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Insurance and the Dietary Supplement Industry 2003
May 26, 2003
6 Min Read
Insurance and the Dietary Supplement Industry 2003
by Dick Griffin
The cost of general liability insurance has become a majorconcern for the dietary supplement industry. In addition to the substantialincreases in the cost of coverage, many dietary supplement companies have foundthemselves unable to purchase insurance at any cost.
Commercial General Liability Including Products & CompletedOperations provides coverage on behalf of an insured business for sums it may belegally required to pay to others as a result of the insured's actions ornegligence. This coverage customarily includes coverage for bodily injury,property damage, personal injury, medical payments and additional supplementalpayments specified in the policy as one limit (Products Liability is specifiedas a separate limit). Another important feature of a Commercial GeneralLiability policy is that it provides funds that cover the "cost todefend" for the insured if they are sued for an accident or negligent act.
In the United States, Liability Insurance is not required to bein business. It can, however, be required by the existence of a contract,written or assumed, that any business might enter into. Today, very fewcompanies would agree to buy products from a supplement manufacturer that doesnot have insurance to cover losses for which the manufacturer might beresponsible. Likewise, distributors need protection for a mistake they mightmake in the way the product is sold to the customer. Basically, the companiestrade the cost of insurance for what it could become liable for, up to thelimits of the insurance policy. If there is no insurance, a business might berequired to forfeit real and personal property. This could put them out ofbusiness.
The Changing Face of Insurance
In September 1996, I secured the exclusive endorsement of theAmerican Herbal Products Association (AHPA) to establish a national insuranceprogram for AHPA members. The company was Rated AA+++ by Bests Insurance RatingService and was the third largest insurer in the world. The program includedCommercial General Liability (Occurrence Form) that included worldwide Products& Completed Operations, Vendor Legal Liability (Broad Form), IncidentalMedical Malpractice and Employers Liability to mention a few. The coverage andrates were the best in the industry.
During the first nine months of 1997, 35 dietary supplementcompanies took advantage of the program and $950,000 in premiums were written.Late in September 1997, the insurer informed me that it did not intend tocontinue the program. The reasons were:
They became concerned their rates were inadequate ($.32 per $1,000 of sales). They no longer wanted to offer Occurrence Form liability coverage. The only way they would consider covering the dietary supplement class of business would be on a Claims Made form due to the long tail exposure for potential losses.
They were alarmed by the rapidly increasing number of complaints that were being reported and filed as potential claims that involved the use of ephedrine and other controversial dietary supplement products, especially those used in products to control weight.
They were concerned about the lack of regulation in the United States for dietary supplements and how freely they were being dispensed. They referred to the extensive regulations in other countries that required stronger government controls and limited over-the-counter sales of many herbal products.
They were concerned about improper product labeling with respect to FDA regulations and the lack of standardization in the manufacturing of products in the United States.
They were concerned about the lack of scientific studies regarding the use of various supplements, with an emphasis on herbal products.
These concerns, for the most part, have become uniformlyaccepted by all but a few of the insurance carriers in the United States today.
Coverage Today
There are two insurance liability coverage forms commonly used:Occurrence and Claims Made. The primary differences have to do with whattriggers the coverage. Occurrence Form coverage is triggered by injury or damagethat occurs during the policy period. Claims Made coverage is triggered when aclaim is first made against the insured during the policy period, even if theactual injury or damage occurred at another time.
Prior to 1998, the Occurrence Form was commonly used throughoutthe insurance industry and it was readily available. However, it becameincreasingly more difficult to find insurance companies willing to writeOccurrence Form coverage at lower rates. Standard insurance companies were nolonger willing to commit to a group program for the dietary supplement industry.("Standard insurance companies," in this sense, refers to insurersthat accept risks that are not considered difficult or unusual.) Insurancecompanies would consider individual submissions but not groups, and there werefar fewer standard markets that were willing to insure dietary supplementcompanies at any price.
In 1999, the standard insurance markets became unwilling toconsider dietary supplement companies at all, requiring us to place the insuredin the surplus lines insurance market. (The surplus lines insurers are insurancecompanies that specialize in insuring "non standard," or moredifficult, risks.) The surplus lines insurers would only insure them on a ClaimsMade form. Today, I do not have knowledge of a single surplus lines insurer thatwill offer anything other than Claims Made.
Lowering Your Premium
There are some things manufacturers can do to increase theirchances of obtaining insurance and keeping premiums as low as possible. First,examine ingredients in the product line. An unfortunate side effect of thenegative studies and press on such products as ephedra and kava is that manyinsurers won't cover companies selling these ingredients. It means weighingsales viability versus safety and risk.
Second, consider GMP certifications. The new FDA proposed GMPrule should cause distributors to more carefully control what is stated on theirlabels. One of the greatest causes of loss for insurers is defending claimsarising out of incorrect statements that were on the label. I am currentlyworking with a national firm in the development of a simplified "inspectionservice" that will be available to the insurance companies to certifycompanies inspected are using good manufacturing practices. We will encourageall businesses we insure to become certified.
Finally, companies may join associations such as AHPA or theNational Nutritional Foods Association (NNFA). Dietary supplement companies ofall sizes and sorts should be members of industry associations like AHPA, NNFAand others that dedicate all their resources to the better understanding andhealthfulness of the products. The insurance companies we work with giveconsideration to companies that are members of industry associations. Theyshould help regulate the industry by supporting FDA guidelines and byencouraging higher uniform standards for all products. When there are glaringexamples of companies violating these standards, they should be pointed out bymembers. It is this self regulation that I believe was the goal of the DietarySupplement Health and Education Act (DSHEA).
Dick Griffin is with Lincoln, Calif.-based GrifconEnterprises Inc., an insurer for the health food supplement products industry.He can be reached at (916) 434-8874 or [email protected];more information can be found at www.dickgriffin.com.
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