By Greg Doherty, Bolton & Company | April 29, 2016
Steer clear of this pitfall with sharp-eyed insurance buying practices.
Most people in the dietary supplement industry who are responsible for the procurement of product liability insurance for their company know from experience that “claims made” (CM) coverage is the only type of coverage available to the industry.
However, it’s another dirty little secret of the insurance industry that there are actually two kinds of CM coverage available in the marketplace. The second type is called “claims made and reported” (CM&R). Not surprisingly, one is better than the other, especially under certain circumstances. Which one do you have now? Which one should you consider—or not? First, let’s look at the differences between the two.
The CM policy form requires as a condition of coverage that the claim first be made against you during the policy period.
A further condition requires the claim be reported to the carrier “as soon as practicable” or sometimes “immediately” after you receive notice of a claim—the latter is usually defined as a lawsuit or written demand for money (e.g., a letter from an attorney representing a claimant).
The CM&R policy form, like the CM form, requires that a claim first be made against you during the policy period. Additionally, it requires—and this is critical—that the claim be reported to the insurer during the policy period. So you may be reading this and saying to yourself “what’s the big deal? If we receive a claim, we immediately send it to the carrier we have now and we’re good to go under our CM&R policy.”
Now let’s lay over the top of these policy forms a real life claim scenario that has happened numerous times in the supplement industry. Due to a manufacturing error, ABC Supplement Company mistakenly formulates and sells a product with 50 times more vitamin D than it should have contained.
Consumers start to feel ill after long-term use of the product, until one of them goes to the doctor, who diagnoses the patient with vitamin D toxicity. ABC is notified, does all of the right things in terms of a recall, publicity campaign encouraging return the products, granting refunds, pulling the product from retail shelves, etc.
The good news is all the people taking the product recover fully. The bad news is that ABC now has 150 people who have called them, written them letters or e-mails, or have otherwise identified themselves as potential claimants under ABC’s insurance policy.
So far, so good. However, the claimants in the pool don’t all file an individual product liability claim against ABC right away. Sure, some get genuinely ill, but now they feel better and they got a refund. The statute of limitations in most states will give them three years to take action. Some will say they really never felt sick from taking the product, until they meet an attorney at a cocktail party who convinces them they should file a claim and get their fair share of the insurance proceeds.
The pool of legitimate claimants is very real and lurking. Now lay on top of this a timing issue. All of this happens three months before your product liability insurance renewal. The 50 claims that are made against ABC and reported to the insurance company in those remaining three months trigger coverage under the CM&R policy without any problem. Again, so far, so good. But don’t forget about the 100 documented, legitimate claimants waiting in the wings.
ABC decides it would be prudent to shop for another product liability insurer for renewal since surely its current carrier is going to raise its premium due to the reported losses. That’s a valid and logical strategy under the circumstances described here.
While completing an application for a new carrier, ABC is asked to answer this question (which is on every application for this insurance): “Are you aware of any fact, incident, circumstance, situation, condition or suspected defect which may result in a claim under the proposed insurance?”
Here comes the tricky part. With either CM or CM&R coverage, a new insurer “steps into the shoes” of the prior carrier and assumes responsibility for any new claims that are reported to them after they take over coverage. So when ABC truthfully answers that question by disclosing that it has a pool of 100 potential claimants from the vitamin D incident, all potential replacement carriers will react one of two ways:
Decline to offer ABC coverage at any price, or
Offer coverage excluding any and all claims that may arise from the vitamin D incident.
Now ABC has a real problem. No insurance company is going to offer the company coverage it needs. ABC is stuck with its existing carrier—maybe. Will the carrier offer ABC renewal terms knowing it will get stuck with additional claims? It has no obligation to offer ABC renewal coverage. Maybe it won’t offer ABC renewal coverage at any price— and therein lays the danger of selecting CM&R coverage. In a worst-case scenario, ABC Supplement Company has become uninsurable.
Only a few of the carriers selling product liability insurance to the supplement industry sell it on a CM&R basis. Two of the carriers actually sell both CM and CM&R, and the CM&R is cheaper because, hello, they too know that it’s not as good as the CM policy.
Yet another dirty little secret is that surprisingly few insurance brokers know the difference between CM and CM&R, and thus can’t advise their clients accordingly. In our practice we refuse to sell CM&R policies to our clients, avoiding a worst-case scenario as detailed here.