completed operations coverage typically protects against include defects caused by accidents and intentional behaviors.
Some claims covered by products-completed operations coverage include:
- Accidental contamination: For example, E. coli ending up in pharmaceuticals
- Labeling mistakes: For instance, a label misidentifying a product as lead-free
- Accidental defects: For instance, a battery defect causing spontaneous combustion when being charged
- Malicious tampering: For example, a hostile assembly line worker interfering with ingredients
If a business owner faces a product liability lawsuit, their products-completed operations coverage kicks in to pay for their attorney’s fees, court costs, and other legal bills. Depending on the policy, the legal fees may be considered part of the aggregate total paid by the liability policy. Check your policy to make sure that you understand how legal fees are covered.
What Products-completed Operations Coverage Doesn’t Cover
Products-completed operations coverage has four standard exclusions. Exclusions are situations that your insurance policy does not cover and that are explicitly spelled out in the contract.
The four standard exclusions in completed operations coverage are:
- Damage to your product: Your products-completed operations coverage only kicks in for damage to property other than your product. Let’s say you sell appliances, and a customer receives a broken dishwasher. Your insurer won’t cover the claim because no other property has been damaged. However, if a busted hose causes flooding, your insurer will most likely cover the claim.
- Damage to your work: Products-completed operations coverage also excludes damage to your completed work. For instance, imagine a carpenter completing a stairway that breaks under the weight of the client. That client might only sue for the damaged stairway. Because that’s the carpenter’s work, the insurance company won’t pay. However, the claim may be covered if the client sues for other damage the broken stairway causes.
Subcontractors are an exception to this exclusion. If the carpenter had hired a subcontractor to build the stairway, then the insurer usually pays the claim.
- Damage to impaired products: Claims stemming from property that’s defective because it contains your defective product or work are also excluded. For example, if a manufacturer’s flawed widget causes laptops to explode, their insurer probably won’t pay the ensuing claims for the damaged laptops but will pay the claims for any property damage or injury caused by an exploding laptop.
- Recall expenses: The costs associated with recalling defective products are not covered by products-completed operations coverage. To be fully protected, a business would also need a specialty policy known as product recall insurance that will pay costs associated with getting a defective product off of store shelves.
Products-completed Operations Coverage Limits
Products-completed operations coverage in general liability insurance has an aggregate limit that is separate from the general aggregate limit. An aggregate limit is the total amount that insurers pay for claims throughout the policy term. Most claims count against the general aggregate, but products-completed operations claims only impact the products-completed operations aggregate limit. This means you could have a general liability claim that hits the policy aggregate limit but also have a products-completed operations claim going against its own limit.
Selecting a lower limit on your products-completed operations aggregate limit can reduce your overall premium. However, that may mean you don’t have enough coverage if you end up in court. This makes it important to balance what you want to pay each year against how much a product liability lawsuit might cost.
Products-completed Operations Coverage Example
Imagine a retailer who sells children’s toys. As a retailer, its main concern is its customers, so it has opted for a general liability policy that includes products-completed operations coverage. This way, the retailer has insurance for customer injuries that occur in the store and injuries its toys cause outside of the store.
The retailer’s products-completed operations coverage may seem unnecessary until a customer claims their child was injured by a defective toy. The customer’s lawyer will likely name everyone involved with bringing the toy to market in the lawsuit, including the retailer. Luckily, the retailer’s products-completed operation coverage can pay for their defense.
However, this situation could play out differently for the manufacturer of the toy. First, the manufacturer is much more likely to be found liable for the defective product. Moreover, it may face multiple lawsuits based on the same defective toy. Each lawsuit eats away at its products-completed operations aggregate limit and the per-occurrence limit in its general liability policy.
With a standalone policy, the toy manufacturer is less likely to exceed its coverage limit, which could be a real risk if its only product liability coverage is part of its general liability policy.
Who Needs Products-completed Operations Coverage?
Any business that has a finished product is a business that needs to make sure that it has enough products-completed operations coverage. While any business with a general liability policy will have at least a minimal amount of coverage—as low as $100,000—businesses with more risk may want to increase coverage or get a specialized policy. Simply put, if consumers walk away from your business with a product in hand, you need to have some products-completed operations coverage because of the risk that the product may accidentally cause harm or property damage.
Most small business owners face some product liability risk, which is why standard general liability insurance includes products-completed operations coverage. However, those at high risk may need specialty insurance, like a standalone product liability policy. Business owners need to assess their risk to determine the coverage limits that make sense for them.