May 13, 2021 (656) 535-1409gdoherty@bolton.co
Greg Doherty
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Double Trouble For Dietary Supplement Liability Insurance Applicants

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On Dec. 22, 2007, a bill signed by President Bush the year preceeding became law. It established a required reporting procedure of serious adverse events (SAE) for dietary supplements sold and used in the United States. Together with further requirements, it mandated the company whose brand appears on the product maintain records associated with each report for 72 months from the period the report is initially received.

However, only those adverse events that are “serious” must be reported. The clarity of “serious” is understandable and includes, but isn’t restricted to, death, a life-threatening experience and in-patient hospitalization.

But has anyone examined the implications of not disclosing SAE reports to their product liability insurance carrier? No, and the results of not doing so could be drastic.

Almost each application for product liability insurance for dietary supplement companies has a question identical or very similar to this: “Is the applicant aware of any fact, circumstance or situation which one might reasonably expect could give rise to a claim that would fall within the scope of the insurance being requested?” Companies subject to the new SAE notification requirements must ponder this question carefully before responding either “yes” or “no.” If a business is keeping the required SAE records, can the company in good faith respond “no” to the question? Hardly.

And what are the results of answering the question imperfectly? Put plainly, if a lawsuit arises out of a previously logged SAE incident, the insurance company will without doubt deny the claim after it discovers (and it will) the SAE was recorded in the company’s files. The insurance company will flag fraud for inducing it to issue a policy based on covered information. It will not only deny the claim, but most likely will look to rescind the policy in its entirety.

Thus, the new SAE reporting requirements have introduced another requirement to disclose such events to a product liability insurance company when applying for the coverage, or take the risk of a claim denial when a claim is made.

The GMP (good manufacturing practice) inspection process holds comparable peril. It’s well known the amount of FDA inspections for GMP compliance have risen spectacularly. According to FDA reports, just seven GMP inspections occurred in ’08, which amplified to 34 in ’09 and to 84 in 2010. From Sept. 13, there have been 145 inspections in ’11. Several of these inspections have resulted in warning notices to companies citing different violations and calling for a swift response outlining remedial steps to be followed. These letters are an issue of public record and can be seen on the FDA’s website. With the number of inspections and enforcement undertakings in general on an abrupt increase, it stands to reason that more companies will be getting a cautionary letter of some gravity in the near future.

Another inquiry on nearly all product liability applications is nearly the same as or identical to this: “Have any of the applicant’s products or ingredients or components thereof, ever been the subject of any investigation, enforcement action, or notice of violation of any kind by any governmental, quasi-governmental, directorial, regulatory or oversight body?” Once more, a “yes” or “no” answer is called for. If a business has had an inspection that resulted in a warning note, it again must ponder carefully before answering the question. If the company has been issued a warning letter, the only logical answer to the question is “yes.”

In spite of this, a “yes” answer will raise the eyebrow of the insurance underwriter, who for a long time has been viewing truthful “no” answers through low enforcement activity before 2008. The underwriter will certainly want to know the details regarding the enforcement action and what remedial steps were taken. Product liability underwriters have almost always been careful with the quality and safety of the manufacturing process for dietary supplements. Seeing this question answered “yes” is indeed gonna cause the insurer request more information.

The threat for answering the question fictitiously is exactly the same as with the SAE reports issue. A liability claim, notably a big one, will precipitate an investigation not just of the fact situation encompassing the claim, but also of the application process and the honesty of the responses. As with the SAE reports, a false answer, whether “accidental” or not, can lead the carrier to attempt to withdraw the coverage at the time a company requires it the most-after the lawsuit is served.

In summing up, these two government regulations have imposed a higher standard of disclosure and detail on companies when applying for product liability insurance each year. As the saying goes, the devil is in the details, and insurance underwriters are looking for those specific details to be correctly disclosed as part of the application procedure.

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