Monthly Archives: October 2008

Product Liability Insurance Quote Tips

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Since we specialize in start-up businesses, I must field on average 50 calls per week from manufacturers, distributors and importers looking a product liability insurance quote.

When obtaining a product liability insurance quote, it is to your benefit to consider the following:

  1. More information about your products is always better than too little information.   When you submit a product liability application, it is to your benefit to provide as much information about the products you want to insure to the underwriter so the underwriter can feel good about their understanding of your products and business.  This includes websites, product brochures, labels with list of ingredients, independent test reviews and certifications.  If you do not provide full and complete disclosure, the underwriter may think you are trying to hide something and may refuse to consider your application or if they do provide you a product liability insurance quote, error on the side of caution and charge you a higher rate and premium.
  2. Include all insurance contract requirements with your product liability insurance application.  It is not uncommon for businesses to purchase insurance and find out later that they either do not have the correct limits of liability or they needed to have purchased an occurrence policy instead of the cheaper claims-made policy they purchased.  Including your insurance contract requirements with your application will help your insurance agent provide you with the correct quotes the first time and therefore, not waste your time having to get new quotes or the unnecessary expense of having to cancel your old policy and purchase a new policy.
  3. Take time to understand the difference between Claims-Made and Occurrence policies before getting your product liability insurance quote.  Start-up businesses, typically, want the cheapest insurance they can buy (claims-made) and often incorrectly assume they can upgrade their insurance once they become more established.  Because of the retroactive date associated with a claims-made policy, it can sometimes be impossible to convert coverage to an occurrence policy without losing coverage for all the years you owned a claims-made policy. To better understand the differences between claims-made and occurrence policies go to our website, Product Liability Insurance – Occurrence Vs. Claims Made
  4. Know if your agent specializes in Product Liability.  Simply put, an agency or brokerage that has placed millions of dollars of business in product liability insurance is going to have better relationships and more power to get things done within the product liability insurance industry and is in a better position to negotiate a competitive rate and premium on your behalf than the general agency that tries to be everything to everybody. 
  5. Be truthful on your product liability insurance application.  If you choose to lie or do not tell the truth on your application, you are setting yourself up to potentially have your claim denied should you be involved in a lawsuit.  When you file a claim, one of the first things your claims adjuster in going to do is review your original application for material misrepresentations.  A material misrepresentation is any statement which if answered correctly, would have been a reason for the insurance carrier to deny the application under its underwriting criteria.  Any material misrepresentation on your product liability application could result in your claim being denied and as result no insurance money to handle your legal defense, settlement or adverse jury verdict.

Personal Injury Attorneys Use YouTube to Attract Clients

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Although many manufacturers and distributors of products, whether foriegn or domestic, think that they are immune to the lawsuits that arise out of product liability, one trip to youtube.com should change your mind as you see that today’s attorneys may not be “ambulance chasers” they are going high tech to come in contact with this technology world.

While simply searching for an interesting Product Liability story 577 results came through, I only made it through the first 280 of them and approximately 6 of them were actual consumers….the rest Personal Injury Law Firms. They are using commercials, educational seminars or just crazy talking heads like the clip below. These attorneys will stop at nothing to see that they are “on the case” for someone in need. Making sure you that your Product Liability Insurance is adequate in case they come after you is more important now than ever before.

Why The Preemptive Defense Cannot Apply To All FDA Approved Products

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Over the past few years I have gone back and forth over whether preemption is good for the American public.

 

Many of the pharmaceutical and medical device company reps that contact me for product liability insurance quotes are quick to point out that there products should be better than average risk because of the preemptive defense, which allows federal law to preempt state laws and since their products are FDA approved they are protected by federal statute. The general rule with Preemption is that once the federal government enacts a statute on an issue, no state can enact contradictory laws

 

I do agree that it is reasonable to argue that the FDA has more expertise to determine what is in the best interest of the American public than twelve random jurors. However, when I see the FDA approving things such as the Ortho Evra birth control patch I believe it will be impossible for the preemptive defense to be used on all FDA approved products.

 

The Johnson & Johnson Ortho Evra birth control patch is a great example what is wrong with the preemption argument.

 

When a jury is asked to determine whether a product has a Design Defect they use commonly what is known as risk/utility analysis. One of the criteria of risk/utility analysis is the availability of a substitute product or products at the time of manufacture, sale or distribution, which would meet the same needs of perform the same functions as the product without containing the alleged defect.

 

Studies on the Ortho Evra birth control patch show this product has double the risk of the pill that is currently on the market. So far, 20 deaths have been linked to Ortho Evra and listed symptoms are deep vein thrombosis, blood clots in legs and lungs, pulmonary embolisms and stroke.

