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

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.

How Purchasing Foreign Liability Insurance May Reduce Your Product Liability Insurance Cost

Many of the U.S. manufactures and distributors that contact me looking for a product liability insurance quote and export products to countries outside the U.S. are often unaware there is often a large difference between U.S. product liability insurance rates and foreign product liability rates.  In many cases U.S. exporters are not always aware that another option exist because local and general agents are not aware of all the options when it comes to product liability.

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.

Understanding Minimum and Deposit Premium

Minimum and deposit premium is the amount of due at the inception of the product liability policy.  Even though the policy is “ratable (subject to adjustment based on rate per sales)”, under no circumstances will the annual earned premium be less than minimum premium.

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.

Why No Refund? – Understanding Product Liability Audits

One of the least understood things about product liability audits is the perceived unfairness of why there is no refund of premium at the end of the policy period from the insurance carrier, if actual sales fall short of projected sales.

An important point with product liability insurance is – the more sales you have the lower rate per $1000 of sales you deserve. In other words, if you have two distributors that sold the exact same products and one distributor had $1M in sales and the other distributor had $10M in sales, the distributor with $10M in sales should receive a lower rate per $1000 of sales than the distributor with $1M in sales.

The primary reason product liability insurance carriers do not offer full refunds, if actual sales fall short of projected sales, is it opens up to much of an opportunity for abuse by the policy holder by over estimating their projected sales and therefore, causing the insurance carriers to not earn a fair rate of return for the overall risk.

To better understand this point, see the two hypothetical illustrations below:

Illustration 1 – Based on current system in which no refund is provided if actual sales are less than projected sales.

• Projected sales are $15M
• Based on this projection, the insurance company provide you with a $8.00 per $1,000 of sales
• Annual premium or Minimum and Deposit Premium is $120,000

Illustration 2 – Insurance Carrier provides a full refund if actual sales are less than projected sales.

• Projected sales are $35M.
• Based on this projected sales, your insurance carrier provided you with a $6.00 rate per $1,000 of sales.
• Annual premium is $210,000
• At the end of policy period your actual audited sales are $15M.
• Because you receive $120,000 refund from the insurance carrier, actual paid premium is $90,000.

If the insurance carriers would offer full refunds when actual sales fall short of projected sales, there is not a business person alive today that would not invest $90,000, if they could guarantee a return of $30,000 at the end of twelve months.

Of course, the information above is an oversimplification and applies almost exclusively to Excess/Surplus product liability policies.  Excess/Surplus insurance carriers are responsible for providing product liability policies for most of the high risk products on the market and those products that may be unique or new to the market and not insurable by the admitted market insurance carriers. 

Product Liability Insurance Quote Tips

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.