Almost every day I get a phone call or e-mail from someone who is starting a dietary supplement company. The questions I get from the caller are always the same. When I sat down to write this month’s column, I thought it would be helpful to do a Q&A format on product liability insurance for nutraceuticals, incorporating many of the questions I get routinely. So here goes …

Q: Why do I need product liability insurance in the first place?
A: Two reasons—and one or both will motivate you to purchase it. First, so you can sleep at night knowing that if you are sued because your product allegedly injured someone, the insurance company you hired will pay for attorneys to defend you and the settlement costs of the lawsuit.

The second reason is that if you intend to do business with a retailer of any consequence (big box drug chains, Costco, GNC, Vitamin Shoppe, Whole Foods, Amazon, BodyBuilding.com, etc.) you will have to show them evidence of product liability insurance.

Q: I’ve heard that very few insurance companies offer this insurance. Is that true and why is that so?
A: In the insurance world, dietary supplements are viewed as “high hazard” risks, much like companies that sell skateboards, pharmaceutical drugs, ladders and motorcycle or football helmets. In turn, that means dietary supplements get kicked into the “surplus lines” insurance market, which means carriers that specialize in offering liability insurance to “high hazard” companies. Most of these companies’ names are unfamiliar to the general public, but they are generally very sound financially; just because you haven’t heard of them does not mean they are inferior or will try to wiggle out of a legitimate claim.

Q: When I purchase a product liability policy, it will cover a product recall event, right? After all, it’s called “product liability” insurance, so it should cover that.
A: No. A product liability policy was never intended to cover the numerous financial liabilities generated by a recall. Only recently have some of the carriers put some “window dressing” product recall coverage in their policy, but don’t be fooled. That coverage is subject to a sublimit of insurance, which will disappear quickly in the event of a recall of any size. And it only covers your direct costs, not the substantial costs that others (primarily customers) will likely incur, will blame you for and will want reimbursement for. Separate, comprehensive product recall coverage is available in the insurance marketplace.

Q: Can I get monthly premium installments like I get from Allstate for my car insurance?
A: No. The carriers in this arena want their money upfront, or no deal. However, you can get premium financing from a third-party provider, but you’ll pay interest.

Q: Will the policy cover California Proposition 65 actions against my company?
A: No. Again, like product recall insurance, carriers have recently begun tacking on and touting “Prop 65” coverage, but it is limited in several ways. Again, don’t be fooled.

Q: Will it cover a false advertising allegation or labeling violation from the FTC, FDA or a competitor?
A: No. Since a Prop 65 allegation is essentially a form of false advertising, it follows that since Prop 65 allegations generally aren’t covered (or at best are inadequately covered), neither is this kind of allegation. Even though there is a coverage part in the policy called “advertising injury,” which might imply that coverage is afforded for false advertising claims, no coverage actually exists.

Q: Are there certain add-ons or options I should seek when negotiating my policy?
A: Yes. And it’s important to negotiate them upfront, because if you don’t and need them later, you will probably be charged an additional premium. Three important add-ons are:

• Additional insured Vendors coverage (this is primarily for your customers, who will ask for it sooner or later). Some insurers include it automatically in their coverage, and some don’t. That’s why you have to ask upfront.
• Defense costs outside of, and in addition to, the limits of liability, which in short expands your policy’s ability to pay claims by increasing the amount of available insurance. Again, some companies offer this and some don’t—until you ask.
• Automatic additional insured status for sponsors of trade shows or landlords (the latter to satisfy the insurance requirements of your office lease). Who among us doesn’t have an office lease or attend a trade show? You’ll need this so ask for it upfront.

Q: I’ve heard there are certain ingredients that these insurance companies won’t insure. Is that true and what should I do to make sure I’m fully covered?
A: Yes, it’s true that each carrier has its own list of excluded ingredients, leaving you high and dry if a claim is made against you for a product with an excluded ingredient in it. First, be aware that these exclusions exist. I have spoken with many people over the years who did not have a clue that such an exclusionary list was on their policy.

Secondly, before you part with your money to buy a product liability policy for your company, make sure you review the exclusion list from the carrier your insurance provider is recommending, because all of the lists are not the same and they are constantly changing in the dynamic nutraceutical climate we live in today.

Q: Can I get coverage for products that have excluded ingredients in them?
A: Often, yes. Many ingredients such as kava, lobelia, yohimbe, magnolia and others that currently are on most exclusion lists can be removed from that list (and thus covered). A discussion about your potentially excluded ingredients should be part of the negotiation process for your policy.

Q: Do I have to submit the label and/or the formulation of new products I want to market to my insurance company for approval prior to selling them?
A: Generally, no. And do you want the insurance company to have such a significant voice in your business, telling you what you can and can’t sell? Of course not. A few of the carriers have wording buried deep in their policy about reporting to them if your gross receipts are going to exceed the estimate you gave them at policy inception, but generally you are free to sell anything you want without the requirement to disclose it to your carrier.

If in doubt about this question, ask your broker to check the policy form for such a reporting clause. Of course, before formulating or launching any new product, be guided first and foremost by the ingredient exclusions on your current policy. If there is an exclusion that applies, there is a good chance you can negotiate the coverage you need, which may or may not cost more premium.

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Greg Doherty
Bolton & Company

Greg Doherty is a commercial insurance broker with Bolton & Company Insurance Brokers and Employee Benefits Consultants, Pasadena, CA. He is the executive vice president and managing director of the Dietary Supplement Practice Group for the firm, which specializes in the nutritional product and dietary supplement industries, including but not limited to contract manufacturers, raw materials suppliers, distributors/retailers. Mr. Doherty has four decades of experience as a broker, focusing solely on the dietary supplement industry for the last 14 years. He can be reached at [email protected]; Phone: 626-535-1409; Website: www.gregdoherty.net