The most common form used for product liability policies is the Claims-Made & Reported Form.  This type of policy requires the “claim” be made during the policy or the designated Extended Reporting Period (ERP) and reported in the same policy period of the policy currently in force.  On the policy declaration (summary) page it may state: “This is a Claims-Made Policy. This Policy only covers those Claims first made and reported against the insured during the Policy Period or “ERP”, if applicable.”

The second type of Claims-Made Policy form and least commonly used is the “Pure Claims-Made Form.  With this type of policy form the insured only needs to report the claim “as soon as practicable.”  This policy form provides more flexibility because the phrase “as soon as practicable” provides more flexibility and may allow claims to be turned in after the policy term.

What Is A Claim?

Hence the name Claims-Made, it is important to understand what constitutes a claim.  Is a claim a notice received by the insured to hold the insured responsible for bodily injury, property damage, advertising injury or personal injury or is it the formal service of lawsuit or institution of arbitration proceedings against the insured?  The answer could be both. I recommend that you examine the “Notice of Claim” reporting provisions of the policy or the “Definitions” section of your policy to understand what constitutes a claim by your insurance carrier.  Please note that a notice could be something as simple and informal as an email or a letter from the alleged injured party or it could be something as formal as being served with lawsuit papers.  This is why it is important you understand the definition of a claim within your policy.

The recommended simple rule for any insured with a claims-made policy is to always report any claim or potential circumstance that could lead to a claim for the insurance carrier.   All too often, when an insured fails to report a notice of claim, it is out of fear that the claim could have a negative impact on future premiums and, as a result, the insured waits, hoping that the notice never turns into a formal claim.  If the definition of a claim is notice (remember this could be a simple email) or threat to hold the insured for bodily injury, property damage or personal and advertising injury and you renew your insurance policy and fail to notify the insurance underwriter in the renewal application of knowledge of potential claim, this could be a reason for your the insurance carrier to deny a claim.  The insurance carrier could claim they would never have renewed the policy, if they had been aware of the potential claim or claims.

If you were to go out of business or the insurance carrier decides to non-renew or cancel the policy, it would be wise for you to purchase the Extended Reporting Period, particularly if you sell high hazard products.  ERP is a period of one, two or three years the insured can extend the reporting period of potential claims on their policy for an additional premium that is a contractually predetermined percentage of the premium of the last policy. In many claims-made policies the ERP for one year is 100%, two years is 150% and for three years it is 200% of the last premium paid.

 We requested a copy from the underwriter and were completely surprised to find out that this endorsement had the power to remove product liability insurance coverage if the following conditions were not met:

1. All sub-manufacturers and suppliers that supply any goods or products to you must have Product Liability insurance with limits no less than $1,000,000.
2. You must have Certificates of Insurance from all sub-manufacturers and suppliers.
3. All sub-manufacturers and suppliers must name you as “Additional Insured” and must be evidences on the Certificates of Insurance provided to you.

 This endorsement goes on to state “ the insured (you) agrees that this insurance policy has been issued upon the above representations and warranties and that this insurance will not apply to claims arising out of work or operation performed by any sub-manufacturer and supplier unless all of the above conditions are met.

 If all of the above conditions are not met product liability insurance will not apply.

 The scary word in this endorsement is “all”.  A more reasonable phasing of this endorsement would be “endeavor to” meet the above conditions.

 If you have this endorsement in your policy, make sure you contact your insurance agent to have it removed or find another insurance policy that does not have this endorsement.

I get several calls a week from business start-ups, inventors, importers, patent holders, etc. that are trying to get product liability insurance for their product.  Many times I may be the sixth or seventh agent they have approached for a quote and they are getting frustrated because the premiums they receive are just too high and will not allow them to make a profit.

I feel your pain, but there is a simple explanation that many insurance agents, who do not sell product liability insurance on a regular basis, do not know how to verbalize.  It is not your product, but the class of business that is keeping you from getting the small premium. 

To make this easier for you to understand, think of the small business insurance as computers versus actual people.  Standard insurance carriers are the computers and the non-admitted or non-standard  insurance carriers are the actual people.

The business model for small business standard insurance carriers is to efficiently deliver quotes so they can hold costs down and deliver insurance inexpensively as possible. The Computers have the ability to generate thousands of quotes a day; whereas, an actual person (non-standard insurance carrier) may be only to generate 12 to 15 a day.  The standard small business underwriter is more of a manager that is assigned the responsibility to make sure your business fits neatly in the class of business the admitted insurance carrier has targeted. 