 

As long as the FDA continues to approve products such as Ortho Evra, when safer alternatives exist, it will be, in my opinion, impossible for courts to rule in favor of preemption.

Are Your Personal Assets Really Protected By Incorporating Your Small Business

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One the most common misconceptions I hear from prospects is that, since their business is incorporated, they have no personal liability in the event of a product liability claim.  In fact, probably 65% of all incorporated start-up businesses that contact me tell me they would not purchase product liability insurance if there was not a contract from one of their vendors or distributors that required them to have product liability insurance because they have corporate status.

While it is true that corporations exist to help protect the personal assets of both shareholders and directors from personal liability for the actions or liabilities of the corporation, it is extremely dangerous for smaller privately held businesses that sell or manufacture products to assume they are free of all personal liability.  The legal concept of “piercing the corporate veil” can often be used to make the shareholder, directors and officers personally liable for the debts or liabilities of the corporation.

Unlike larger businesses, smaller businesses are more susceptible to having the corporate veil pierced.  Smaller corporations, that have no product liability insurance, often hold little or no assets, and a plaintiff or injured third party may seek to hold liable a related person such as a shareholder, director or officer with more assets.  Large corporations typically have more assets available and legal staffs to help them avoid the technical issues, which helps them avoid having the corporate veil pierced.

 Wikipedia  has identified the following factors that courts consider when piercing the coporate veil:

  • Absence or inaccuracy of corporate records;
  • Concealment or misrepresentation of members;
  • Failure to maintain arm’s length relationships with related entities;
  • Failure to observe corporate formalities in terms of behavior and documentation;
  • Failure to pay dividends;
  • Intermingling of assets of the corporation and of the shareholder;
  • Manipulation of assets or liabilities to concentrate the assets or liabilities;
  • Non-functioning corporate officers and/or directors;
  • Other factors the court finds relevant;
  • Significant undercapitalization of the business entity (capitalization requirements vary based on industry, location, and specific company circumstances);
  • Siphoning of corporate funds by the dominant shareholder(s);
  • Treatment by an individual of the assets of corporation as his/her own;

It is important to note that not all of these factors need to be met in order for the court to pierce the corporate veil. Further, some courts might find that one factor is so compelling in a particular case that it will find the shareholders personally liable.

In conclusion, if you are a small business and you have incorporated to separate you personal asset from you corporate assets, it is important that you have both General Liability and Product Liability insurance so that, in the event you are sued, the lack of corporate assets does not become a motive for piercing the corporate veil and exposing your personal assets.  On the other hand, if you have little corporate or personal assets, then you may consider rolling the dice and not having General Liability or Product Liability insurance because if there is little chance of recovery or restitution by the injured third party, you become a less attractive target for a lawsuit.

  • Was the corporation being used as a “façade” for dominant shareholder(s) personal dealings; Alter Ego Theory;

    • When Should You Buy Intellectual Property Abatement Insurance?

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    On average, we get about three calls per month from inventors, patent holders and current product liability clients that are looking for insurance that would allow them to sue or protect their rights from those individuals or businesses that steal their patents or intellectual property. 

     Intellectual Property Abatement Insurance covers litigation expenses incurred in enforcing the insured’s intellectual property (IP) against infringers up to the policy limit (typically $100,000 to $3,000,000).

    My advice for those looking to purchase Intellectual Property Abatement Insurance is always the same – only insure those patents that have the potential to make you very rich.   While intellectual abatement insurance does potentially provide you with financial resources that you otherwise would not have access too, it also requires that you pay a large part of the expenses to prosecute the offenders of your intellectual property rights.  Typically, the deductible is 2% or more and co-insurance is 20% or higher.  In other words, if your insurance carrier spent $100,000 going after a company that infringed on your intellectual property or patent in court, you are going to be responsible for slightly more than $20,000 of this expense.

    From the insurance carrier’s perspective, they puposely want you to have some skin in the game and share a large portion of the expense because they want you to be thoughtful about choosing cases that are winnable and not seeing the insurance carrier as a deep pocket to sue every business that may have a similar patent or products. 

    In summary, if your product has potential to earn millions of dollars of future revenues, Intellectual Property Abatement Insurance is a small price to pay to protect your interest.

