Risk and Litigation Avoidance in Addition to Liability Insurance

Risk and Litigation Avoidance in Addition to Liability Insurance
by Greg Doherty

Insurance costs for commercial general liability, including productliability, have finally leveled off for companies in the dietary supplementbusiness. All sectors of the industry are currently seeing their renewal ratesdecreasein some cases dramatically.

While this is good news for the bottom line, it does not mean that duediligence should be discarded when purchasing the insurance. There is still the constantly changing landscape of ingredient exclusions todeal with. These exclusions vary greatly from insurer to insurer, and the listsof exclusions are getting longer, not shorter. (There is, however, an increasing willingness by most insurers to negotiatesome of the ingredient exclusions off the policy, thus granting coverage.) Yourinsurance broker may offer you several quotes at a lower premium, but be sure tocarefully review the ingredient exclusions before making a final decision.

Having InsuranceSimply a Good Idea

Having a product liability policy in place is a good idea for severalreasons. A major, often unappreciated, feature of the policy is the payment ofattorney fees and related costs of litigation. Most often in the dietarysupplement industry, the allegations will involve bodily injury or death, andthe cost to defend these lawsuits can be substantial, even if the lawsuit isgroundless. Generally, plaintiffs lawyers will be somewhat intimidated at theprospect of having to battle the big bad insurance company with deeppockets to fund a vigorous defense. Being uninsured when the lawsuit comes, and having to fend for yourself, willbe expensive and may make the plaintiffs lawyers more aggressive aboutextracting money from you to settle.

Many people bristle at the large deductible that comes with a productliability policy. Typically, deductibles start at $10,000, but can often go muchhigher. However, what most people do not realize is that the deductible isapplied only to final judgments or settlements for damages. It does not applyto defense costs. For example, one large West Coast contract manufacturer wassued by a big pharmaceutical company. The contract manufacturer should neverhave been a party to the lawsuit and finally was dismissed from the litigationon summary judgment. Their insurance company paid over $150,000 in thesuccessful defense of the claim. Even though the company had a large deductible,they paid nothing in connection with the lawsuit.

The key to getting the best insurance is to select the right broker toprocure proposals from the handful of insurers willing to sell it to the dietarysupplement industry. An insurance broker who specializes in the dietarysupplement industry is the best choice. A broker with just one or two clients inthe industry probably wont be on top of industry issues and specifics neededto assemble an underwriting package about your company that underwriters willfind informative, thereby resulting in a lower premium for you. A competentbroker should be able to readily identify all of the insurers for productliability, belong to or have knowledge of industry trade associations, attendtrade shows or other networking events, and understand the source and meaning ofGMPs (good manufacturing practices) and other certification processes.

It is also important to understand what product liability insurance does notcover. Many people are under the impression that a product liability policywill cover any litigation that involves the companys products. This is notthe casefar from it. In addition to the ingredient exclusions, there arenumerous other exclusions, most of which fall in to one of two categories: risksthat are meant to be insured by another type of insurance policy (automobile,workers compensation, etc.) or risks that are generally uninsurable (nuclearattack, asbestos, etc.). Basically, a liability policy only covers allegations of bodily injury orproperty damage to others. People are often upset when they are involved in asimple business dispute involving their product (for example, an allegation ofstolen trade secrets), are sued, and find out their product liability policydoes not defend the litigation or pay any resulting damages.

Risk Management Tools

So what can a company in the dietary supplement industry do, in addition tobuying the insurance, to protect itself from lawsuits in general, whetheror not that lawsuit may be covered by insurance?

Get a Good Attorney: Finding a good attorney who is familiar with theindustry and, preferably, has actually defended dietary supplement industrycompanies in front of a jury will be worth its weight in gold. Such an attorney will come to you knowing the plaintiffs lawyers endgame and will be able to advise you on numerous strategies to implement thatwill substantially deter the plaintiffs lawyers strategy to attack yourcompany.The lawyer should be versed in federal regulatory issues, labelingissues, etc. Retaining a competent attorney before the lawsuit comes inis an investment that might someday prevent a major disruption and cost to yourbusiness.

Get Insurance Evidence from Suppliers: One way to shift risk is to haveyour suppliers give you evidence of their product liability insurance and havethem add your company as additional insured on their policy (so-calledvendors coverage). This will provide you with coverage under their policy in theevent they and you are sued for a covered claim. It will insulate you and yourinsurance company from having to defend the claim, thus keeping your loss recordspotless, reducing future insurance costs for you. For these reasons, you shouldbe wary of suppliers that do not carry insurance (and there are many that stilldo not).

Product Representations: Implement a system to check and double checkyour product labels for proper warnings and (improper) advertising claims. Evenif there is no design defect in the product itself, a failure to warnabout certain characteristics of the product can lead to a costly lawsuit. Ifyou are a contract manufacturer and the customer supplies their labels, checkthe label to make sure it matches the formulation the customer gave you. If youare a contract manufacturer, design a written document that the customer signs,stating they understand the product you are making is his formulation andthey will be solely responsible for any liability arising out of hisformulation.

Documentation Issues: Have good record keeping procedures throughoutevery phase of your company, including personnel, grounds (physical plant),equipment, production and distribution. Keep records of product samples,complaint files and have a records retention policy. But on a related issue, be careful what you say in electronic mail.You maythink its gone, but it probably can be recovered by a sharp technicianworking for the plaintiffs lawyer.

Certifications and GMPs: Strive to earn certifications from theorganizations that offer them. They will put you ahead of your competition andimprove your risk management processes. The coming federal GMPs will addresssome of the above items, so like a good Boy Scout, Be Prepared is anappropriate and timely attitude to take to protect you and your companysassets.

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