By Greg Doherty, Bolton & Company | March 1, 2017
Costs for product liability insurance are relatively low. Here’s some advice to reduce your costs and protect your company.
Things have changed in the 15 years that our insurance practice has been providing product liability and other insurance products to the dietary supplement industry. My column this month will give historical perspective to some of the relevant issues facing buyers of commercial insurance for their supplement company, and also outline current trends and provide tips for smart insurance buying.
Premium Costs for Product Liability
Premium costs for this insurance have never been lower over the last 15 years. Companies starting up these days have no idea how expensive this insurance was in the “bad old days.” But for these startups, which our practice embraces (and many brokers will turn away), the 2017 cost is often shocking. This is due in large part to “minimum premiums” imposed by all of the carriers active in this space, but unfortunately for these small companies, it is the price of entry.
For larger companies not subject to a minimum premium, costs have generally flattened out over the past 18 months. That said, there is still competition for larger, attractive accounts. However, I still talk to people who have not seen quotes from alternative carriers for many years—not a good sign. It probably means someone has become complacent (the buyer, their broker or both).
Tip: If you are a company with $5 million or more in annual revenue and you have not seen alternative quotes in several years, there is a good chance that your cost can be reduced. Simply conduct a fair competition among the several viable carriers that can likely quote your account.
The ingredients commonly excluded by carriers have not changed much in the past few years, except for those involved in sports nutrition products. Since the DMAA flap began in 2012, that and several other ingredients are on many (but not all) of the lists. These include BMPEA (Acacia rigidula), picamilon, AMP citrate and dendrobium. DMAA is making its way back into the market, promoted by those who don’t think or understand that it’s illegal. Bitter orange is excluded by most carriers, but can be taken off and thus covered, as the fear that it was the “ephedra alkaloid replacement” has faded in underwriters eyes as time has passed.
Tip: Your product liability policy will have ingredient exclusions. It is incumbent on you to review that exclusion list each year before you write a check for your policy renewal, because the exclusion lists are changing (growing) all the time in response to various forces, which include FDA enforcement actions, bad publicity (factual or otherwise), class action lawsuits, or a Consumer Reports article that drags a dozen common dietary supplement ingredients through the proverbial mud.
Finished Goods Inventory: What if My Fulfillment House Burns Down Tonight?
A few years ago I came to realize that many of my customers, and people in the industry in general, went to bed at night thinking: “I carefully chose my fulfillment provider and if something happens to my inventory there, like a fire or theft, then they must have insurance for that to protect my loss.”
And the unfortunate truth is, in general they are not giving you that protection. Sometimes they will give you evidence of their “warehouse legal liability” insurance. But you would be remiss in accepting that as coverage that protects your inventory, because in reality it only protects them if they are deemed legally liable for a loss to your property. (For example, they store gasoline in open drums at the facility, and it ignites and destroys your property. Because that behavior screams negligence, their policy would probably respond.)
Tip: Review your contract with the fulfillment house. Chances are that deep in the contract, you will find verbiage that says they aren’t covering your property against physical loss, under any circumstances. That means you have to insure it yourself. If the contract is silent on this, draw the same conclusion—it’s on you to insure it against fire, theft, etc. You don’t want to find this out after the smoke from the fire has cleared.
The Myth of Product Recall & Prop 65 Insurance
Some of the carriers offering product liability insurance to the dietary supplement industry have published Internet brochures and other promotional material saying they provide Prop 65 coverage as part of their policy coverage. What some of them don’t tell you is much more telling. First of all, in the fine print, the coverage is limited to a low amount, such as $25,000 or maybe $50,000. The average Prop 65 settlement is much higher than that. Further, coverage may be limited to “civil penalties” from Prop 65 litigation, which statistics show is usually around 15-20% of the average settlement, at most. So what are you getting really? Almost nothing. Don’t make your buying decision based on the ostensible Prop 65 “coverage” they are offering.
Similarly, since Prop 65 litigation is essentially an allegation of false advertising, don’t be fooled into believing that you have any coverage for false advertising claims, whether they arise from a regulatory action (FTC) or a consumer class action—the latter seems to be the litigation de jour for plaintiffs’ attorneys attacking the industry today. Tip: Understand that you have no coverage for this. Protect yourself as best you can using other means, like a top-notch regulatory attorney or a consultant equally qualified.
Regarding product recall insurance, see the previous comments on Prop 65 “coverage.” The coverage is limited to a pitifully low amount, and is often further limited to your costs of the recall, not your customers’ costs, which in reality may greatly exceed your costs. Tip: Proper, comprehensive product recall coverage is available from a small handful of specialty carriers, and the cost has fallen in recent years. If you want to pursue proper coverage, it’s one of these carriers that you want on your team.