What product liability is
Product liability is the legal obligation to compensate the damage a defective product causes to third parties once it has been placed on the market. It does not refer to the quality of the product itself or its replacement, but to the harm it causes to people or their property: food poisoning, a short circuit that starts a fire, or a component that fails in someone else's assembly line.
The distinction matters to a finance director or a risk manager. The triggering event is not an oversight on the premises, but the product your company manufactures, imports or distributes. A single defective batch reaching the market is enough for the exposure to multiply with every unit sold.
Under Spanish law this liability is strict: the injured party does not have to prove negligence, only the defect, the damage and the causal link between them. This is why a well-designed corporate insurance programme treats product liability as a line in its own right, with its own sub-limits and specific terms.
New Brokers is an independent insurance brokerage registered with the DGSFP under reference J0140. This article is for general guidance and does not constitute binding advice.
Who is liable: manufacturer, importer or distributor?
Royal Legislative Decree 1/2007, which consolidates the General Law for the Defence of Consumers and Users, treats both the manufacturer and the importer into the European Union as the producer. Liability is also joint and several: the injured party may pursue any of those responsible for the full amount of the damage.
| Party | When it is liable |
|---|---|
| Manufacturer | For the finished product, an integrated part or the raw material it produces. |
| Importer into the EU | Takes on the position of producer when the manufacturer is outside the European Union. |
| Distributor / supplier | Liable if it does not identify the producer or importer within three months of the claim (art. 138.2). |
The practical reading is clear: a company that only distributes or imports may end up liable as if it had manufactured. This is why it is worth mapping your position in the supply chain precisely before sizing the programme. Within our areas of cover we handle product liability in coordination with the rest of the corporate lines.
Would you like to review where your company sits in the chain of liability? Request a review of your programme with no obligation.
What the legal framework says: Royal Legislative Decree 1/2007
The regime for liability for defective products is set out in Book III, Title II of Royal Legislative Decree 1/2007 of 16 November. These are the points worth knowing:
- Definition of a defective product (art. 137): one that does not offer the safety that could legitimately be expected, taking all circumstances into account.
- Property damage (art. 141.a): a franchise of 500 euros is deducted from compensation for property damage.
- Global cap (art. 141.b): the producer's total civil liability for death and personal injury caused by identical products with the same defect is legally capped at 63,106,270.96 euros.
- Limitation (art. 143): the right to claim compensation lapses three years after the injured party suffers the damage.
- Extinction (art. 144): rights are extinguished ten years after the product was placed on the market.
These figures and periods are set by law; they are not policy sub-limits. The specific cover, its amounts and its exclusions depend on the terms of each policy and insurer. The role of the brokerage is to align the insurance programme with this legal exposure, not to replace it.
Product recall and its costs
When a defect that may affect safety is detected, a company is often required to withdraw the product from the market. A recall is not damage to a third party in the strict sense, but an internal, logistical cost: locating batches, notifying distributors and consumers, transporting, storing and, where applicable, destroying or reconditioning.
These expenses are not always included in the basic product liability cover. They are usually arranged as a specific product recall expenses guarantee, with its own sub-limits and terms. It is worth distinguishing three blocks of cost that a programme may or may not include:
- Damage to third parties from the defective product (the core of product liability).
- Recall expenses as such (the logistics of the recall).
- Loss of profit or associated reputational harm, which may require additional guarantees.
Whether your programme covers one, two or all three blocks depends on the terms taken out. As an independent brokerage, we review that breakdown before an incident puts it to the test.
Do you know whether your current policy includes recall expenses? Let's talk about your exposure; we review your portfolio with no obligation.
The most exposed sectors
Product liability affects any company that places goods on the market, but some sectors carry greater exposure because of the nature of the potential harm:
- Food and beverages: poisoning, undeclared allergens, batch contamination. Recalls are frequent and carry high reputational impact.
- Industry and capital goods: components that fail and are integrated into third-party products, with a knock-on effect.
- Electronics and appliances: overheating, batteries, fire risk.
- Automotive: parts and systems whose defect may lead to accidents; large-scale recalls.
- Cosmetics, healthcare and chemicals: adverse reactions and harm to health.
In these sectors, the scale of the damage depends not only on an isolated incident but on the number of units affected. The same defect replicated across thousands of references turns a quality problem into a large-scale liability claim. This is why sizing the sum insured and the sub-limits must start from the real volume of production and the target markets, including export markets.
How it differs from general or operating liability
This is the most common confusion, and it has consequences at the point of contracting. General or operating liability covers damage arising from the company's activity: a visitor injured on its premises, damage caused by its employees during their work. The triggering event is inside the operation.
Product liability covers the damage the goods cause once outside the company, already in the hands of third parties. The triggering event is the product placed on the market. They are complementary lines: covering one does not cover the other.
A well-built corporate programme coordinates them so that there are neither gaps between the two nor unnecessary overlaps. That fitting work is precisely the role of an independent brokerage: we work under the client's mandate and with access to the whole market, including London and Lloyd's, to tune cover, sub-limits and exclusions to your real exposure and, where necessary, to defend your position in the claim.
Frequently asked questions
How does product liability differ from general or operating liability? In general or operating liability the triggering event is the company's activity. In product liability it is the product itself once placed on the market. They are complementary lines, and it is worth checking that your programme covers both, subject to the terms of each policy.
Does product liability insurance cover recall costs? Not always. Recall is usually arranged as a specific recall expenses guarantee, with its own sub-limits and exclusions, subject to the terms of each policy and insurer.
Who is liable if the manufacturer is outside the European Union? The importer into the EU takes on the position of producer. In addition, the supplier may be liable if it does not identify the producer within three months.
For how long can a claim be brought over a defective product? The right to claim lapses three years after the damage and liability is extinguished ten years after the product is placed on the market, under Royal Legislative Decree 1/2007.