Another import point to understand about the small business insurance policies provided by a standard insurance carrier is the policies are very broad and meant to cover the entire business.  For example, if you are a small baby business that only sells art work for baby rooms and even though this product is not likely to ever be responsible for any type of bodily injury or property damage that could lead to a lawsuit, chances are a standard insurance carrier will not provide coverage for your business.  The reason is simple.  Their policy is so broad that if you later decided to start selling baby cribs your policy would provide product liability for the cribs also, even though the intent of the insurance carrier was to only provide coverage for baby art. 

I know you are wondering why doesn’t the underwriter simply put on the policy that only the baby art is covered under the policy?  Well, think about it. The business model is efficiency and low price. If the underwriter has to stop and write a special endorsement to only cover baby art, then they are not available to process the other quotes generated by the computer.

So if you sell a product or product within the sporting goods, health supplement, construction, energy, exercise, child, disabled, medical or elderly category, remember, it is not your specific product that is causing you to pay a higher minimum premium, but the class of business.

The Excess/Surplus or non-standard insurance market exists for the specific purpose of covering risks that do not fit neatly into the standard or admitted insurance market and have the ability to tailor a policy for your specific products and business needs.

We know from my previous blog, “Why Naming Multiple Defendants In A Lawsuit Is Common Practice”, that it is typical for the plaintiff’s attorney to name as many defendants as possible, when there is a product liability lawsuit.   However, what may surprise you is that even if you have only marginal ties to the product that is responsible for the product liability lawsuit you could potentially be responsible for paying the lions share of the damages or even paying all of it. 

How can this be? This is not fare! What kind of law would allow this to happen?

Joint and Several Liability was created to make sure the injured party or plaintiff was able to be made whole, even if one or more of the defendants are unable pay their share of the product liability monetary damages.  Many of the critics of Joint and Several Liability refer to this approach as the “deep pocket” rule because of the potential of a product liability lawsuit becoming a search for the “deepest pockets”.

Over time tort reform efforts have led to many states limiting the applicability of pure joint and several liability.  Currently states are using one of the following three approaches when distributing financial liability of defendants:

1. Pure Joint/Several Liability – Each defendant in a product liability lawsuit is responsible for the entire amount of the damages, regardless of amount responsibility or liability each defendant had.  Currently, 16% of states use Pure Joint and Several Liability, including my fine state, South Carolina.
2. Pure Several Liability – Each defandent is only liable for their assigned portion of the damages, based on their percentage of responsibility or liability.  For example, manufacture and designer of a faulty product would have a higher percentage of responsibility or liability than the retail distributor of the product.  Currently, 28% of the states use Pure Several Liability.
3. Modified Joint/Several Liability – This is somewhere between Pure Joint/Several Liability and Pure Several Liability and can vary greatly state to state.  Currently, 56% of the states use Modified Joint and Several Liability.

Overall, the point of this blog is that life is not fare and if you are a business that distributes products in all or most of the 50 states, the amount of monetary damages your business may be responsible for paying could largely depend on the state in which the product liability case is being tried. 

If you want to know which states use Pure Joint and Several Liability, Pure Several Liability or the Modified Joint and Several Liability, simply click on this chart.

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.

Many manufacturers, assemblers and importers of equipment such as machinery, piping and hoses overlook the fact that chemicals will be passing through their products and think that their product liability policy will cover them in the event a chemical is released causing property damage or bodily injury.  A defective product that releases chemicals into the environment can render business property completely unusable and potentially cause far reaching and long lasting environmental damage that could take massive amounts of money to rectify.  The damages could easily reach into the million of dollars.

Most general liability and product liability policies specifically deny coverage for bodily injury or property damage arising from the discharge of pollutants “which arises of ‘your work’ … or … which arises out of ‘your product’”. 

The next time you and your risk managers meet, I highly recommend that you discuss your pollution liability exposure.  You may agree that your pollution liability may be roughly the same or higher than your product liability exposure.

Remember the primary reason you should buy insurance – to cover severity and catastrophic loss.  Even a minor pollution spill may be too expensive to cover out of pocket and possibly expose the officers and owners of the business to personal liability.

Of course the Peanut Corporation of America has a product liability insurance policy, but it may not provide any coverage because of the “intentional acts exclusion” in the policy.

It appears that via email the company president, Stewart Parnell, was informed by the plant manager, Sammy Lightsey, of a positive Salmonella test and despite of that warning instructed the plant manager to ship the products.

