It’s been almost eight years since I wrote about the basics of what to watch out for as an owner or financial manager of a dietary supplement company when searching for product liability insurance. Things have changed a lot in same cases, and very little in others. This article will update some of the pertinent issues that prevail in today’s insurance marketplace with respect to product liability insurance rates.
Premium rates for dietary supplement and nutraceutical product liability have fallen tremendously since their peak in 2005, as the post-ephedra era faded into memory. A “soft” market for commercial insurance in the U.S. was also a contributing factor, with carriers fighting for market share and relaxing prior underwriting guidelines. Today, rates are basically flat; they generally aren’t rising or falling much either way, unless your company has had insured losses that a carrier has paid, in which case you will most likely be paying higher rates.
Ingredient exclusions continue to haunt insurance buyers, especially those in the weight loss, sports nutrition and sexual enhancement categories. These products tend to contain ingredients that carriers normally exclude, such as yohimbe, bitter orange, synephrine and kava. More recently, exclusions have been added for DMAA and “synthetic steroids.” The rule for insurance buyers remains the same: check the ingredient exclusion list on the policy before you buy it to make sure all of your products are covered.
False advertising claims, be they an individual lawsuit against your company or the currently popular class action, are not covered by your product liability policy. Despite the fact your policy has an essentially misleading coverage section called “Personal and Advertising Injury,” it provides zero protection from these kinds of claims. For a period of time in 2011 and 2012 there was coverage available through a specialty carrier, but it was expensive and did not sell well. Insurance carriers voluntarily removed it from the marketplace. I don’t know of any insurance coverage for false advertising claims anywhere in the world.
Claims made policies are still, with few exceptions, the only form of coverage available for the dietary supplement and nutraceutical industry for product liability. (This is opposed to the so-called “occurrence” coverage with which most people are familiar.) Some brokers will say claims made coverage is “bad coverage” but that’s simply because they are not knowledgeable on the subject and find it easy to criticize it. Properly managed by a competent insurance broker, trading daily in claims made coverage, it is just fine. Occasional problems arise in leases or other contracts that call exclusively for the “occurrence” form of coverage, but again, with a competent broker as your advocate you should be able to get over that hurdle.
Broker shopping your product liability insurance rates to ostensibly get the best rate is still a bad idea. Remember, it is not the broker that sets the rates, but the insurance company. And those rates are offered after a review of your company’s profile: industry category (contract manufacturer, raw materials, etc.), insured loss history (if any), quality control procedures, association affiliations, GMP certifications (NSF, NPA, etc.), FDA warning letters, etc. Underwriters look at all of these things, and you will get a better rate if the package presented to your insurance broker is prepared well. Broker-shopping often results in you acquiring a reputation as a habitual “price shopper” within a very small community of underwriting companies, which indeed raises your profile—but not in a good way.
Another bad side effect of broker shopping is that the (cheapest) insurance company ends up selecting your broker for you, without regard to the broker’s skillset in the supplement space. Select one competent broker and let him/her do the job. Your life will be much easier.
An Extra Layer of Protection
Certificate of product liability insurance from your manufacturers, naming your company as an “additional insured,” is a must. Years ago we found that few companies were taking the time to get these. We have counseled hundreds of companies over the years about why it is important to get this extra layer of risk transfer protection.
Product recall insurance should be considered, but purchasing it is a bit of a slippery slope, as there are essentially two kinds of coverage available. The first covers only your costs of the recall; it is cheap and generally not offered in meaningful amounts in the event of a real-life product recall scenario. It’s cheap because as a supplier to retail, who is going to incur much of those recall costs? Your retail customer, not you, and those costs won’t be covered. The second kind of product recall coverage will cover those second-party costs, but because it does, it is exponentially more expensive to purchase than the inexpensive variety.
Disclosing serious adverse event reports (SAERs) to your current or prospective product liability insurer is a new dilemma, evolving since the law was passed in 2007 and exacerbated by vigorous FDA enforcement. Here’s the issue: on virtually every application for product liability insurance rates there is a question that says, “Do you know of any event or circumstance that might give rise to a claim under this proposed insurance?” If you have a half dozen SAERs sitting in your file, whether or not causality appears to exist between the alleged injuries and your product, common sense dictates that you report these to your carrier in response to the question. Not doing so virtually guarantees that your insurer will deny a claim that comes in later related to one of those SAERs that you failed to disclose.
Good Manufacturing Practice (GMP) inspections should also be kept in mind as some of the insurance applications ask a question similar to this: “Have any of the Applicant’s products or ingredients or components thereof, ever been the subject of any investigation, enforcement action or notice of violation of any kind by any governmental, quasi-governmental, administrative, regulatory or oversight body?” If you have carelessly answered “no,” then you run the real risk of having your coverage rescinded by the insurance company at the worst possible time (after a claim comes in) even if the FDA inspection was generally favorable!
In short, take the application process very seriously each and every year, and work with a competent broker who can walk you through it if need be.
Greg Doherty is the dietary Supplement Practice Leader for broker with Poms & Associates based in Los Angeles. He specializes in information on product liability insurance rates 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[author-box-2]