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.

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.

The great thing about these add on endorsements are, they provide some product recall expense coverage at a much lower price than if a small business had to purchase a stand-alone or individual product recall policy.  Minimum premiums for a stand-alone product recall policy typically are in the $10,000 range per year and just too expensive for most small and start-up businesses to afford.  The product recall expense endorsements allow the small business owner to choose a smaller sub limit ($25,000 to $250,000) of their product liability limit to be used on for product recall and provides affordable premiums for 5% to 25% of the total product liability premium.  Some of the dietary supplement insurance carriers are offering $25,000 sub limits of coverage for as low as $500 or 5% of total premium, whichever is higher. 

Product recall or withdrawal is necessary when your product is deemed to have or suspected to have a defect that will potentially cause bodily injury or property damage.  The determination that a product needs to be recalled can be made by you or because a government entity has ordered you to withdraw your product from the market place.

Products recall expenses can include the following:

1. costs of notification;
2. costs of stationary, envelopes, product of announcement and postage or facsimiles;
3. costs of overtime paid to regular nonsalaried employees and cost incurred by your employees, including costs of transportation and accommodations;
4. costs of computer time;
5. cost of hiring independent contractors and other temporary employees;
6. costs of transportation, shipping or packaging;
7. costs of warehouse or storage space;
8. costs of proper disposal of “your products,” or product that contain “your products,” that cannot be reused, not exceeding your purchase price or your cost to produce the products.

The cost of getting this endorsement can vary greatly depending on limits of coverage you want, the type of products you sell and amount of product you have in the market place. 

If have any doubts about the need for product recall insurance, I highly recommend you go to www.recall.gov and look at the list of all the products similar to yours that are being recalled.  I believe you will quickly conclude that during the life of your business it is much more likely that your business will face a recall than a product liability claim.

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.

Why this is extraordinary is because in the past, manufacturers have used additional insured vendors endorsements as a way to entice retailers and wholesalers to sell their products.  By being additional insured on the manufacturer’s product liability policy, the retailers and wholesalers were reassured that they were protected in the event they were shotgunned into a products liability lawsuit for a manufacturing defect of the product.

This reversal by the manufacturers is due, in my opinion, to two different factors. The first reason may be because more manufacturers are using high self-insured retentions and loss-sensitive rating plans to save money on product liability insurance premiums. When using these methods to reduce their premium costs, manufacturers are likely to be required to come out of pocket for a large portion of the defense costs.  By eliminating clients as Additional Insureds, the defense costs would have to be covered by their client’s product liability insurance policy, thus, saving them a significant amount of money.

The second reason manufacturers may be reluctant to name their clients as Additional Insured is the manufacturers are not always the designer of the products they are manufacturing.  There are 3 legal theories of recovery in a product liability lawsuit – 1) Manufacturer Defect, 2) Design Defect and 3) Instruction and Warning Defect.  When a manufacturer names a client as Additional Insured on their product liability policy, the manufacturer’s policy is primary to their clients product liability policies and the manufacturer’s policy would have to respond to all product liability lawsuits, even if the reason for the lawsuits were for Design or Instruction and Warning defect.  When manufacturers are contracted to build products designed by others, they are not responsible for the design or instructions and warnings of the products and, therefore; do not feel it is their responsibility to cover these types of claims on a primary basis.  This type of manufacturer is often called a third party manufacturer because they are simply building products based on the specifications provided to them by other parties.

Since these third party manufacturers are not responsible for the design or the warning labels or instructions, we are seeing many of these third party manufacturers asking their clients and vendors to name them as Additional Insured on their policy.  The logic the third party manufacturers use to justify this request is that since they are making products to the specifications of their clients and not responsible for warning labels or instructions, they should be covered on the clients Product Liability policy. This is a very convincing argument and not without merit.

What is odd about this dilemma is there is not overt Indemnification agreement or contract that simply declares that the third party manufacturer is responsible for manufacturing defect and the designer of the product, which is more often than not, also, the seller, be responsible for design and instructions and warning defect claims.

If anybody is aware of such an indemnification agreement, please email or fax me a copy.  We would love to be able to recommend this to our clients as a simple way of resolving this troubling issue.

Over the last ten years Graco and Simplicity has distinguished itself as one of the most embattled and recalled company’s in the history of the United States, yet it seems to be able to continue to live up to it’s business model of delivering inexpensive baby and children’s products.  During this time, products such as cribs (suffocation), strollers (finger amputations), high chairs (falls), car seats (choking), toddler beds, swings, walkers, baby carriers, bassinets and toys have been recalled by the millions.  The cost alone to handle all the recalls and product liability lawsuits has to have reached into the hundreds of millions of dollars over the past ten years.  I guess the Civil Penalty imposed by the CPSC of $4M for not reporting known product defects in a timely manner must have seemed like a small slap on the wrist.

I have to believe somewhere some college professor is teaching a class based on the business model of Graco.  You have to give Graco their props.  Despite it’s name being negatively being associated with baby and children’s injuries and deaths and spending hundreds of millions in fines, product recalls and product liability lawsuits they appear to not only survive, but to thrive and remain profitable.

