Product Liability Insurance for Dietary Supplements

Products liability insurance for the dietary supplement industry is written in the surplus lines insurance markets, with very few exceptions, which are not “admitted” in the various states. State insurance commissioners have limited authority to regulate these non-admitted insurers.

Because insurance commissioners have little control over the non-admitted carriers, they have an obligation to carefully monitor licensed surplus lines insurance brokers. Should a problem occur with a claim against the surplus lines policy, the state insurance commissioner will go after the insurance broker. Should the broker be found negligent due to an error or omission concerning coverage, it will be the broker’s Errors and Omissions Liability policy that will probably be required to pay the claim.

During the past three years, premiums for products liability have dropped substantially—in some cases up to 70 percent. This is a good thing for the supplement industry, but it also creates some serious problems for the insured. While the growth in the dietary supplement industry has continued during the past three years, many other industries, such as home building, have collapsed. Contractors' insurance premiums, which are placed primarily in the surplus lines insurance market, suddenly disappeared and the surplus lines insurance companies looked toward the dietary supplement industry as a place to make up for the premiums lost.

Surplus lines companies encouraged underwriters to press insurance brokers to place coverage with them in lieu of the surplus lines companies that had been specializing in insuring the dietary supplement industry during the past decade. Many brokers took advantage of the soft market and moved accounts to less experienced insurers. These new insurers did not require, in many instances, the amount of information that is customarily required and, as a result, became a shortcut for the broker.

Insurance policies issued by admitted insurance carriers are generally much broader in coverage than surplus lines policies. Surplus lines policies generally have specific exclusions that in many cases limit the coverage, as in the “list of excluded ingredients.” In most cases any or all of the exclusions can be “endorsed off the list,” but this must be done at the request of the insured. It is imperative that the insured be given a list of the exclusions with the quote for insurance given them by the broker. Then, when the policy is issued by the insurance company, the insured and the broker should review the list again to make certain it is exactly as requested.

During a soft insurance market, when premiums have dropped, many brokers ask for less information, such as product labels, believing that the underwriters won’t review them. This would be a serious misstep. Applications to an insurance underwriter need to tell the whole story about a company. An underwriter must trust in the skill and honesty of the insurance broker, who is duty-bound to act in the most professional way on behalf of the insured. The insured, to make certain their products and services are covered properly, should provide full information and answer all questions on the insurance application. If requested on the application, labels should never be omitted from submission. In addition, when new products are launched, submit those labels as well to have on file. On an annual basis, review the label file and remove expired or deleted products. Contract manufacturers should assist by providing complete lists of ingredients used in manufacturing.

The president of one of the largest claims adjustment firms in the United States recently told me, “The first thing we look for when a claim is submitted on a dietary supplement company is the labels and a list of the product ingredients they submitted with the application.” He added, “The adjuster usually is looking for ways not to pay a claim, not ways to pay a claim; but hard evidence in the underwriting file, including labels and ingredients works in the insured’s favor every time.” The time to make certain that a claim will be paid is when the application is being completed.

Dick Griffin ([email protected]) is the owner of Grifcon Enterprises Inc.; he has worked as an insurance agent/broker for 45 years and is endorsed by industry associations including the American Herbal Products Association (AHPA) and Natural Products Association (NPA).