Product Liability vs Professional Indemnity: Which Policy Responds?

Your IoT smart thermostat causes £80,000 in water damage when a software bug prevents the heating system from detecting a burst pipe. The customer claims under your insurance. You have both product liability and professional indemnity policies. Which one responds?

The product liability insurer argues this is software error (professional services, covered under PI). The PI insurer argues this is a defective physical product (hardware issue, covered under product liability). Both decline coverage pending determination of primary cause.

Understanding the product liability vs professional indemnity boundary determines whether you’re adequately protected or facing coverage gaps where neither policy responds. For companies selling physical products with embedded software, the boundary creates complexity requiring careful policy coordination.

This article explains when product liability responds versus professional indemnity, how to handle hybrid hardware-software products, and policy wording to ensure no coverage gaps exist.

The Core Distinction: Products vs Services

Product liability covers physical goods causing injury, damage, or loss. Professional indemnity covers negligent service delivery causing financial harm.

Product liability responds to:

• Manufacturing defects in physical goods
• Design defects in hardware products
• Failure to warn about product hazards
• Products not meeting safety standards
• Physical goods causing bodily injury or property damage

Professional indemnity responds to:

• Errors in software or code
• Negligent advice or consulting
• Mistakes in professional service delivery
• Data processing errors
• Missed deadlines or project failures

The simple cases:

A medical device with faulty mechanical components causing patient injury → Product liability

Software bugs in a SaaS platform causing client financial losses → Professional indemnity

A manufacturing defect in consumer electronics causing fire → Product liability

Negligent consulting advice on business strategy → Professional indemnity

The complex cases:

Medical device with software error causing misdiagnosis → Both policies may be relevant

IoT device hardware functioning correctly but software bug causing property damage → Contested boundary

Smart home hub with defective power supply AND software security vulnerability → Multiple policies potentially involved

According to the Association of British Insurers, approximately 15% of technology company insurance claims involve disputes over whether product liability or professional indemnity is the primary coverage—demonstrating the practical frequency of boundary ambiguity.

Product Liability Insurance UK: When Tech Hardware and Life Sciences Need Cover →

Hardware Companies Selling Physical Products

Pure hardware manufacturers with minimal software components have clear coverage needs.

Definitive product liability scenarios:

Consumer electronics with embedded firmware. Smart speakers, fitness trackers, home security cameras—physical devices with basic firmware enabling hardware functions. Hardware defects (battery failures, overheating, electrical faults) are product liability. Firmware bugs enabling hardware to function are also product liability (the firmware is integral to the product).

Medical devices with software integral to device function. Insulin pumps, patient monitors, diagnostic equipment—the software is part of the medical device. Software defects affecting device safety or efficacy are product liability, not professional services.

Industrial equipment and machinery. Manufacturing equipment, robotics, process control systems—primarily mechanical with embedded controls. Hardware failures and control system defects causing injury or damage are product liability.

Key principle: If the software is embedded in and integral to the physical product (not sold separately, not updateable as a service, part of the manufactured device), defects in that software fall under product liability, not professional indemnity.

When professional indemnity becomes relevant:

If hardware companies also provide consulting, integration services, or custom software development alongside product sales, those service activities require professional indemnity separate from product liability.

Example: Medical device manufacturer also provides hospital integration consulting and custom reporting software. Product liability covers the device; professional indemnity covers the consulting and custom software.

Software Companies Without Physical Products

Pure software businesses (SaaS, cloud platforms, mobile apps) don’t need product liability—professional indemnity and cyber insurance cover their exposures.

Professional indemnity responds to:

• Software bugs causing client financial losses
• Data processing errors
• Missed project deadlines causing consequential damages
• Negligent software development or consulting
• Integration failures affecting client systems

What PI doesn’t cover: If software companies sell any physical component (even minor hardware like security keys, IoT sensors, or physical access devices), those physical products create product liability exposure requiring separate coverage.

The Hybrid Challenge: Products with Software-as-a-Service Components

Modern hardware increasingly includes cloud services, mobile apps, and ongoing software updates—creating hybrid products requiring both policies.

Common hybrid product scenarios:

Smart home devices (thermostats, locks, cameras). Physical hardware installed in homes plus cloud services, mobile apps for control, and ongoing software updates. Hardware defects are product liability. Cloud service failures, app bugs, or data breaches are professional indemnity and cyber.

Wearable health devices. Fitness trackers, smartwatches with health monitoring—physical device plus cloud data processing, AI analysis, and health insights delivered as service. Device hardware failures are product liability. Data analysis errors or service failures are professional indemnity.

Connected medical devices. Devices with cloud connectivity for remote monitoring, data transmission to healthcare providers, or dosing algorithms in the cloud. Device hardware and embedded software are product liability. Cloud services and remote monitoring are professional services.

Industrial IoT sensors and controllers. Physical sensors plus cloud analytics platforms, predictive maintenance services, and data insights. Sensor hardware failures are product liability. Analytics platform errors are professional indemnity.

Coverage coordination strategies:

Ensure both policies are in place. Hybrid businesses need product liability AND professional indemnity. Relying solely on one creates gaps.

Clarify boundaries in policy wordings. Work with brokers to ensure policies clearly address the product vs service boundary specific to your offering.

Example wording in product liability policy: “Coverage extends to physical products including embedded software integral to product function, but excludes cloud-based services, mobile applications provided separately, and data processing services.”

Example wording in professional indemnity policy: “Coverage includes software services, cloud platforms, mobile applications, and data processing, but excludes physical hardware product defects.”

Notify both insurers for ambiguous claims. When claims could fall under either policy, notify both insurers simultaneously and let them coordinate coverage determination.

