People in the nutraceutical or dietary supplement industry want to buy product liability insurance for one of two reasons, or both reasons combined. The first reason is that they want to sleep better at night knowing that they may get sued any day for the products they sell. The second reason is that they want to get into GNC, Wal-Mart, Walgreens, Rite Aid, or Vitamin Shoppe and those companies, being big retailers, have minimum liability insurance requirements. Their suppliers have to meet these requirements or they can’t do business with them and can’t get on their shelf. Or, as I said, it’s for both these reasons put together.
The fact is that these product liability policies are a lot like what’s called prepaid legal defense insurance. This insurance is often sold on a group basis under the guise of an employee benefit. It entitles a group member to a schedule of benefits for legal defense costs for such events as adoption, probates, divorces and other legal services.
Nutraceutical product liability insurance works in a somewhat similar fashion. Eighty percent or more of the dollars that are paid out by insurance companies for nutraceutical companies is for defense costs as opposed to settlement costs. Thus these policies are very much like a prepaid legal defense policy, as I described earlier for companies, because of the way that they respond to a lawsuit, that is, principally and practically, payments for legal fees and other costs of defending an insured claim. The people that appreciate this the most are the people that have had claims in the nutraceutical industry. They’ve experienced that even if you haven’t done anything wrong how expensive and time consuming it can be to defend yourself from someone who’s coming after you.
Often, several parties are sued in a single lawsuit, and many of those times some of the defendants in the lawsuit are absolutely guiltless of any wrongdoing. Nevertheless the insurance company steps up to pay for legal defense from day one—that is their primary contractual obligation in the insurance policy. The insurance company may pay out many thousands of dollars for legal defense and ultimately doesn’t pay any settlement cost to the plaintiff. One of the costs of doing business in the dietary supplement and nutraceutical arena is having this insurance in place even though it’s expensive. This could be called the “you’re in good hands” feeling, that is, knowing that policy is going to respond for you if you have a product liability claim made against you.
I work with lots of startup companies that have been in business for a year or two and have reached one of those two plateaus I mentioned earlier. They want to sleep a little better at night because they know they have a viable business now that they started or are about to start and/or they want to go in to GNC and they can’t get in GNC without the insurance ticket.
The minimum premium, which I also call the floor premium, for a $2 million product liability deposit is around $4,500 a year. I have people that call me that are doing $50,000 to $100,000 in revenue and when I tell them their insurance is going to cost $4,500 they fall on the floor. They are shocked by the high price, but that’s the minimum premium. Subject to the minimum premium, a product liability policy premium is driven mainly by the projected sales volume of the company for the next twelve months (the term of the policy). The more sales, the more you pay. It’s a very simple mathematical equation but for some people it’s a pretty good percentage of their gross sales to buy the insurance.
That $4,500 premium is good for up to about a million dollars in sales. If you were going to tell me, “Great, I’m going to do $150,000 this year in revenue or I’m going to do $500,000 or I’m going to do $800,000 in revenues this year generally speaking the premium for the policy is the same because you’re on the floor, the minimum premium. When you go over a million dollars in sales then the premium starts to go up, because of the direct relationship between your revenue and the premium.
Greg Doherty is the dietary Supplement Practice Leader for broker with Poms & Associates based in Los Angeles. He specializes in nutriceutical product liability insurance and is a member of the Consultants Association for the Natural Products Industry (CANI) and the American Herbal Products Association (AHPA). Greg Doherty can be reached at (818) 449-9317 or firstname.lastname@example.org, Google+ or his website at GregDoherty.net