Broker Selection Key to Managing Product Liability Insurance

Broker Selection Key to Managing Product Liability Insurance
byGreg Doherty

Insurancecosts for commercial general liability, including product liability, haveskyrocketed in the past few years for all sectors of the dietary supplementindustry. In addition to premium cost, companies must consider two otherimportant aspects of product liability insurance. The first is the limits ofinsurance required. In past years, most companies were able to satisfy customerswith limits of $1 million per occurrence/$2 million aggregate. However, duringthe recent hard market for liability insurance, many of the largeretailers raised their vendor requirements to $5 million. In addition, theseretailers are getting more diligent about gathering and tracking certificates ofinsurance from suppliers. One large West Coast distributor simply stops sendingout its clients products if a current certificate of insurance, with minimumlimits of liability required by the distributor, is not on file. Thus, thelimits of coverage a company selects is driven by more than just one factor andmust be selected carefully.

The second important consideration has to do with the coverage, in particularthe ingredient exclusion that each insurance company attaches to their policy.These ingredient exclusions apply to both single-ingredient products (forexample, St. Johns wort) and to any formulated product containing an excludedingredient. These exclusions vary greatly and are constantly changing.Unfortunately, the list of excluded ingredients is getting longer, not shorter,so care must be taken to be sure that the ingredient exclusion attached to acompanys policy maximizes the coverage for the products that it sells.

So how should a company in the dietary supplement industry procure liabilitycoverage and be confident of proper limits of insurance, coverage and acompetitive premium?

Many companies take the approach of the more brokers, the merrier inthe belief that healthy competition will keep costs down. But purchasingliability insurance for a company in the dietary supplement business is not thesame as buying insurance for a family restaurant on Main Street, USA. There areliterally scores of insurers clamoring for restaurant insurance business, butonly a handful of underwriters for the dietary supplement business. Given thissmall community of insurers, a supplement company must carefully select who willrepresent the company in the most favorable light.

A capable and knowledgeable insurance broker is a valuable asset, and theselection process is important. But by using a specific set of selectioncriteria, a good choice can almost be guaranteed.

In addition, most insurance buyers are not aware that all insurers offeringproduct liability to the dietary supplement business require the use of awholesale insurance broker to access them. So the broker you select (hereaftercalled the retail broker) must submit your account to a wholesale broker,who in turn will submit it to viable insurance companies. Most people are underthe impression that their retail broker is talking directly with the insuranceunderwriters. This is not the case. Thus, the introduction of yet another partyto the buying chain makes the insurance procurement process more vulnerable tosomething falling between the cracks.

Selecting the Right Broker

With two brokers (wholesale and retail) now in the picture, it is even moreimportant that a company select a competent and knowledgeable retail broker tocoordinate the marketing of product liability insurance. The retail broker isthe quarterback, responsible for directing the right information to hiswholesale broker and executing a clear, planned marketing strategy on his clientsbehalf.

Very often, when a company follows the more brokers the merrierphilosophy, two or more retail brokers engage two or more wholesale brokers, whoall go to the same handful of insurers. Underwriters will often not spend the time and effort to quote an accountwhen they realize multiple companies are bidding against them, which isconfirmed when they receive an account from two or more wholesale brokers.

It is clear that selecting a single retail broker to represent your companyto a single wholesale broker and all insurers, greatly enhances the quotationprocess and maximizes the options to buy the right coverage, limits of insuranceand at a competitive premium. What are the qualities a company in the dietary supplement industry shouldlook for when selecting a retail insurance broker?

Specialization in the Product Area:A broker with just one or two clients in the dietary supplement business may notbe compelled or motivated to be on top of industry issues on a daily, weekly ormonthly basis. In addition, brokers who have active accounts in the industryshould be able and willing to share references to underscore their performanceclaims. It is also beneficial to request a copy of a typical underwritingpackage shown to wholesale brokers for companies characteristic of your own.

Understanding the Issues: Activebrokers within an industry such as the nutraceutical market appreciate theimportance of understanding industry issues and take steps to stay educated,including attending trade shows and industry networking events. Companies can gauge a brokers industry familiarity by the questions thebroker poses about the companys business operations. For example, a goodbroker could ask questions about your companys GMP (good manufacturingpractice) standards, manufacturing certifications and association memberships.

Insurance Industry Connections: Acompetent retail broker should be able to readily name all of the currentinsurers for product liability and identify specific traits of each one (minimumpremium, ingredient exclusions, minimum and maximum deductibles, etc). Also, companies should review whether the retail brokers wholesale brokerhas knowledge of, and is committed to, the dietary supplement industry, and ifthe company can meet with the wholesale broker.

Logistical Abilities: It is criticalto ensure the retail broker selected has adequate support staff to service youraccountissuing certificates of insurance promptly and answering routinequestions in a timely, accurate manner, for example. In addition, it is worthreviewing whether the broker can handle other insurance options for yourcompany, such as workmans compensation or fire coverage, if need be.

If you sense that it might be time to consider a new retail broker, dontwait until the renewal quote arrives. Start seeking alternatives at least threemonths prior to the renewal date; a motivated, professional retail insurancebroker will dispense good advice and answer questions at any time, regardless ofrenewal date.

Selection of an insurance broker is a highly technical and important matter.All the principals of the company should be involved in the decision. If theselection is made with these stated criteria in mind, the result will bemaximized protection of company assets from insurable legal liability events.

Greg Doherty is with Los Angeles-based Poms & Associates.He is a broker specializing in the dietary supplement industry and a member ofCANI (Consultants Association for the Natural Products Industry). Doherty can be reached at (818) 876-3317 or at[email protected].