Category Archives: product liability quote

Are Claims-Made Product Liability Policies Cheaper? Yes And No!

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One of the primary reasons many businesses purchase a claims-made product liability policy is the perception that it is cheaper than an occurrence based policy. 

On the surface, claims-made policies can be cheaper than their superior counterpart, occurrence based policies.  However, when you examine claims-made policies closer, you may find, in the long run, they can cost more than occurrence based policies.   This is something many agents do not tell their clients because they either do not understand claims-made policies or know most applicants focus on the short-term cost and it is easier to make a sale by having the lowest premium cost.

The first question that comes to mind is why are claims-made policies initially cheaper than occurrence based policies?  One answer is your claims-made insurance carrier has the option to cut their losses should a product or products be defective and have the potential to cause bodily injury or property damage.  Remember for a claim to be covered by a claims-made policy you must have both the incident  involving your product and the claim during the policy period or the Extended Reporting Period.  With an occurrence based policy you only have to have an incident or occurrence during the policy period in order to be covered.  So if your business where to release a defective batch of products into the market place and a product recall was necessary or you had a claim that was reported to your insurance carrier, your claims-made insurance carrier could cut their losses by canceling or non-renewing your policy.  The end result could be that you have defective products in the market place in which several incidences or occurrences of bodily injury or property damage have taken place with no coverage because the claims-made insurance carrier has cancelled or non-renewed your policy.   The uncovered cost of discovery and defense cost alone could bankrupt most small to medium sized businesses should they experience this type of scenario.

Another reason claims-made policies may be initially less expensive than occurrence based policies could be a recent Retro-Date of the policy.  A retro-date is usually established as the first effective date of your first claims-made policy.  If an incident or occurrence occurs prior to the established retro-date on a claims-made policy, there is no coverage for bodily injury or property damage claims.  If your retro-date is less than one, two or three years old, your insurance carrier typically is providing a discounted premium because there is a limited amount of your products in the market place. However, once your retro-date is over three, four, or five years old, the insurance carrier may see each additional year of your policy as another year of products being added to the market place and a higher probability that more incidences or occurrences will occur involving your products.  At this point your policy may start to equal or exceed the premium of an occurrence based policy.  Get six, seven or eight years into a claims-made policy and your premiums could be much higher than a comparable occurrence based policy. You also may find it impossible to switch policies because no other insurance carriers will pick-up the retro-date of your policy. 

So the moral to this blog is – when you first buy a claims-made policy the premiums will be cheaper than a comparable occurrence based policy; however, the longer you own a claims-made policy, the more likely your premium is going to increase and eventually be higher than an occurrence based policy.

Also, it is of critical importance not to lose the retro-date of your claims-made policy by letting your policy lapse or when you are changing policies because you will lose all of your coverage for any incidences or occurrences involving your products.  Any good risk manager will tell you that you should never assume just because you have never had any claims, it does not mean you do not have any incidences or occurrences involving your products.

A Better Understanding of Claims-Made Policies

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In many industries that sell high hazard products such as medical and children’s products, claims-made policy forms are very common. However, it is important to note that not all claims made forms are created equal.  There are two distinct types of claims-made policy forms.  One of the policy forms is the “Claims-Made & Reported Form” and the other is the “pure Claims-Made Form.”

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.

Many Broker of Record Letters Based On Deceipt

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Simply put, a Broker or Agent of Record letter allows an agent to take the quotes and work of another agent.  A BOR or AOR is a formal letter that gives an agent or broker authority to access insurance carriers that have previously been accessed by other agents or brokers and revokes those agents or brokers authority to deal with the insurance carriers on your behalf.

The letter will say something to the effect, “Please recognize (agency or agent with address) as my Broker of Record for all prior submissions. This authorization revokes any previous authorizations.”

Please note, I do not have a problem with BOR or AOR’s, if properly represented, but I am finding that more and more insurance agents are deceiving their prospects by asking them to sign a BOR letter and telling them it is standard operation procedure, when in fact, it is shrewd play to take the work of others.   