 Statute of Limitations laws place a time limit on how long an injured party has to file a product liability lawsuit, after the time of the injury.  After the time limit has expired, an injured party loses the right to file a product liability lawsuit, unless a legal exception applies. For most states, a product liability claim must be filed within 2 to 4 years, after the injury.

 While the Statute of Limitations appears to have less variability from state to state than Joint And Several Liability and Statute of Repose, the real variability lies primarily with the legal exceptions.  When legal exceptions exist, it allows the Statute of Limitations to stop running. Typical legal exceptions are when a victim was a minor or mentally incompetent at the time of the injury or the defendant is in bankruptcy.  For example, in the state of New York, a minor has 3 years after their 18^th Birthday to file a product liability lawsuit. 

Claims-Made Policies and Children’s Products

Because most states allow, at least, until the eighteenth birthday of a victim to bring a product liability lawsuit, claims-made policies are not a good fit for businesses that manufacture, import or distribute children’s products. 

To state it as simply as possible, once a claims-made policy is cancelled or non-renewed, there is no product liability coverage for any prior injuries or incidences involving your products.  To have a claim covered by a claims-made policy two things must exist – you must have the injury and the claim during the policy period.  In other words, you must keep renewing your claims-made policy or, if you switch policies, you must have the new insurance carrier to endorse your new policy to include the retro-date (original effective date of our first claims-made policy) of your first insurance policy.

The other issue for children’s businesses is the large retailers of children’s products are all too aware of the legal exception for minors that stop the statute of limitations from running.  As a result, most of the large retailers will require providers of children’s products to have an occurrence-based policy.  Unlike a claims-made policy, an occurrence-based policy only requires an incident or injury to provide coverage.  So all prior incidences or injuries to the cancellation or non-renewal of an occurrence-based policy would still be covered by the insurance company.

In summary, while it is tempting to purchase a claims-made policy because premiums can be 30 to 40% less than an occurrence-based policy, most of the major retailers are aware of the legal exception for minors and, as a result, will contractually require their vendors to have an occurrence-based policy in order to do business.  Also, from a pure risk management point of view, the owners, principles and stockholders of a children’s business should be able to sleep better at night knowing the occurrence-based policy will still provide product liability coverage for incidinces or injuries prior to the policy being cancelled or non-renewed.

One of the state laws that can have a major impact on the outcome of a product liability lawsuit is the Statute of Repose.  The Statute of Repose prevents product liability lawsuits against the manufactures, importers, designers and distributors of products based on the age of the product.  However, only 19 of the 50 states have Statute of Repose laws to protect businesses from product liability lawsuits.  Most of the states that have Statute of Repose laws limit product liability lawsuits somewhere between 5 to 12 years after the sale of a product.  Two states, Arizona and Rhode Island, have found Statutes of Repose laws for products unconstitutional.

One of the industries that is very familiar with Statute of Repose laws and the impact they can have on a product liability lawsuit is the Tree Stand industry.  For example, if a kid where to die or become a quadriplegic in a state with a 10 year Statute of Repose law and the age of the tree stand was 11 years from the date of sale, the manufacture, designer and sellers of the tree stand could be protected from a product liability lawsuit because of the 10 year deadline was exceeded.  However, in another state that did not have a Statute of Repose law, the manufacture, designer and sellers of the tree stand could find themselves named as defendants in a product liability lawsuit and, at the very least, incur discovery and settlement costs and, at the worst, large monetary judgments by a sympathetic jury.

This article supports a previous blog I wrote, “Health Supplements Biggest Problem – Undeclared Substances”.  In this blog I reference a study that indicates that up to 25% of all health supplements in the market could contain undeclared substances.  This study did not indicate that all the undeclared substances were harmful, but it is, just the same, disconcerting not knowing what is going into your body when you take a health supplement.

What I find fascinating is that while the folks at bodybuilding.com maintain that they were not aware of any unlawful substances going into their health supplements, I cannot help but wonder, since they were in the body building business, if they were trying to gain an unfair advantage over their competitors.  If you go to their website, you will see grandpa’s before and after pictures.  In the after picture, grandpa has a body most 26 year old guys could only dream of.  Give me what he is taking! On second thought, I think I will pass.  If steriods were unknowingly in his health substances, he could have an increased risk of heart attack, stroke and death, not to mention acute liver damage, shrinking testes and male infertility.

I wonder what Bodybuilding.com’s product liability insurance carrier is thinking.  My bet is their product liability policy has either been cancelled or they have been notified that they will be non-renewed.  The policy was more than likely a claims-made policy and once cancelled will not cover any of the  prior or future incidences by their customers such as liver damage, stroke, etc. that may have been caused by unknowningly ingesting steriods. 

I, also, wonder what person liability will be assigned to the owners or stockholders of the company in the future, if it turns out that there was knowledge that steriods were being used in their dietary supplements.  Every General Liability policy has an exclusion for intentional acts and even if a product liability lawsuit was filed against the company, it is likely their insurance carrier could deny coverage.  With no insurance coverage for the company, plaintiffs may have a case to go after personal assets of the company principles.

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.