Liability Insurance for Dietary Supplements and Nutraceuticals
This article provides an overview of general liability insurance and risk management items that should be addressed and understood at whatever level management and staff are involved in their respective functions. Note that it is limited in scope and cannot comprehensively address all aspects in detail. Each business operation is unique, and various issues and exposures are addressed, the applicability of which will accordingly differ for each business. The information contained is to be used at the sole discretion of the company or individual. A company or individual should always engage a qualified expert to assist in insurance purchasing and risk management decisions.
In the dietary supplement industry, owners, management, and employees think about risk and quality throughout a product lifecycle more than most other industries. Manufacturing, packaging, labeling, and distribution operations are responsible for the safety, identity, purity, and efficacy of the products sold to consumers. In June 2007, the U.S. Food and Drug Administration (FDA) published comprehensive regulations for current good manufacturing practices (cGMPs) for those that manufacture, package, or hold dietary supplement products. To ensure compliance to 21 CFR 111 standards, all ingredients must be variously tested to ensure the identity, purity, quality, strength, and composition of these products. These regulations were phased in based on employee size until 2010, and FDA continues to step up their frequency of onsite inspections. Complying with cGMPs helps ensure that no one is harmed by inferior or dangerous products and also helps maintain public safety. Following these dynamic expectations is mandatory if a company expects to do business.
General Liability, including Products and Completed Operations Liability
There are a number of different types of liability policies to protect a business from potential financial responsibility. The first one addressed is commercial general liability, which is one of the less specific forms of coverage and provides a generalized, overall coverage for liability claims resulting from an array of possible incidents. While it does not provide protection from everything, a good general liability policy provides a solid foundation.
Usually the general liability policy is the first one a dietary supplement company will purchase. From products that are actually dangerous to products that are contaminated or labels that fail to warn, there are many different ways companies need products liability insurance. When selecting any liability policy, it should cover the business from as many angles as possible. If there are specific risks that are not covered by general liability insurance, usually there are additional policies to provide that coverage; however, not all risks are insurable. It is important to understand what is covered within the general liability policy and what is not; waiting until a claim occurs is the worst time to discover one or more policy exclusions may not cover a claim!
Adverse Side Effects, Allergic Reactions and Prescription Drug Interactions
Dietary supplement and herbal products companies tend to believe their products are safe, and most have gone through various necessary procedures, performed product testing, and followed regulations to help ensure so. However, products can be defective, create adverse side effects and allergic reactions, or allegedly or actually adversely interfere with over-the-counter or prescription drugs and create complications. For asset protection, a company needs to have good public liability coverage—meaning that members of the general public who might sustain injury or loss as a result of negligence on the company’s part can be compensated. Whether the company supplies, manufactures, sells, imports, packages, or formulates any type of dietary supplement, ingredients, or food-related products, then products liability insurance is necessary. While coverage is not legally required, except by contract, the insured company that takes responsibility for their products by providing this kind of coverage also protects the consumers who purchase the product. In the event that something happens, they will be given compensation and will be more likely to trust your company again in the future.
A general liability policy that includes products liability, which most do, prevents the insured company from facing potentially serious financial damage due to bodily injury, including physical injury, sickness, and disease, including death resulting from any of these, and property damage, or other types of claims that can be proven to be a result of a company’s actions or products. While products liability insurance may be obtained on a standalone basis, it is usually purchased as part of a commercial general liability insurance policy, which can also include a small sub-limit for medical expenses (for minor, “non-fault” claims), limited personal and advertising injury, and specified supplemental payments contained within the policy. Coverage for the insured premises is also included. In addition, a general liability policy provides coverage for defense from lawsuits (even those that are frivolous, fraudulent, and/or groundless) and to pay out covered injury claims when negligence on the insured’s part can be proven. Paying legal defense costs is often an overlooked aspect of the policy, and this feature can often be more important than the liability portion itself.