    Three Reasons Why Your Attorney May Discourage You From Purchasing Intellectual Property Abatement Insurance

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    While many attorneys are looking out for the best interest of their clients and will recommend their client purchase Intellectual Property Abatement  coverage so their clients have the financial means to enforce their Intellectual Property rights or patents against infringers, it has been my experience many attorneys are quick to discourage their clients from purchasing this coverage. I believe there are three reasons why many attorneys will discourage their clients from purchasing Intellectual Property Abatement Insurance.

    Intellectual Property Abatement Insurance covers litigation expenses incurred in enforcing the insured’s intellectual property (IP) against infringers up to the limits of the policy.

    First, one of the conditions of the policy requires that before you can prosecute an infringer that stole your intellectual property or patent, you must submit to the insurance carrier a favorable letter from outside patent counsel (independent of the counsel you have chosen to litigate), at your cost, on matters of validity, infringement and legal impediments.  In other words, you must chose an unbiased attorney and present them with the facts of the case.  The unbiased attorney must provide a favorable opinion letter that your case is winnable based on all the facts.  

    A second reason is when choosing an attorney to litigate against infringers your attorney 1)must be independent of the insured and 2) cannot have participated in the prosecuting or the securing of your Intellectual Property or Patent.

    The third reason is, even if you current attorney passes the first two conditions or requirements, the insurance carrier requires that your attorney propose a reasonable budget for the work to be done to get you through a lawsuit.

    In summary, the first two reasons above may exclude your attorney from being involved in the prosecution of infringers of your Intellectual Property; therefore, denying them an opportunity to make money. If you attorney passes the first two conditions, the third reason may limit what your attorney can charge.

    Understanding The Differrences Between Product Liability, Product Recall and Impaired Property

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    One of the most common confusions for many of the prospects and customers I come in contact with is there understanding the differences between Product Liability, Product Recall and Impaired Property.
     
    Many people will wrongly assume that Product Recall and Impaired Products are covered by their Product Liability policy.  It is important to note that the standard ISO Product Liability policy form specifically exclude “damages claimed for any loss, cost or expense incurred by you or others for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of your product, your work or impaired property.”
     
    The other most common mistake that prospects make when contacting me is assuming “Impaired Property or Products” are covered by a Product Recall policy. The trigger for product recall is when your product has caused bodily injury or property damage or poses an imminent danger of bodily injury or property damage. Impaired Property is “tangible property (other than your product(s)) that cannot be used, or that is less useful, because it incorporates your product(s) that is known or thought to be deficient, defective, or inadequate, but only if such property can be restored to use by the repair, replacement, adjustment or removal of your product(s).”  Most calls I receive regarding product recall the prospects are really looking for profit protection in the event they are required to warranty or pull their products because of their product is found to be defective or does not perform as promised and is returned by the end user for a refund. While it is possible to find Product Recall policies that will offer an “Impaired Property” endorsement, it is important to note that the “Impaired Property” endorsement does not cover your obligation to replace your product(s) or to refund the price paid for your product(s).  Impaired Property is specifically designed to provide some protection to the third party that incorporates your component or ingredient into the their finished product.
     
    In summary, product liability does not provide coverage for product recall or impaired property and product recall does not provide coverage for impaired property without endorsement and impaired product does not provide coverage to replace or refund the price paid for your products.

    Product Recall Vs. Product Guarantee – Know The Difference

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    We often get calls from prospects wanting to buy product recall insurance. After a little while of discussion it becomes obvious that most of the prospects are really looking for product warranty insurance. It is important to understand that the trigger for Product Recall Insurance is the potential for the product to cause bodily injury or property damage and as a result, is considered to be unsafe and must be removed from the market or public. Product warranty is much more passive and involves a promise to repair or replace or refund the purchase price of a product because it fails to meet a particular standard of performance.
     
     Increasingly, large retailers are asking manufacturers, distributors and wholesalers to warranty their products in the event they fail to perform to a reasonable standard for the retail customer and the retailer is forced to take back the products and provide refunds.
     
    Most manufacturers or importers that contact me are looking for an inexpensive way to protect their profits in the event they are forced by warranty or indemnity agreement with the distributor to take back product. To the best of my knowledge, there are no insurance carriers willing to provide this type of insurance coverage. Most warranty insurance coverages are extended warranties for the repair of automobiles and equipment such as electronics, washing machines, etc. 
     
    Important point – product warranty insurance is provided for the end user. For example, when you buy a car or washing machine, you can purchase an extended warranty insurance to cover repair or replacement costs. This insurance is a money maker for the retail establishment and the insurance carriers that provide this coverage.
    In most cases, companies that call and ask for product recall or product warranty insurance are in fact looking for cheap insurance that would protect their profits in the event they would have to take back their product because the product was defective or simply did not perform as advertised.