The popular television commercial that ends with the line “What’s in your wallet?” got me thinking about some of the insurance exclusions that exist (and often are conveniently hidden) in the product liability insurance policies of dietary supplement and nutraceutical manufacturers and retailers.
Most people are aware that certain ingredients, and finished products containing said ingredients, are excluded from coverage by all of the carriers. But while there are similarities in the exclusions from one carrier to the next, there are also distinct differences in what they exclude. In the end, each carrier has its own unique exclusionary wording, which behooves you, the insurance buyer, to examine your exclusion list each year at renewal time, because not only are they different from carrier to carrier, they are constantly changing. And the lists are getting longer, not shorter!
The commonly excluded ingredients currently in wide use in the supplement industry are: yohimbe, kava kava, lobelia, bitter orange/citrus aurantium, magnolia, willow bark, creatine, DHEA, HCG, tryptophan, St. John’s wort, Chaparral and hormone replacement products (an undefined term and therefore dangerous).
Under the right circumstances, all of these exclusions can be negotiated out of the policy, thus covering the ingredients/finished products that you may be selling. But you must know that they are excluded in the first place, and work with your broker to get them removed before writing a check for your product liability policy.
Recently, I have seen a disturbing trend: Insurance companies are adding new exclusions to their policies, not just by lengthening the excluded ingredient list, but also by hiding exclusions deep in the policy that can be devastating at the worst possible time—after a lawsuit is filed against you. The balance of this article will examine some of these.
Biological or Chemical Materials Exclusion
One carrier currently utilizes an exclusion called the “biological or chemical materials exclusion.” It excludes coverage, for example, if a disgruntled employee adulterates a batch of product, which results in bodily injury. This claim scenario is one that absolutely should be a covered claim. Bodily injury is bodily injury and it matters not that an employee or some third party maliciously caused the contamination (remember Tylenol?).
Reporting Requirements to Carrier
A series of connected conditions and limitations are buried inside the liability policy offered by one carrier. These “reporting requirements” have three subparts.
The first part requires you to report any changes in its product mix “as set forth in Schedule A of the policy.” The trouble is that Schedule A is not normally populated by the carrier with your product schedule as called for. In our experience, the carrier merely identifies the insured as “manufacturer and distributor of dietary supplements” or similar wording on Schedule A.
The second part requires you to report to the underwriters a copy of “any notification it provides to FDA” regarding a product with a new dietary ingredient.
The third part is yet another reporting provision that requires you to report to underwriters “within 10 working days…the initiation of an enforcement action by the FDA or the recall of any product, whether initiated by the insured, the FDA or any other unit of government.”
Finally, the last paragraph states that it is a “condition of coverage under the policy” that the above notifications be given to the insurer; otherwise any claim “arising out of an Occurrence involving a product affected by the foregoing notice requirement(s)” will not be covered.
When you string these conditions together and realize the infinite number of real-life situations that could occur and fall prey to these limitations, it’s pretty scary.
Virtually all of the underwriters offering product liability to the nutraceuticals industry have a “silica exclusion” on their policy. Since silica or a derivative of silica is used in the dietary supplement industry both as a drying agent for tablets and also in packaging (those silica packets in supplement containers) coverage could easily be denied unless the carrier has amended the exclusion to stipulate that it does not apply to your products. Some carriers have done this; some will do it if you are informed enough to ask; and some won’t do it even if asked.
Two New & Dangerous Exclusions
Very recently, one of the leading carriers came out with new exclusionary wording that takes away coverage under two separate and distinct circumstances. The first takes away coverage for: “Any other substance, ingredient or product that has been the subject of any United States Food and Drug Administration warning letter, ban or recall as of the inception date of this policy that was not disclosed in the application for this insurance.”
Asked to comment on this exclusion, Michael DiMaggio, a leading industry regulatory attorney, said this restriction “is very troubling. Just because a substance, ingredient or product is the subject of a United States Food and Drug Administration warning letter, ban or recall does not necessarily mean the product, ingredient or substance is dangerous or prohibited. Furthermore, this section would seem to require that in order for a company to be insured for such a product, ingredient or substance, they must disclose this information in the application. What if the warning letter was sent to another company, because the issue was product or ingredient specific? In fact, in most cases, FDA warning letters are sent only to individual companies. How would a company know what another company received? Why, for example, would a protein ingredient be excluded for an applicant if a competitor’s product was once recalled for salmonella contamination but the applicant was not aware and therefore did not disclose it on their application?
Mr. DiMaggio added, “This provision places a totally unreasonable burden of disclosure on the applicant for coverage. I would absolutely advise my clients against purchasing such a policy unless their broker was able to get this exclusion removed. In fact, I would advise a client not to pursue a policy with a carrier who proposed such unreasonable exclusions or otherwise attempted to exclude certain ingredients or even products based on similar misinformation related to the industry. This shows a complete lack of understanding of the dietary supplement industry and makes me question whether such a carrier could properly service my clients.”
The second exclusion excludes coverage for: “Any other substance, ingredient or product, in any combination, that the United States Food and Drug Administration has determined as of the inception date of this policy is not a dietary ingredient or a dietary supplement under the Dietary Supplement Health and Education Act of 1994 (DSHEA).”
Mr. DiMaggio said of the second paragraph: “The irony of this section is that the FDA rarely ever makes a ‘determination’ that a substance, ingredient or product, in any combination is not a dietary ingredient or a dietary supplement under DSHEA. At best, FDA will inform a company that they are unaware of any information which substantiates that a product or ingredient is compliant with certain terms of DSHEA and will leave the door open for the company to provide such information. FDA will state that based on this information, they believe the ingredient or product is ‘adulterated’ or ‘misbranded.’ They almost never make a ‘determination’ as is required by this section. In other words, this exclusion is relatively pointless. But it leaves open the real possibility of a coverage dispute with this insurance company in a real life claim situation.”
In conclusion, companies need to be aware of these and other exclusions that may take away coverage for you when you need it most. Work with a professional broker to walk you through this minefield, and remember the old adage “you get what you pay for,” because it is proven correct again when it comes to buying liability insurance for dietary supplement and nutraceutical companies.