Whether a one-person distribution company or a large corporation, a products liability lawsuit can destroy a business. Even if the lawsuit is won by the company, the cost to simply defend it can put it out of business long before the case has finished wending its way through the court system. Without products liability coverage, or good enough liability coverage, a company could wind up paying these claims out of pocket. In the dietary supplement industry, historically over 70 percent of the insurance claims costs are comprised of legal and investigation expenses. As such, defending these lawsuits can cost substantially. A plaintiff attorney probably will not be as aggressive in pursuing a products liability claim against an insured company knowing that the backing insurance carrier can fund the defense costs, as opposed to an uninsured company that would be left on its own to defend and settle a suit.
Many smaller businesses believe that they will not be the target of such a high dollar lawsuit because they are not big name brands. This thinking is dangerous; while some people may increase the dollar amount of their lawsuit when they know a company can pay, large lawsuits are still often brought against smaller companies. And smaller companies are the least able to absorb the loss if they are forced to fight a court battle and pay out on a settlement. That is why these companies really do need liability coverage, or more of it, than they may believe.
General and products liability insurance limits usually start at the following limits:
- $1,000,000 for each occurrence for any one loss
- $2,000,000 in the general aggregate for all losses within the policy period
- Sometimes a separate $2,000,000 products and completed operations aggregate
- $1,000,000 per person or organization for a personal and advertising injury occurrence
- And a deductible, usually starting at no less than $1,000 or $2,500 per claim or occurrence
Minimum Premiums for General Liability
The minimum premiums are determined by each individual insurance companies. Since the FDA’s ban on most products containing ephedra and its derivatives and with a more regulated environment including Adverse Event Reporting (AER) laws, as examples, fortunately, insurance rates have dropped significantly, as the frequency and severity of reported claims that were paid are well below what was happening well over a decade ago. In the current market conditions, premiums start at $1,500 with one newer program, then typically jumps up to $3,000 to $3,500 for small companies and start-up operations under about $2,000,000 in annual sales. Some insurers have much higher minimum premiums and only consider larger operations. Historically, premium cost is calculated by multiplying a rate per $1,000 of estimated annual gross receipts, which would be subject to verification and reconciliation, also known as the audit, by the carrier or its assigned third-party representative soon after the policy expires. The rate in the dietary supplement industry is usually determined by the insurance companies’ underwriters’ assessment and judgment of an individual company’s risk profile as presented and perceived by the experience of the underwriters.
How Premium is Calculated
Premiums are generally rated based upon estimated annual gross sales. When representing the sales figure to carriers, it is better to be realistically conservative because most policies do not allow for return premium if the sales estimate in the policy is found to be less than the actual amount. If the sales estimate turns out to be higher, usually an additional premium is owed. The sales amount on the policy can sometimes be increased during the policy term. There have been instances when a company’s sales become far higher than the prior year’s estimate, and when this information is presented to the carrier prior to the policy renewal, as an inducement for the insured to renew with the same carrier, the underwriter can agree to waive the audit, resulting in large savings over what would have been owed. For smaller policies, insurance companies tend make the policy non-auditable, or they may waive the audit altogether if it is subject to audit according to the terms of the policy.
Review Policy Terms Carefully
The general liability policies underwritten by the few insurance companies that focus on insuring the dietary supplement industry must be reviewed carefully, as each one has its own ingredient exclusions, as one prime example, and other exclusionary language and different coverage enhancements. Dietary and herbal ingredient exclusions are ever-changing with insurance carriers that insure this industry, and there isn’t much consensus or disclosure of methodology behind the rationale for exclusion. Some of them make no sense and are based on misperception, such as from bad press, and general lack of product knowledge. The ingredient exclusion should be reviewed each year to ensure that no ingredient is inadvertently uncovered, either as a single ingredient product or used within a formulation. If a product or products of an insured company contain any excluded ingredient, the underwriters are often willing to remove it with an amendment, known as an endorsement, to the policy so that there is coverage. Sometimes additional premium is charged to do so by increasing the rate or premium. Requesting such changes may need to be made each year prior to policy renewal.
Depending on the insurance company, some coverage enhancements to the policy include the following:
- Additional insured coverage for vendors and also trade show sponsors, landlords or lessors. These endorsements extend coverage to these respective entities and may be included within the policy at no additional premium.