Below are some legitimate reasons you may want to provide an agent or agency a Broker of Record Letter:

  1. You are not receiving good service from your agent or agency.  If it takes days or weeks to get your agent to return your phone calls or it is difficult to get Certificates of Insurance to your clients, this may be enough to consider a BOR or AOR letter.
  2. You lack confidence that you agent or agency adequately understands your insurance needs.  Not all agents and agencies understand product recall or product liability insurance and as a result may struggle with providing the appropriate coverage and premiums.  The same could be said for contractors, trucking, doctors offices, etc.  Having confidence that an agent or agency specializes in your type of business may be reason to provide a BOR or AOR letter.
  3. A family member is in the insurance business. Let’s not be naive.  It is okay to support a family member and want them to do well in their profession.  However, it is not appropriate to seek other agents and agencies to do all the work with the intention of moving it over, after the work has been complete.  If the family member tried to help, but did not provide the best quote, it would not hurt my feelings or be unexpected for you to move your business with a BOR or AOR letter.

So the next time you are seeking multiple quotes from different agents or agencies and they send you a BOR or AOR letter and tell you it is standard procedure to secure quotes, you may want think twice about working with that agent or agency.  Trust and honesty are the most basic requirements for any type of relationship.

Sometimes It Is Not Your Product, But The Class Of Business

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Oh, the frustration! Why doesn’t anybody understand how safe my product is and give me a fair premium?

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.

Defense Costs Inside or Outside The Limits of Liability?

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When buying a surplus lines product liability insurance policy, you are often presented with product liability quotes that indicate the defense costs are inside the limits of liability.  If you read your proposal or quotes carefully, you will often see the option of adding defense costs outside the limits of liability for an additional 10% premium charge.

Why is this important? Before I can answer this it is important that you first understand what it means to have defense costs inside or outside the limits of liability.  If your defense costs are inside the limits of liability, any lawyer fees, investigation expenses, defense expenses and appeal expenses erode your limits of liability.  In other words, if all these expenses add up to $500,000 and you have a $1,000,000 per occurrence limit on your product liability policy, you only have $500,000 left to pay a judgment or settlement.   If your defense costs are outside your limits of liability, lawyer fees, investigation expenses, defense and and appeal expenses of a claim will not reduce your liability limits.

This may not appear to be a big deal on the surface, but if you had a bad batch of defectively manufactured products, you may find yourself faced with multiple claims.   Recent data indicates the national average cost to defend a product liability claim is $876,000.   A $1,000,000 per occurrence with a $2,000,000 aggregate liability limit could be exhausted very quickly and you could find your business with no limits left to pay the judgment or settlement of additional claims very quickly.

Once the liability limits have been exhausted, your insurance carrier no longer has any obligation to pay any claim, judgment or claim expense or to defend or continue to defend your company.

So when purchasing or renewing your product liability policy, review it carefully and if your defense costs are within the limits of liability, think very carefully about spending an additional 10% to add your defense cost outside the limits of liability.  It could mean the difference between success and failure as a business.

Tips for Startup Businesses Having Trouble Getting Product Liability

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I recently read a very good article, “When You Can’t Secure Product Liability Insurance” in BusinessWeek written by Karen K. Klein. 

In the article Karen pointed out the following points that make it difficult for startup businesses to get product liability insurance:

  1. Premiums for even low risk products are often too high relative to sales.  Minimum premiums can be between $2,500 to $5,000 annually  and can go up to $5,000 to $10,000 a year.
  2. Commissions for brokers are typically in the 7.5% to 10% range and as a result, there is not enough revenue to get a broker’s interest.   

Since we specialize in providing product liability insurance to startup businesses, I want to share the following tips that may help startup businesses, like yours,  secure product liability quotes and insurance:

