The cost of insurance for dietary supplement startups is particularly onerous.
By Greg Doherty, Bolton & Company 05.01.18
This month’s column will cover two subjects. The first is the availability of product liability insurance for companies marketing cannabidiol (CBD) products. CBD was a “hot topic” at Natural Products Expo West this year and many entrepreneurs and established companies want to get in on the “Green Rush.” However, like any tangible product, these companies will need product liability insurance to protect not only themselves, but also their customers, which normally ask for evidence of this insurance before ordering any product.
The second topic is liability insurance for startup dietary supplement companies. From my perspective, marketers with “fire in the belly” are as eager and numerous as ever in their desire to sell supplements. The ease of selling on Amazon has something to do with this, in my opinion. In any event, liability insurance costs are still a challenge to smaller startups. We’ll examine the details.
Obstacles to CBD Liability Insurance
Today, CBD insurance is neither widely available nor inexpensive. Why is that? There are several reasons. First, we need to consider the insurability of CBD from the supplier’s standpoint—that is, the insurance companies.
Traditionally, insurers have not offered insurance for illegal activities or substances; the thinking being this would be against public policy. Currently, the regulatory bodies that have authority over CBD are too numerous to mention, and this has been the subject of some well-written articles by others. But suffice it to say that the “legality” of CBD is still under a dark cloud, and this by itself scares many insurers off.
A related issue one insurer has pointed out to me is the proliferation of direct-to-consumer sales of CBD products on the Internet. Their concern is that if a product is sold to a consumer in a state where there has been no favorable cannabis legislation enacted (e.g., medical, legal), and they insure it, then have they insured an illegal act?
Remember, these insurance companies are by-and-large public companies, and the last thing they want is a regulatory action against them for insuring illegal activities and possibly precipitating a derivative shareholder lawsuit.
Availability of CBD Liability Insurance
The availability of liability insurance has actually shrunk in the past year. There were about a half-dozen carriers willing to entertain the idea, but now there are only maybe two or three. Not surprisingly, these are the same carriers, generally speaking, that also have entertained liability insurance for dietary supplements for many years. And you aren’t going to get your “household name” insurers like Hartford, Travelers, Nationwide, GEICO, Farmers, or State Farm to do it. Forget about that.
We deal with one carrier that is openly and actively underwriting CBD risks. But the cost is not cheap. It starts at about $6,500 for a $2 million liability policy. That’s the absolute minimum premium that smaller startups will pay. Larger companies will pay more. This is approximately twice what a startup dietary supplement company would pay for a similar policy.
Dietary Supplement Startup Insurance
Almost all startup companies that come to our Dietary Supplement Practice for liability insurance have two things in common: 1) they are short of cash (no surprise there), and 2) they have waited until the last minute to investigate the cost of the insurance.
The first item is fairly easy to overcome, as the premium can be financed with a premium finance company, although the borrower will pay some interest considering it’s a loan.
The second one is usually more difficult, as many end up with sticker shock at the cost of the insurance. That cost is disproportionate to larger companies’ premiums for selling the same products, and thus can be a real barrier to entry for a supplement startup. But why is that so?
The Minimum Premium Concept
The small handful of carriers offering liability insurance to supplement companies are so-called “excess and surplus lines” insurers. What does this mean? If I were to list them here, you would not recognize all but maybe one or two. This does not mean they are small, or financially unstable companies. Indeed, they are in almost all cases subsidiaries of larger insurance conglomerates you would recognize.
These conglomerates set up subsidiary companies to underwrite specialty, often inherently dangerous industries that make or sell products that have a track record of injuring people and causing insurance claims. Actually, it is a blessing that these excess and surplus lines companies are allowed to exist, for without them, such industries as ladder manufacturers, skateboard and snowboard manufacturers, football helmets suppliers, and yes dietary supplements, might not be able to get insurance at all.
That said, these carriers also have minimum premiums, which are defined as the absolute minimum cost a single policyholder will pay. The majority of these carriers have anywhere from a low-to-high five-figure minimum premium, which makes them unviable for a startup company projecting sales of about a million dollars or less.
Thus, a startup company shouldn’t expect to have several insurers bidding on its account, as might occur if it were starting a restaurant or an ice cream shop. The startup will be stuck with the carriers that have the lowest minimum premium today. I say “today” because that is a moving target too. A few years ago, for a standard $2 million liability policy, the lowest minimum premium was about $10,000. Today, it is hovering around $3,000, which is quite an improvement, but still a big bite for a startup company seeking to conserve cash.