Nutraceuticals and Insurance: Unusual Exposures

by Laura Tucker

Almost every nutraceutical manufacturer or distributor is aware of their product liability exposure, and many are aware of the potential financial harm that can be caused by the need to recall your product.

Product liability and product recall policies, along with supplementary payments and services, are broadly available for companies seeking to transfer the financial risk to an insurance carrier. Sometimes, one policy can meet both needs. And although product liability policies are easily accessible, its worth noting the quality of coverage therein varies widely. Each policy contains endorsements and exclusions that can significantly impact coverage, particularly with regard to the list of excluded ingredients. It is a common misconception that if a carrier has reviewed a label, coverage will thus apply. But it is important to note if the product contains an ingredient described on the list of excluded ingredients in the policy, any ensuing claim arising from that product will likely be denied. Careful analysis of both exposures and coverages is critical in matching insured to carrier for a proper fit.

Once a company has the most basic coverage under control, its time to focus on less-recognized exposures. What about actions taken by regulators? What about unfair competition, false advertising, fraud and other allegations that can be lodged by disgruntled competitors or a class of consumers being whipped into a litigious frenzy by an aggressive plaintiff bar?

Up until recently, these exposures were generally uninsurable. A company would just have to manage the risk as best possible, and dig deep if a lawsuit was filed. But that tide is turning.

In the last several years, Management Liability Coverage has been a growing class of insurance coverage. Its basis is the old-fashioned Directors & Officers Liability policy, which protects individual Ds and Os for their personal liability arising from service to the company. A Management Liability policy differs from a traditional D & O policy in one very important waythe company (entity) is also an insured.

This means corporate actions can be covered. Corporate conduct that was previously considered a business risk can now fall under the coverage provided by a Management Liability policy. And some of the claims typical in the nutraceutical industry can find a home in a robust (and robust is critical) Management Liability policy.

This can be crafted in several ways. A Management Liability policy generally starts with an extremely broad definition of Wrongful Act. In most policies, typical wording would include any act, error, omission, misstatement, misleading statement, breach of duty or act of neglect

As long as the Wrongful Act is committed by a covered person (or company) in their capacity as such, during a covered time period, and is not otherwise excluded, its covered.

It can be safely said many Management Liability carriers do not have an appetite for the risks attendant upon the nutraceutical industry. They may offer quotes for insureds in this class, but they will exclude unfair trade practices, claims arising from bodily injury, regulatory actions and so on. More importantly, a handful of carriers will carefully consider these exposures and will refrain from excluding them.

So it is possible to buy insurance for some, if not virtually all, of these exposures. If a company already has a Management Liability policy, check it for exclusions that pertain to these unique exposures. If those exclusions are in place, it is time to go shopping for a new carrier when the insurance renewal date approaches.

There is another facet to the coverage available under Management Liability policies. Most of the policies have exclusions that apply to the whole policy, and then a few exclusions that apply only to the coverage provided to the entity, leaving the coverage available for the individual Ds and Os. Paying careful attention to those exclusions can yield even more coverage. Two very important examples: intellectual property infringement and pollution.

Both of these exposures are frequently excluded with regard to the entity. But many carriers are willing to (if they dont already) provide what is called a carveback to the exclusion for claims that are brought against the Ds and Os individually.

A word of caution about those carvebacks: Some carriers will proudly proclaim theyre providing a management carveback to an exclusion; but, in fact, the carveback is only for claims brought against the Ds and Os by shareholders. Execs who are the director or officer of a closely held company arent going to get much help in that situation. Its frequently not the shareholders that are a concern. Its the regulators, the public, non-equity investors, competitors, customers or vendors, and such a limited carveback wouldnt help at all. Hold out for a carveback that provides coverage for any claims brought against the Ds and Os.

The above review of the capabilities of a robust Management Liability policy just scrapes the surface of what such a policy can accomplish. There are many other ancillary exposures that can be addressed by this coverage, and there are other coverages available for those exposures that are even more esoteric.

The bottom line: Keep pushing for the coverage you need and want. The insurance industry expands to respond to the needs of policyholders, as long as the exposure can be underwritten and an adequate premium can be collected for it.

Laura Tucker is with Mourer Foster Inc., Lansing, MI, serving as the program director for the Internet-based nutraceutical insurance specialty program Nutra-Sure . She has more than 20 years experience as senior commercial lines underwriter, program manager and MGA specializing in the health and beauty supplements industry. Tucker can be reached by phone at (517) 346-5231 or (517) 862-9928, or by e-mail at [email protected] .