Why Are Product Liability Minimum Premiums So High?

Probably the most common question I receive from start-up businesses and small businesses is ‘why are my product liability premiums so high?’

The primary reason most start-ups and small businesses do not qualify for low minimum premiums for product liability is because they do not qualify to placed with a standard or admitted market insurance carrier and as a result, must be placed with an excess surplus lines insurance carrier.  To qualify to be placed with a standard or admitted insurance carrier, your business and product/s must fit neatly into a pre-determined class of business that the admitted insurance carrier is familiar with and has experience with and has created a specific class code so it can be rated online.  If your business fits in one of these pre-determined classes by the admitted insurance carrier, quotes can be generated online by one of our account managers and usually takes no longer than 10 minutes generate, if we have a completed application.

When your business or product/s do not fit into a nice neat pre-determined class and you must get your insurance from the excess surplus marketplace, you can expect to pay higher minimum premiums for product liability because instead of taking 10 minutes to complete an online quote, your product/s and application must be individually reviewed by an underwriter who then must take time to prepare a formal proposal. 

If you think about the economics between the standard insurance carrier and the excess surplus insurance carrier, it is easy to understand which one is more efficient and can generate the most return for the insurance company in the shortest period of time.  An online computer is capable of generating thousands of quotes in a single day; whereas, a single underwriter may, on a good day, may generate 12 to 15 quotes a day.

So the real question for start-up businesses and small business owners is what are the reasons you would not qualify for admitted or standard market quotes?  Below is a list of the more common reasons your business may not qualify for a standard or admitted market quote:

1. Your products are high risk or your advertising makes claims that your product provides safety or reduces risk.
2. Your product/s are unique and do not fit into a pre-existing product class that the admitted insurance carrier writes.
3. You are an outsourcer or importer that currently or could possibly deal with a multitude of different types of products. Standard or admitted insurance carriers policies are not set-up to specify individual products by a business and would have to pick-up coverage for all the products of a business. Because outsourcers and importers can handle so many different types of products, the concern by the admitted insurance carriers is, even though you currently do not have any high risk products, a high risk product could eventually get into your product mix and they would have to cover a claim for a product that is clearly not in their accepted product appetite.
4. You are a start-up company with owners and principles with no experience in the business or products that you want to insure.
5. Your business has no formal loss history to show the standard or admitted insurance underwriter that you are a better than average risk.

It does not always matter if your product is safe, when trying to qualify for a standard or admitted insurance quote.  It is important to remember that the standard insurance carriers business model is not set-up for individual underwriting of your products for product liability purposes.  The admitted insurance underwriters often lack the technical knowledge to do product evaluations and often consider their premiums too low to stop and complete a thorough evaluation.