IoT and Connected Device Liability: The Hardware-Software Boundary →

Policy Wording: Exclusions That Create Gaps

Standard policy exclusions in each policy type can create coverage gaps if not addressed.

Product liability policies typically exclude:

“Professional services or errors in software development, consulting, or advice”—This excludes software bugs and service delivery errors, pushing them to professional indemnity.

“Data breaches, cyber incidents, or network security failures”—This excludes cyber exposures, requiring separate cyber insurance.

Professional indemnity policies typically exclude:

“Bodily injury, sickness, disease, or death”—This excludes physical injury claims, pushing them to product liability.

“Damage to or destruction of tangible property”—This excludes property damage, pushing it to product liability.

“Products manufactured, sold, or distributed by the Insured”—This explicitly excludes product defects, requiring product liability coverage.

The gap risk: If your product causes property damage through a software error, product liability might exclude it (software error = professional service) while professional indemnity excludes it (property damage = product liability). You’re uninsured for that specific scenario.

How to address gaps:

Manuscript policy wordings. For complex hybrid businesses, work with insurers to create customized policy wordings that explicitly address your specific product/service mix without gaps.

Coordinated placement. Use the same broker for both policies. Ideally, place both with the same insurer who can write coordinated wordings.

Explicit coverage confirmations. Request written confirmation from both insurers on how specific scenarios would be handled. Example: “IoT device software bug causes property damage—which policy responds?”

Scenarios: Which Policy Actually Responds?

Real-world examples illustrate the boundary in practice.

Scenario 1: Smart thermostat hardware failure causes fire.

Physical device with faulty components overheats and ignites. Property damage: £150,000.

Which policy responds? Product liability—clear hardware defect causing property damage.

Scenario 2: Smart thermostat software bug prevents heating during freeze.

Hardware functions correctly but software bug prevents heating activation during sub-zero temperatures. Burst pipes cause £80,000 water damage.

Which policy responds? Contested. Product liability could respond (software integral to product function). Professional indemnity could respond (software error causing property damage). Likely outcome: Policies coordinate; both may contribute depending on causation analysis.

Scenario 3: Medical device diagnostic algorithm error.

Device hardware functions correctly. AI diagnostic algorithm produces incorrect results. Patient receives wrong treatment causing injury. Damages: £400,000.

Which policy responds? If algorithm is embedded in device as sold (not cloud service), product liability. If algorithm runs in cloud as separate service, professional indemnity.

Scenario 4: IoT industrial sensor with cloud analytics.

Physical sensor hardware fails, providing incorrect temperature readings. Cloud analytics processes the incorrect data and recommends wrong action. Client suffers production losses: £250,000.

Which policy responds? Both. Product liability for sensor hardware failure. Professional indemnity for cloud analytics service. Apportionment depends on causation—if hardware failure alone would have caused losses, primarily product liability; if losses resulted from combined hardware and analytics failures, both policies may contribute.

Scenario 5: Wearable device with health app.

Wearable hardware functions correctly. Mobile app software bug miscalculates heart rate data. User relies on incorrect data during exercise, suffers cardiac event. Injury claims: £200,000.

Which policy responds? Professional indemnity—app software error causing injury (even though physical injury typically excluded from PI, this is injury resulting from negligent software service delivery rather than product defect).

Contractual Requirements and Customer Expectations

B2B customers increasingly require both product liability and professional indemnity, recognizing hybrid products create both exposures.

Common customer contract requirements:

“Supplier shall maintain Product Liability insurance of £5 million covering physical products and Professional Indemnity insurance of £2 million covering software, services, and advice.”

This explicitly requires both policies, preventing gaps.

Certificate of insurance requests. Enterprise customers request certificates for both coverages before contract execution. Having only one delays commercial relationships.

The insurance stack for hybrid hardware companies:

1. Product liability (£5-10 million): Physical product defects
2. Professional indemnity/Tech E&O (£2-5 million): Software, services, consulting
3. Cyber liability (£1-5 million): Data breaches, network security
4. D&O (£2-5 million): Director liability
5. Employers’ liability (£10 million minimum statutory): Employee injuries

Total annual cost for mid-market hardware company: £40,000-£100,000 depending on risk profile and limits.

The Bottom Line

Product liability covers physical products causing injury, damage, or loss. Professional indemnity covers negligent services, software errors, and advice causing financial harm.

For pure hardware manufacturers, product liability is primary with professional indemnity needed only if providing consulting or custom software services alongside products.

For pure software businesses, professional indemnity is primary with no product liability needed (unless any physical components are sold).

For hybrid businesses (IoT devices, connected medical equipment, smart home products), both policies are essential with clear coordination to prevent coverage gaps.

Standard exclusions create risks: Product liability excludes software/services; professional indemnity excludes products and property damage. Without coordinated policies, hybrid products may fall in coverage gaps.

Address this through: both policies in place from same broker/insurer ideally, explicit policy wordings addressing your product/service mix, written confirmation on specific scenarios, and notification to both insurers for ambiguous claims.

Customer contracts increasingly require both coverages explicitly—having only one delays commercial relationships and may prevent contract execution.

The practical approach: Assess your offering honestly (physical products? Software? Both?), arrange appropriate coverage for each element, coordinate policies to eliminate gaps, and document coverage decisions for consistency when claims arise.

External Resource

Association of British Insurers (ABI) Search for claims data. https://www.abi.org.uk/data-and-resources/. UK insurance trade body, publishes claims statistics and coverage dispute trends.

 

Simplify Stream provides educational content about business insurance for UK companies, especially those with high growth business models that require specialist insurance market knowledge. We don't sell policies or provide regulated advice, just clear explanations from people who've worked on the underwriting and broking side.