  1. Have a business and marketing plan and be willing to provide it with your application.  Businesses that have gone to expense and trouble to put together a business and marketing plan represent, in the eyes of the insurance broker and insurance underwriter, a business that is serious about purchasing product liability insurance.  You would be surprised at how many applications we receive that do not have the basics such as estimated sales or limit of liability.  The higher quality submission you provide the more likely you will find people to help.
  2. Do not approach insurance agents or brokers for formal quotes until you are within 30 to 45 days of needing product liability insurance.  If the agent or broker specializes in product liability insurance, they can, usually, provide you with a premium indication without having to get the underwriter to prepare a formal quote by simply picking up the phone and talking with some of the various underwriters they work with on a regular basis.  
  3. Chose an agent or broker that specializes in product liability.  This is a highly specialized field and not all agents know how to approach the appropriate underwriters or underwriting groups to maximize you chances of getting a competitive  quote.  For example, it is possible that your local agent and I could approach the same insurance carrier, but through two different underwriting groups.  If you local agent uses an underwriting group that has no expertise in the type of product you sell, you will get a quote, but because of the underwriter’s lack of knowledge with your product you are less likely to get as competitive of a quote as you could have from the underwriting group that is familiar and has written similar products.
  4. Be honest.  If your words or application has inconsistencies, then this is a red flag that you are not a serious prospect or a problem prospect that is hiding something.   Experienced agents and brokers know that these types of prospects are the least likely to buy insurance and their time is usually best spent working on other accounts.
  5. As a last result, offer to pay a consulting fee to the insurance agent or broker based on the condition they will refund the fee if you purchase insurance.  As an insurance agent and broker, I constantly have to make decisions, based on past experience, on which applications to submit to the market.   It is our job to make sure we provide high quality prospects and applications to the underwriters so they earn a fair income for their time and effort.  If we bring the underwriters too many low quality prospects that do not buy insurance they may decline to work with us in the future.  As a result, we decline to work with many applicants.  By paying a consulting fee, your broker will know you are a serious prospect and may be willing to go the extra mile to help you secure product liability insurance.

Why Are Product Liability Minimum Premiums So High?

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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.

Understanding Strict Liability

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Many of the prospects that contact me have a difficult time grasping the concept of Strict Liability and how it impacts their business and product liability insurance.

First of all, strict liability requires no burden of proof that negligence exists. It only has to be proven that the product was the approximate cause of the bodily injury or property damage and that the product defect was a result of a design defect, manufacturing defect, improper warning or improper instruction.   Secondly, when a plaintiff brings a product liability lawsuit, they are not required to make a choice between design defect, manufacturing defect or failure to warn defect and may elect to use all theories to support their case.

Prior to 1963, injured parties had the burden of proof that negligence existed in order to be compensated for their injuries.  After 1963, due to the Strict Liability doctrine, the costs of injuries shifted to those who market the products – the manufacture, wholesaler, distributor and retailers. 

Basically, the logic behind Strict Liability is that the manufacturers, distributors and retailers of a product that causes bodily injury or property damage are more responsible than the consumer that was injured or suffered a loss and are in a better position financially to accept the burden of making the consumer whole again.

10 Ways A Non-Manufacturer Can Be Held Liable As The Manufacturer

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When can a retailer, assembler or distributor be viewed as the manufacturer in courts for product liability claims?

Most retailers, assemblers and distributors of products are not aware of real degree of liability for which they are responsible.  Below are 10 ways you may be ultimately responsible for a defective product even though another manufactured the product:

  1. You rebuild or remanufacture a product for resale;
  2. You exercise control over the manufacturer such as providing product specifications;
  3. You are the successor of a manufacture of an injury-causing product;
  4. You are an employer and you modified a product or manufactured a product that injured your employee;
  5. You represent yourself as the manufacture of the product to the public;
  6. You apply your name, tradename or trademark to the product;
  7. Your advertising leads the public to believe you are the manufacture;
  8. Your sales methods leads the public to believe you are the manufacture;
  9. The seller of the product is a subsidiary or agent of the manufacture and the manufacture exercises control over the seller;
  10. You are the importer and distributor of a foreign product.

It is important that if a manufacturer makes a product for you that you clearly identify the manufacturer on a label or other markings of the product and you distinguish yourself as a distributor by “distributed by” or “made for” wording on the label or product.

My Product Is Safe – That’s What They All Say!

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Possibly the most over used comment by product liability prospects is ‘my product is safe’ and usually followed by something regarding a low insurance premium because the product is so safe.

What I find most difficult about this statement is there is almost never any independent test data to back up these assertions and the products that are so safe are often being imported from a foreign manufacturer where the prospect likely has little or no control on the overall quality control.  However, those that do have independent test data to back-up their assertions are typically very well received by the product liability insurance underwriters and do receive better than average insurance premiums and rates.

Even if you product is safe, it is important to understand when you purchase insurance, you are participating in a product liability pool with businesses that sells products similar to your own or a similar class of products such as sporting goods, dietary supplements, etc.  One or two product liability claims can result in sever losses by your product liability insurance carrier; even if was not your product that caused the loss.

If you are one of the many that believe being a product liability insurance carrier is a license to print money, I strongly recommend that you go to www.recalls.gov.  The number of recalls in just one month will astound you.  To have a product recall there must be imminent danger that the product in question could or has caused bodily injury or property damage so all of those products being recalled represent potential product liability lawsuits.