Product Liability Insurance for Internet Supplement Sales
Transferring risk to an insurance company, at historically low costs, deserves serious consideration.
I’ve been receiving more and more calls lately from people who are selling, or are planning to sell, dietary supplements exclusively via the Internet. Amazon.com appears to be the go-to place to start a reselling business, no doubt because it does much of the work you would otherwise need to do yourself if the Internet is your selling channel of choice. I searched Amazon.com for “dietary supplements” in preparation for writing this article and found an amazing 97,000 product listings!
From my perspective, there are three broad categories of Internet sellers of dietary supplements:
- Those selling only branded products of other companies;
- Those selling only their own branded products;
- Those selling a combination of their own branded products and branded products of other companies.
Is there a difference, or should there be a difference, in insurance rates for the first two categories of Internet sellers? After all, logic would seem to suggest that if you are selling other companies’ products, and don’t alter them in any way—not even repackaging them—then if a consumer alleges they got sick from consuming the product, then how could you possibly be legally liable just for selling it? Obviously the alleged injuries did not arise out of anything you did, right?
Welcome to Reality
Here’s the harsh reality of the risks involved in selling dietary supplements on the Internet in the U.S., no matter which of the three categories you fall under. A plaintiff’s attorney has one objective when he/she represents an allegedly injured client, and that is to fill up a bucket with money until the amount is such that it constitutes a fair settlement for his/her client’s injuries, plus of course his/her own fair share of that settlement for legal services. The attorney does not care where the money to fill up that bucket comes from.
Whether you are “guilty” of causing the injury does not matter very much. What matters is that you, as the Internet seller of your or someone else’s products, was squarely in the stream of commerce, which ultimately results in the consumption of a dietary supplement. And that, in all likelihood, is going to make you a contributor to that bucket of money in the event of a lawsuit. You probably won’t need to contribute as much to the bucket as the manufacturer, but you will likely contribute.
Let’s digress from this track for a moment. Let’s say, for example, as a result of a massive number of claims against a manufacturer for allegedly injuring scores of people, the manufacturer goes bankrupt and can’t contribute to the bucket. Who do you think will be called upon to contribute more than their fair share to that bucket, so as to fill it? That would be you, the arguably-innocent Internet seller of dietary supplements.
Transferring the Risk
Let’s now examine the wisdom of transferring this business risk to an insurance company by buying a product liability insurance policy for your Internet sales operation.
But first let’s look at a very compelling fact about product liability litigation involving dietary supplements. Historical data show that about 80% of the costs of settling this litigation are defense costs (i.e., attorneys’ fees and attendant costs to defend the policyholder). Of course, this means that only 20% of the costs are for actual settlements.
What does this tell us? Buying a product liability policy is similar to buying a “pre-paid legal defense insurance,” which is offered by some employers as a benefit to employees. Those policies work like this: Somebody sues you for a dog bite, even though it wasn’t your dog that did the biting, and your pre-paid legal cost insurance will pay for an attorney so that you have competent defense in court.
There are parallels between product liability insurance for an Internet retailer of supplements and pre-paid legal defense insurance. First, as we have seen, most of the costs to dispose of a product liability claim are indeed defense costs, so wouldn’t it be wise to consider insurance that covered these costs, which can get expensive very quickly? Would it be better to transfer all of that risk for a few thousand dollars to an insurer, which might end up shouldering tens or even hundreds of thousands of dollars defending your company?
The second parallel is, just like the dog owner, lots of supplement injury claims are in fact not caused by supplements at all. There are varying reasons for that, which we all know, but that doesn’t stop an upset consumer from retaining counsel and suing you.
Cost of Insurance
In closing this article, it’s worth noting the cost of product liability insurance. Admittedly, for a small Internet seller of supplements, the premium seems like a lot of money. However, here’s some historical perspective people may not realize. The price of this insurance has dropped in the vicinity of 80% since the high point in 2002-2004. And given the advantages of having a policy, as outlined in this article, transferring the risk of product liability lawsuits to an insurance company, at historically low costs, should be something that you seriously consider.