Careful attention to details and a knowledgeable insurance advisor could save you from disaster.
Early last year in this column I wrote about the state of the commercial insurance market in the U.S., and offered some tips to companies in the dietary supplement and nutraceutical industry on navigating what is always a complex process: understanding what insurance your company needs to buy—or not—and buying that coverage at a reasonable premium.
First, let’s talk about what a reasonable premium is, along with opposing buying philosophies companies have about commercial insurance. Some people believe that all insurers are greedy companies that will deny any claim presented to them; these people try to get the absolute cheapest insurance possible because they never expect to collect a dime if they have a claim. It’s a jaded viewpoint but one we see with some regularity.
On the other end of the spectrum, there are people who believe the transfer of risk to an insurance company is a sound investment, as long as they select the right carrier and are asked to pay market prices (but not necessarily the lowest price).
Having been a commercial insurance broker for 40 years, I have seen many businesses saved from oblivion because they had the right insurance in place at the time of a catastrophic loss, such as a fire or a big product liability lawsuit. So I lean toward the “sound investment” philosophy. It’s important for companies to think about what philosophy they bring to the process, because that thinking changes the process of buying insurance.
A ‘Trusted Advisor’
How do you know you are always getting a premium that is in line with current market prices—not necessarily the lowest premium, but one that is, for example, at least within 10% of the correct “average” price in the current market—and gives you the tailored coverage your company should expect?
Enter the trusted advisor, your insurance broker. For example, when your product liability policy is about to renew, discussions with your broker about the following questions will give you an indication of whether the renewal process will produce the right coverage at the right price—but not necessarily the lowest price:
- We have two GMP certifications and most companies have none. Do we get a lower premium in recognition of this?
- We use several ingredients we understand are commonly excluded by the product liability insurance carriers. Will they be covered by the renewal policy?
- We are being asked to consider a “non-admitted” insurance company. Isn’t that dangerous and will they be around to pay a
- claim if we have one?
- We had a serious adverse event report during the past year. Do we have to tell the insurance company about it and how will it affect my renewal premium?
- We’ve heard about industry association insurance programs. As our broker, did you check those out and will they save us any money if we belong to the association?
- As a wholesale distributor, we have scores of people asking us for “additional insured” status on our product liability policy. If we continue to offer this, does it drive up our premium and if so, by how much?
If you sense that your insurance broker may not be the right one, your instincts are probably correct. 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: Over the years, your broker has seemingly done you a favor by completing the product liability renewal application for you, and submitting it to the carrier for quoting purposes. The reality here is that while he/she may be attempting to be helpful, it could get you in big trouble.
Most people do not realize that an application for insurance effectively acts as a warranty that the disclosures asked for were answered truthfully and completely. This means if there are material misrepresentations in the application, even if accidental, the insurance company can subsequently rescind coverage. This will happen at the worst possible time—when a claim is submitted, which will cause the insurer to examine the application once again for possible misrepresentations.
Does your broker have enough knowledge of your business to answer technical questions on the application about quality control processes, standard operating procedures or which ingredients you may have sold in the past and have discontinued? Most certainly not, and many similar questions appear routinely on the applications for manufacturers and retailers. An erroneous answer by your well-meaning broker could void the coverage you paid big money for.
Secret #2: You ask your broker if your product liability policy will cover an FDA-mandated product recall (after all, it does cover my “products” so it must cover a recall). His answer is “yes of course.” Is this correct?
No! There is no intention to cover product recall costs on a standard product liability policy. In fact, product recall costs are specifically excluded for reasons of clarity. Why?
The first reason is that a product liability policy has historically been designed to cover “bodily injury” or “property damage.” A product recall event is neither of these. The second reason is that separate coverage for product recall is available in the marketplace, and if you want coverage, you need to work with one of the handful of carriers that offer true product recall coverage.
But a product recall event will not be covered by your product liability policy! (Note that a few carriers do offer low “sub-limits” of insurance for a product recall, typically $25,000 to $50,000 and sometimes a bit more. It covers only your costs of the recall, not those of any of your customers, which can be significant. The reality is that a serious product recall event will be very expensive for a company, rendering the coverage that is provided woefully inadequate at best. Basically, this coverage is window dressing).
In conclusion, use these tips and secrets to stay on top of your commercial insurance coverage and costs as we head toward 2015.