With financial constraints mounting on business owners during this challenging economic period, many are looking to cut costs. Some are reducing insurance covers, or utilising premium funding, and others are cancelling policies completely as they wind up their business. Unfortunately, when it comes to Public & Products Liability Insurance, cancelling your cover could end up being a costly decision in the long term.
Before cancelling or lapsing your Public & Products Liability Insurance, consider the possible long term outcomes, and ask for specialist advice on how you can best manage the risk.
Source: information in this article has been adapted from a piece published by LMI Group.
What does Public & Products Liability Insurance cover?
As a business, you have a duty of care to your customers, employees, and the general public. However if you are deemed negligent, causing property damage and/or bodily injury, even without intent, compensation ordered payable to claimants can be substantial and potentially harmful to the financial position of your company.
Public and Products Liability insurance is designed to protect you and your business from the costs associated with legal action as a result of your actual or alleged negligence that has caused third party property damage or personal injury, whilst acting in the course of your business or through your products. Read more.
How am I putting myself at financial risk if I cancel or lapse my Public & Products Liability Insurance cover?
A Public & Products Liability Insurance policy works on an “occurrence” or “event” basis.
Under an “occurrence” policy, you are covered for alleged acts of negligence causing bodily injury or property damage that occur while the policy is in effect. It does not matter if the coverage is in effect at the time the claim is made, it only matters that you have cover in place when the ‘event’ causing the damage/injury occurs. The benefit of occurrence coverage is that even if you cancel your policy at a future date, you will still have coverage for events that occurred in the past while the policy was in effect.
Conversely, if there is no cover in place at the time an event occurs, you can be left exposed, paying for legal defence costs and damages associated with alleged third party property damage or injury as a result of your actions.
We elaborate how this can occur in the examples below.
Example 1: Public Liability Insurance
A plumber installed a tap fitting in their client’s bathroom in January. In mid-March the tap fitting burst, causing severe water damage to the flooring underneath. The plumber was then hit with a claim from the homeowner, alleging negligence and seeking damage for repairs to the flooring. If the plumber is found at fault for the way the tap was installed, he will be responsible for payment of the resultant damage to the flooring, as well as any legal fees incurred to defend the claim.
Unfortunately, the plumber cancelled his liability cover at the end of February, before the incident occurred. With an ‘occurrence’ or ‘events’ based policy wording like Public Liability, the plumber no longer has insurance in place to defend himself against the claim for negligence, or pay for the third party damages. Even though he installed and performed the work in January, he had no cover in place when the actual ‘event’ of the tap bursting occurred, meaning there is no insurance policy to respond to the claim.
Example 2: Products Liability Insurance
An appliance manufacturer designed and produced an iron. The iron handle failed, disconnecting from the iron itself, causing the hot iron to fall on an individual’s foot while they were using it. This incident caused severe burns.
The manufacturer had closed their business permanently before this incident occurred, and had also cancelled their products liability insurance cover at the time of closing.
The third party sought damages for negligence causing personal injury against the manufacturer. Unfortunately the manufacturer was not covered by insurance for the personal injury claim, as there was no products liability cover in place at the time the person was injured – when the ‘event occurred’.
The former manufacturing company business owner was left to cover the legal defence costs and damages awarded to the victim. As the business was no longer trading, the business owner was required to pay for this themselves, putting their personal assets at risk.
What costs could I be exposed to without Public & Products Liability Insurance cover?
- No cover for legal defence costs – Regardless of whether you are at fault in a claim, you still need to defend yourself. Legal defence costs can fast amount to tens of thousands of dollars.
- Damages payable – if you are found to be negligent, causing third party property damage or personal injury in the course of your work, you could be required to pay significant damages to those affected. Depending on the claim, this can reach into hundreds of thousands of dollars, if not more.
Without Public or Products Liability Insurance, you would be left to incur these potential expenses on your own. Additionally, if your business is unable to afford these costs, or the original entity no longer exists, directors of the business can be sued personally, exposing personal asset loss and the possibility of bankruptcy.
What should I do if I am closing my business?
When closing your business or deciding you cannot afford Public or Products Liability Insurance cover, there is still a continuous risk - even if you completely stop working. A new ‘event’ can still take place that requires a current liability policy in force e.g. water damage from a tap fitting that failed 3 months after installation.
Public and Products Liability policies do not provide an option for run-off cover, like Professional Indemnity insurance. Therefore, it is essential when making a decision to cancel or lapse a liability policy, that you understand you may still be exposed by past work performed / products produced, and related events that occur. To avoid this situation, speak to your insurance broker on how you can appropriately manage the risk.
Whitbread are here to support you with important insurance advice throughout this challenging time and into the future. For guidance on achieving the most effective Public and Products liability insurance outcomes for your situation, while managing the risk, please get in touch with one of our specialists:
This insight article is not intended to be personal advice and you should not rely on it as a substitute for any form of personal advice. Please contact Whitbread Associates Pty Ltd ABN 69 005 490 228 Licence Number: 229092 trading as Whitbread Insurance Brokers for further information or refer to our website.