When Insurance Won’t Cover Your Business Losses: Navigating Gaps in Product Liability Coverage

You probably already know that running a business means managing risk, but what happens when the insurance policy you relied on doesn’t cover your loss? This happens more often than you’d think, especially when it comes to product liability insurance.

If your company makes, sells, or distributes products and you’re relying on insurance to protect you from lawsuits or financial damage, this blog post is for you. At our law firm, we’ve seen business owners blindsided by coverage denials, and we help them fight back.

Here’s what you need to know about gaps in product liability insurance, what to watch for in your policy, and what legal options may be available when claims are denied.

What Is Product Liability Insurance Supposed to Cover?

Let’s start with the basics. Product liability insurance is designed to protect your business from claims related to:

• Defective products
• Injuries caused by your product
• Property damage caused by your product
• Failure to warn or improper labeling

If someone gets hurt using your product, or claims your product caused financial harm, this is the coverage that should step in. But like most insurance policies, the fine print matters.

Why Won’t Insurance Cover Certain Business Losses?

Denials happen for all kinds of reasons, many of them buried in your policy’s exclusions or limitations.

Here are some common reasons insurers deny coverage:

1. Design or Manufacturing Defect Exclusions

Some policies don’t cover design flaws, only manufacturing defects. That means if the product was made correctly but designed poorly, your insurer might refuse to pay.

2. Contractual Liability

If you’ve made certain guarantees in contracts with vendors, distributors, or retailers, and someone sues you based on those contract terms, the insurer may claim it’s a contractual issue, not a covered liability.

3. Claims Arising Outside the Coverage Period

If the incident occurred before your coverage began or after it expired, even by a day, the insurer may deny the claim.

4. Misrepresentation or Application Errors

If your insurance application omitted key information or described your product operations inaccurately (even unintentionally), the insurer may argue that the policy is void.

5. Improper Use Not Covered

If the injured party used the product in a way not intended or reasonably foreseeable, your coverage may not apply.

6. Pollution or Toxic Substance Exclusions

If your product allegedly caused environmental or chemical exposure, many policies contain pollution exclusions that bar those types of claims.

How to Spot Gaps in Your Product Liability Insurance Policy

Many business owners don’t discover their coverage gaps until it’s too late. If you want to avoid that, here are the red flags to look for now:

• Exclusion clauses that are overly broad
• Policies that only cover “bodily injury” and ignore financial or business harm
• Narrow definitions of what constitutes a covered product
• Policies that don’t cover products sold internationally
• Policies that don’t include recall expenses or reputation-related damage

Before signing anything, or when renewing your policy, it’s worth having an attorney review your product liability coverage. A single overlooked clause can cost you hundreds of thousands in uncovered losses.

What Legal Options Do You Have When a Claim Is Denied?

If your insurer denies your product liability claim, it doesn’t necessarily end there. You have legal rights, and often, you can fight back.

Here’s what we do when clients come to us with a denied insurance claim:

1. Policy Analysis

We dig deep into the policy language to see whether the denial holds up. Many denials are based on misreadings of the policy, or gray areas that can be challenged.

2. Coverage Dispute Litigation

If your insurer is acting in bad faith or misapplying the policy language, we can initiate a coverage lawsuit to enforce your rights under the policy.

3. Negotiation or Mediation

Sometimes we’re able to negotiate with the insurer or go through mediation to secure at least partial coverage, or get the defense costs paid.

4. Pursuing Third Parties

In some cases, another party (a supplier, manufacturer, or distributor) may have indemnification responsibilities that shift liability away from you, even if your insurer denies coverage.

How to Protect Your Business Moving Forward

If your business deals with products, whether you manufacture them, import them, sell them, or distribute them, you need to take proactive steps to protect yourself:

• Review all insurance policies with a lawyer, not just a broker
• Make sure your policies cover your actual business operations, not just general categories
• Ask your attorney to identify gaps or conflicts between your contracts and your insurance coverage
• Consider a custom-tailored risk mitigation strategy that includes contract language, coverage layers, and operational safeguards

At Ayala Law , we help businesses identify legal exposure before a lawsuit hits. And if the worst happens, we’re there to help them hold insurers accountable and protect what they’ve built.

Know What’s Actually Covered Before You Need It

Too many business owners assume insurance will be there when they need it, only to find themselves alone when a lawsuit hits. Don’t wait until after a product defect claim or injury to find out what’s not covered.

If you’re unsure whether your business is protected or you’re already dealing with a denied claim, contact an experienced attorney in Miami at 305-570-2208.

You can also contact trial attorney Eduardo A. Maura at eduardo@ayalalawpa.com.

Schedule a case evaluation online here.

[The opinions in this blog are not intended to be legal advice. You should consult with an attorney about the particulars of your case].