Selling online is easier than ever. You can launch a Shopify store, list on Etsy or set up a dropshipping business in an afternoon. But if a product you sell injures someone or damages property, you can be named in a lawsuit even if you didn't make the product. Product liability is one of the most overlooked risks for small e-commerce sellers. This guide explains how liability works and what coverage independent sellers should consider. If you sell on Amazon, see our guide Do I need product liability insurance to sell on Amazon?
Who can be liable for a defective product?
Under product liability law in many states, including California, liability can extend to businesses throughout the chain of distribution, not just the manufacturer. That can include distributors, wholesalers, importers and retailers. Claims typically involve:
- Manufacturing defects: a product differs from its intended design, such as a contaminated batch
- Design defects: the design itself is unreasonably dangerous
- Failure to warn: missing or inadequate instructions or warnings
Higher-risk seller situations
Private label and white label
If your brand is on the product, customers and courts may treat you like the manufacturer. You may be responsible for design, labeling and warnings.
Importing
If you import products from overseas manufacturers, injured customers may have trouble suing a foreign manufacturer, which can push claims toward the importer or seller. Importers may also have regulatory duties for certain products.
Dropshipping
You don't touch the product, but you're the seller of record. If the supplier is overseas or uninsured, you may be the most reachable defendant.
Handmade and small-batch goods
Makers on Etsy and similar platforms are manufacturers of their products. Candles, cosmetics, children's items, food, and pet products carry specific risks and rules.
Regulators and safety rules
- The Consumer Product Safety Commission (CPSC) regulates many consumer products and sets safety standards. Businesses must report certain product hazards. See CPSC – Small business resources.
- Children's products often require testing and a Children's Product Certificate under federal law. See CPSC – Children's products.
- Cosmetics, food and supplements fall under the FDA.
- California Proposition 65 requires warnings for products that expose consumers to listed chemicals, with some small-business exemptions. See OEHHA – Proposition 65.
Insurance doesn't replace compliance, and some policies exclude losses from regulatory violations or certain products.
What product liability insurance covers
Product liability is usually part of a general liability policy, under the "products-completed operations" coverage. It can cover:
- Bodily injury or property damage caused by products you sell
- Legal defense costs, even for groundless claims
- Settlements and judgments, up to your limits
It generally doesn't cover:
- The cost to replace or refund the defective product itself
- Product recall costs (separate recall coverage may be available)
- Intentional acts or known defects
- Intellectual property claims, which usually need separate coverage
- Contractual liability you take on, beyond what the policy allows
Platform requirements
Some marketplaces require sellers above certain sales levels to carry liability insurance with specific limits and to name the platform as an additional insured. Check each platform's current seller terms. Independent store platforms like Shopify generally leave insurance to you.
Supplier contracts and vendor endorsements
Protect yourself upstream:
- Ask suppliers for certificates of product liability insurance.
- Ask to be added as an additional insured under the supplier's policy through a vendors endorsement.
- Use indemnification clauses that require the supplier to defend and indemnify you for defective products.
- Check the supplier's insurer to make sure it can respond to U.S. claims. Overseas policies may not.
See our explanation of certificate holder vs. additional insured.
Keep good records
If a claim comes years after a sale, records are your best defense. Keep supplier invoices, batch or lot numbers, test reports, product listings, the warnings and instructions you shipped, and customer communications. Store them where you can find them years later.
Recalls
If a product you sell is recalled, act quickly: stop sales, notify customers, coordinate with the manufacturer and follow CPSC guidance. Product recall insurance can help with notification, shipping and disposal costs.
How much does it cost?
Premiums depend on product type, sales volume, where you sell, claims history and limits. Higher-risk products like children's items, ingestibles, electronics with lithium batteries, and sporting goods cost more to insure. A broker can compare options, including policies designed for e-commerce sellers.
Other coverage online sellers should consider
- Cyber liability for data breaches and payment fraud
- Commercial property or inland marine for inventory at home, in a warehouse or in transit
- Business owner's policy (BOP) that bundles liability and property
- Umbrella coverage for higher limits. See our commercial umbrella guide.
- Home-based business coverage if you run your shop from home. See our home-based business insurance guide.
Checklist for online sellers
- ☐ Identify your role: manufacturer, private label, importer, dropshipper or reseller
- ☐ Check CPSC, FDA and Proposition 65 rules for your products
- ☐ Buy general liability with products-completed operations coverage
- ☐ Get supplier certificates, vendor endorsements and indemnification
- ☐ Meet platform insurance requirements
- ☐ Consider recall, cyber and inventory coverage
- ☐ Keep records of suppliers, batches and testing
Contact Alishahi Insurance or call (877) 711-4545. See also our product liability insurance page.
Frequently asked questions
Can I be sued if I didn't make the product?
Yes. In many states, liability can extend to sellers and others in the chain of distribution, not just manufacturers.
Do dropshippers need product liability insurance?
Many do. As the seller of record, you may be named in a lawsuit, especially if the supplier is overseas or uninsured.
Does product liability insurance cover recalls?
Generally no. Separate product recall coverage may be available.
What is a vendors endorsement?
An endorsement on a supplier's liability policy that adds you as an additional insured for claims arising from their products.
Does Shopify require product liability insurance?
Independent store platforms generally leave insurance decisions to the seller. Marketplaces may have their own requirements.
Alishahi Insurance · 439 N Canon Dr, Penthouse, Beverly Hills, CA 90210 · (877) 711-4545 · CA License #4348151. General information only. This isn't legal, tax or financial advice or a coverage determination. Coverage depends on policy language and underwriting, and rules vary by state.
Related guide: Insurance for California e-commerce and online sellers