- Government mandated product recall coverage. Often this coverage is a sublimit of $25,000, $50,000 or $100,000. A formal, written product recall plan must be in effect and submitted to the carrier to offer this coverage.
- Products bodily injury coverage arising out of mold and silica, both of which are standard exclusions in a general liability policy
- Worldwide coverage territory, which extends products liability to insured products sold anywhere in the world. (Otherwise, products liability insurance purchased by U.S. based companies covers domestic sales only.)
- Higher primary liability limits, up to $5,000,000
- Additional claim expense limit, subject to a specified outside limit. These policies include legal defense costs inside the liability limits, so when legal costs are paid on behalf of the insured company, the liability limits are eroded so there is less money to pay a settlement or judgment. When offered, adding this feature often is relatively inexpensive – as little as 10% of the annual premium.
- Primary and non-contributory and waiver of subrogation status, as required by written contract or agreement with a third party
- Hired (rented) & employee non-owned auto liability
- Employee benefits liability
Choice of Insurance Company
“Standard lines” insurance markets include insurance companies that insure businesses that are perceived to be less risky, like most food processors and distributors, as examples. The standard lines carriers are licensed in the respective states where they offer and sell insurance. For the dietary supplement industry, the products liability policies are mostly written in the “excess & surplus lines” insurance market and are not licensed by the states in which they operate, however are still regulated for the products sold in each state. This market is also called “non-standard” and “non-admitted.”
Understand the Critical Differences Between “Occurrence” versus “Claims Made” Coverage Forms
There are two different types of coverage forms for general liability policies: “occurrence” form and “claims made” form. The difference is in the coverage trigger. The “occurrence” form responds to a claim that happened during the insurance policy year, even many years after the affected policy period. This form is used for industries whose liability risks are considered less risky. For the supplement industry, “claims made” is primarily the only available form due to the perception of higher than average risk to loss. The claims made coverage only provides insurance under the policy while it is in effect. Generally, there are three dates to determine coverage under a claims made policy: 1) date the claim occurred, 2) retroactive date of the policy, and 3) the date the claim is reported to the insurance company. The claim also needs to be reported as soon as practicable. Other claim reporting conditions may apply depending on the policy conditions.
“Claims Made” versus “Claims Made and Reported” Coverage Forms
Some carriers also use a “claims made and reported” form, which can restrict coverage and have a negative impact on the business at the time of a claim. With this policy form, it only applies to claims made and reported during the policy term (or a short window after policy expiration, usually within 30 to 60 days). Consider the implications: when an incident is reported to a dietary supplement company, the insurer is not necessarily notified of a claim right away. A business often will work to resolve a problem before considering reporting the issue. Typically, while seeking resolution internally, time is spent looking into details and ascertaining whether the incident needs to be reported to the carrier. Internal procedures could specify when and how to advise the insurance company, and these internal requirements could delay reporting. The more time that is spent investigating possible claims and dealing with customers, the greater the chance for delayed notification could have on the insurance, particularly if it happens toward the end of the policy period. If a complaint resulting in bodily injury is reported to the insurance company beyond the restrictive reporting period, the “claims made and reported” policy would potentially not respond to the claim!
With “Claims Made” Coverage, Maintaining a Retroactive Date is Critical
It is imperative to maintain the same “retroactive date” so that at each renewal there is uninterrupted coverage going back to the inception date of the original policy. Requesting coverage to be renewed sometime after the policy expiration date can jeopardize the retroactive date, a very expensive error indeed. If switching insurance companies, make sure that the same retroactive date is maintained, otherwise coverage would only apply to claims made within the new policy.
Personal & Advertising Injury and Intellectual Property Coverage
Dietary supplement distributors and manufacturers need to make sure that health claims made have sufficient supporting evidence that they are not false or misleading. The Federal Trade Commission’s role is to ensure consumers receive accurate information about dietary supplements so informed decisions can be made about the products. The Federal Trade Commission has an advertising guide publication for the industry available on its website. Truth-in-advertising standards are particularly important for dietary supplement and nutraceutical marketers.
Please refer to our article regarding issues with Personal & Advertising Injury and Intellectual Property coverage in the dietary supplement and nutraceutical industry.