Careful attention to details about your insurance plan will protect your company from the unexpected.
The commercial insurance market for dietary supplement companies is a changing landscape. Product liability rates have stabilized after falling for about seven straight years; some companies are even seeing rate increases. Coverage for DMAA has all but disappeared. Property insurance rates are rising after several years of steep decline, fueled in large part by shrinkage in the worldwide availability of insurance caused by loss payments and reserves for several catastrophe events—Superstorm Sandy being the most recent.
Workers’ compensation premiums, a statutory coverage you can’t simply decide not to purchase, are also rising—most precipitously in California, and especially for contract manufacturers.
So here are some practical tips to get you through the insurance minefield during the coming year.
Prepare upper management for the likelihood of higher premiums. This is the “no surprises” rule and it’s as true as it ever was. Work closely with your insurance broker on the specifics.
Be prepared to work harder to get competitive renewal quotes. Underwriters will take a closer look at your account, especially if you have had insured losses, a 483 Warning Letter (yes they are on the Internet), or your business is one of the high-profile areas: sports nutrition, weight loss, sexual enhancement and now energy drinks. You will need to demonstrate that your insurable risk is more attractive than your peers’ and that you are “best-in-class”—and that will take more time than it used to.
Look for areas where you may be uninsured. The most common uncovered exposure in the supplement industry is inventory or raw materials stored at a location other than your own, such as a fulfillment house. Most businesses think, “well it’s in their custody and control and they must be insuring it, aren’t they?” The answer is almost always no, they are not. More than one supplement company has found out about this the hard way, after the smoke from the fire has cleared.
Carefully select a broker who specializes in your industry. Have you ever said to yourself, “my broker clearly does not understand what we do?” Make it a top priority to find a broker who understands the supplement industry and will be an effective advocate for your insurance interests. I am always amazed by CEOs and CFOs who say they are compelled to have one of the large national brokers as their trusted insurance advisor. Those entities are merely large corporations, not people, and its only people who can demonstrate expertise, passion and knowledge of an industry, not things. So think twice before you subscribe to this “bigger broker is better” approach. Find an individual broker who is deeply committed to the supplement industry, regardless of the size of the corporation he or she works for.
Speaking of which, I am also constantly amazed how much bad service people will put up with from their insurance broker before they realize that a change in providers is needed. Don’t be afraid to at least consider a change. Here are two “dirty little secrets,” which may indicate that your broker, or any broker for that matter, may not be the right one for you.
Secret #1: The next time an insurance agent or broker asks you to sign a “broker of record” (BOR) letter, be careful! Many such letters are obtained by unscrupulous agents who want you to sign your account over to them on false pretenses.
Simply put, a BOR letter is a powerful document. It allows a broker to take total control of your account. It gives that broker authority to access insurance carriers that have previously been accessed by other agents or brokers, and transfers to him your prior authority to deal with the those insurance carriers on your behalf.
Furthermore, if the agent files that letter with your current insurance carriers, then it absolutely terminates your current broker on the current policy and replaces him with the broker to whom you have given the BOR letter.
On the other hand, a BOR letter is at times a necessary and useful tool. Obviously there are situations when you want to get competitive insurance proposals, such as:
1. You are not receiving good service from your broker. If it takes several days to get return phone calls or it is difficult to get certificates of insurance to your customers, this may be enough to consider a BOR letter.
2. You lack confidence that your broker adequately understands your insurance needs. Not many brokers understand such things as product recall insurance, which may be an important facet of your insurance needs. Having confidence that a broker who specializes in your business may be reason to provide a BOR letter to a new provider.
3. A family member or friend is in the insurance business. Don’t be naive. It is okay to support a family member and want them to do well in their profession. However, it is not appropriate to ask another broker to submit proposals (and put in a lot of hard work) with the intention of moving it over to your family member using a BOR letter. If the family member tried to help, but did not provide the best quote, it would be expected, and ethical, for you to move your business to the agent who did the work and rightfully won your business.
So the next time you are seeking multiple quotes from different brokers and they tell you, “I just need you to sign this BOR letter so I can get competitive quotations, it’s just standard procedure,” you may want to think twice about working with that broker. He is no doubt trying to trick you into getting your business using a deceptive tool and not disclosing his true intentions. As with any provider of professional services, trust and honesty are the foundation of any relationship.
Secret #2: You ask your broker if the Advertising Injury coverage section of your liability policy will cover false advertising class action lawsuits, private or regulatory legal procedures regarding your label claims, etc., and he says, “Yes, absolutely!” Sounds right, doesn’t it?
Wrong! So what is covered by Advertising Injury? In two words: not much. For the most part, Advertising Injury only covers certain torts that are intentional acts. And the coverage, such as it is, has 15 exclusions that narrow and clarify what is covered.
One of these exclusions is “quality or performance of goods—failure to conform to statements,” exclusion that ends any doubt as to whether false advertising/label claims are intended to be covered by the Advertising Injury insurance language. Clearly, this exclusion is also designed to eliminate claims that products do not perform “as advertised” or are not of the quality advertised.
So pay a little more attention to the details of your commercial insurance program in 2013 and you’ll be able to protect your company better against unexpected loss, and sleep better this year.