During the 16 years I have been running a dietary supplement insurance practice, large retail chains have almost always asked their suppliers for product liability limits that are higher than a “standard” product liability policy of $2 million. Back in the 2000s and the early part of the second decade of this century, the price difference between buying a standard policy ($2 million) and a higher limit of, for example, $5 million, was substantial—and for some, was the tipping point for companies getting into a Big Box Chain or not.

In 2017, things have changed. Product liability rates for dietary supplements have fallen dramatically since the bad old days of ephedra hysteria, and that’s a good thing for the suppliers of supplements and similar products, such as cosmetics, the latter which generally suffer from high liability insurance rates right along with supplements.

Offsetting this good news about rates is the higher insurance requirements Big Box Chains are demanding for product liability insurance. Why is this happening? I have two theories that I think work in tandem to drive this trend.

First, big companies think all of their suppliers should buy as much insurance as they do. This is not logical thinking, but I believe it exists. It’s a corporate mindset. True, big companies buy lots of liability insurance because they are big targets for plaintiff’s attorneys, and because they have a lot to protect. They also have shareholders who expect them to buy adequate insurance to cover catastrophic risks (and thus protect profits from uninsured losses). But this does not necessarily translate into a requirement to have a supplier with $5 million a year in revenue to have $20 million of liability insurance.

Second, some of the Big Box Chains have been stuck with large financial losses due to the products of suppliers, and those suppliers did not have adequate insurance to cover the loss, leaving the Big Box store holding the bag. There are many examples of this; the most recent being the lawsuits against Amazon for alleged faulty solar eclipse glasses that came from China and were sold on Amazon by some very small, opportunistic suppliers.

Enforcement of Insurance Requirements
It’s one thing to have requirements for liability insurance to be a supplier to a Big Box Chain. It’s another thing to enforce them. For if you do not enforce them, it’s the same as not having them at all. Similarly, if you enforce them on a seemingly arbitrary basis, that creates questions of a double standard or possibly favoritism among suppliers. And there is plenty of this behavior going on for dietary supplement suppliers.

For example, Amazon has a requirement for $1 million of liability insurance for supplements and, to the best of my knowledge, for all products sold by all suppliers to Amazon. It is widely known among the Amazon supplement sellers and resellers that there is no enforcement of this requirement by Amazon. We can testify to that as we have scores of customers selling on Amazon. We never receive correspondence from Amazon asking for documentation of our customers’ liability insurance.

What this also means is that there are probably tens of thousands of Amazon sellers operating without any liability insurance whatsoever. In addition, Whole Foods Market, recently acquired by Amazon, has a $7 million insurance requirement for supplements and vigorously enforces the requirement. Will Amazon’s requirements be adjusted to be closer to Whole Foods, or vice versa? Stay tuned.

Walgreens and Walmart both require $20 million of liability insurance for supplements. However, it is not a well-kept secret that these requirements are arbitrarily enforced by both companies, or so it would seem. Some companies selling supplements to these firms have been getting away with $5 million or $10 million of insurance for years. Others, most recently a small client ($10 million revenue), eager to get into Walmart, was pushed into buying the $20 million limit before they could get final approval. Is this fair to those companies forced to comply with published requirements, while others are openly non-compliant?

Trends for 2017 and a Solution
There’s little doubt that the Big Box Chains will elevate their liability insurance requirements over time. If nothing else, inflation will guarantee that. Already, as pointed out in this article, the process of setting minimum requirements for insurance can be arbitrary and, for small companies, downright punitive, in terms of costs to comply.

Recognizing this problem, our Dietary Supplement Insurance Practice recently created an exclusive facility to help companies, large and small, to comply with insurance requirements of $20 million (Walmart and Walgreens) and other Big Box Chains that have a high requirement for supplements (e.g., $10 million). Our first customer to use this facility saved 33% on its premium versus an “open market” premium, which we had priced just before creating this facility. So yes, there are solutions to the cost parameter. But the process of marching to the drum of the Big Box Chains can still be a headache-inducing experience.

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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.