Typically, a commercial general liability policy states that the policy does not cover “bodily injury” or “property damage” expected or intended from the standpoint of the insured.  It could be easily argued that Stewart Parnell and Sammy Lightsey could have reasonably expected consumers to get sick and possibly die because of the positive Salmonella test and chose to ignore the positive test and warnings for profit.

The Peanut Corporation of America’s insurance carrier, Hartford Casualty Insurance Company, will be within their rights, in my opinion, to deny the claim. However, based on an inside source at The Hartford, it is more likely The Hartford will pay the $10,000,000 in policy aggregate limits and wash their hands of the ugly mess.

From The Hartford’s viewpoint, even if they could successfully deny product liability coverage based on the “intentional acts exclusion”, they would still pay out the full $10,000,000 in policy limits sooner or later.  All the insurance carriers of the manufacturers such as Cliff Bar and Hershey that used Peanut Corporation of America’s products in their finished products and were sued, as a result, would sue The Hartford to recover their losses.

While it is, in most cases, safe to assume that your insurance policy will cover you in the event you have a foreign product liability lawsuit, it is important to understand that most of the U.S. product liability insurance policies will only cover foreign product liability claims that are brought back into the U.S. courts. 

The problem with allowing foreign product liability claims to be heard in the U.S. courts is it is usually much more expensive than the alternative of having the claim heard in the country of origin.   The first reason for this is contingency fees. In the U.S., lawsuits can be brought with little or no expense to the litigant and therefore, there is no cost to the litigant and no reason not to “roll the dice”.  The result is often frivolous and marginal lawsuits in the hopes of “hitting the jackpot”.  Contingency fees are simply a percentage of settlement or judgment awards so the litigant pays nothing if nothing is won or recovered by the litigant’s attorneys. The second reason is the liberal discovery rules in the U.S.  It has become an art for U.S. law firms to cover-up defendants with discovery materials. The cost for a defendant to comply is enormous. Even when it is obvious that the defendant has no negligence or role in the lawsuit, the defendants’ insurance carriers are often willing to pay thousands of dollars to get their names released from a lawsuit because it cheaper to settle than respond to all the discovery materials. The third reason is punitive damages.  Punitive damages allows the jury to reward further damages on top of compensatory damages.  If a plaintiff can show the defendants behavior was egregious and callous, punitive damages may be awarded.  While in many cases proving gross negligence can be a daunting task, foreign product liability litigants may have the luxury of venue shopping to find more favorable forums or courts in the U.S. to have their cases heard and therefore, increase the chances of finding a more sympathetic jury pool and receiving punitive damage awards.

In summary, for many U.S. exporters of products that are considered very high risk such as chemicals and critical aircraft and auto parts, foreign liability insurance will likely not be available. For all other U.S exporters, when the foreign liability insurance coverage is available it should save you considerable money by have purchasing this insurance and excluding Worldwide coverage on their U.S. product liability insurance policy.

In other words, the product liability policy may generate additional premium on audit because of an increase of actual sales over the projected sales, but will not generate a return premium, if actual sales fall short of the projected sales.

I am not completely sure, but I have a pretty good idea why business owners hate insurance premium audits so much. It has to do with a combination of feeling they are being taxed for their success, imposition on valuable time and privacy being invaded. 

But be warned, if you are a business owner reading this blog, not cooperating with an insurance auditor rarely works in your favor.

The first thing every business owner or officer should realize is, the auditor assigned to conduct the audit for the insurance carrier is typically paid by the job and not by the hour. So the longer you put off the auditor, the more likely the auditor will simply declare your account “uncollectible or uncooperative”. Once this happens, your frustion level is now guaranteed go up by about 1000% and the following four things are likely to happen:

1. If you are lucky and can convince the auditor to come back out to perform the audit, you may find an auditor with little patience and unwillingness to hash out the small details that could save you money.
2. The insurance company performing the audit may multiply your previously projected sales by two and send you a bill for the additional premium.
3. If you renewed your insurance with the same insurance carrier that tried to unsuccessfully audit your business, the insurance carrier may elect to cancel your existing insurance policy.
4. The insurance carrier will turn he the debt over to a collections agency.

If you are thinking – “I will just get my insurance from another insurance company”, be aware that most insurance carriers will not want to work with a business that has been non-renewed because of a year end audit. This is a ‘red flag” that you are a problem client and will likely have the same problems with them, since sales audits are standard operating procedure in the product liability industry.