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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.

3D Printers Will Change The World As We Know It

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 After reading an article, “The Printed World”, in the February 12th issue of The Economist, I was taken back at the possibility of a new world of innovation where it will be just as cheap to produce single items as it is to make thousands of items and therefore, undermine the whole concept of economies of scale and how businesses bring products to the market.

3D printing or additive manufacturing, as it is also called, is a technology that will change society so profoundly it defies the imagination.  Think of a world where products being made no longer have go through the start-up steps or costs to be manufactured, where anyone with an imagination can bring a product to reality and manufacture 10 units to determine if there is a demand for the product. No molds or lathes required, just a computer and a 3D printer.  Inventors and start-ups will thrive, as never before seen in the history of man because making and trying new products will become less risky and expensive. 

For example, under today’s standards of manufacturing, to make a plastic part you need to create the mold.  To make a completed product several molds may need to be made before the product is ever completed and brought to market.  To offset the fixed costs required to make the molds, assemble and deliver the product to market, a product must be mass produced and sold by the thousands, thus creating the economies of scale.  With additive manufacturing or 3D printing, you pull up the blueprint on your computer screen, make the necessary changes to the shape and color and then press print.  A machine or 3D printer builds the product by progressively adding on material, one layer at a time.  No molds or factories are required. 

Today, most 3D printers are used primarily to build prototypes and then current manufacturing techniques such as molds and reduction machining are used to build the final products. Currently, only 20% of the output of 3D printers are used to build the final products.  However, by 2020 it is estimated final products produced by the 3D printers will grow to 50%.  In 50 years, it is possible that complete planes, trains and automobiles and anything else you can imagine will be made entirely from 3D printers.

The other great thing about 3D printing is it not just limited to consumer products. 3D printing has already progressed into the areas of human health.  In the future, it may be standard practice to print replacement parts for the human body from layers of human cells.  A company called Organovo apparently has already managed to make blood vessels and cardiac tissue via a printer that dispenses cells instead of ink. 

From an insurance point of view, there are going to be some monumental hurdles to be cleared.  How does a business protect it’s intellectual property rights, if anyone with a 3D printer can make an exact replica of their product almost immediately after it has hit the market?  Because products can be duplicated so quickly, will this cause businesses to push to get products to market quicker; therefore, forgoing valuable testing to make sure the products are safe for the consumers?  How will the patent offices keep up all the new products? And will a businesses want to submit their products to be patented because of the risk of notifying potential competitors to their new products?

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.

Drop Down Cribs Being Recalled By The Millions

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The CPSC has announced a voluntary recall of over two million drop down cribs.  The companies affected by the recalls are as follows:

  • Child Craft (out of business)
  • Delta Enterprise Corp of New York, NY
  • Evenflo of Miamisburg, OH
  • Jardine Enterprises of Taipei, Taiwan
  • LaJobi of Cranbury, N.J.
  • Million Dollar Baby of Montebello, Calif.
  • Simmons Juvenile Products, Inc. of New London, Wis.
     

Apparently, drop down cribs have a long history of problems and are known to be less structurally sound than four fixed side cribs.  In the last 5 years, more than 9 million drop down cribs have been recalled from the market.  They are also more suscetible to age related wear and tear and incorrect assembly than the fixed side cribs.

If you want to know more about crib safety, go to JPMA Crib Safety.

Graco And Simplicity In The News Again

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How does the Graco and Simplicity product name survive and apparently continue to thrive, when it seems it has a major product recall about every other month?

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.

Retailer Will Pump You Up With Undeclared Steriods

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I just read an online article, “Retailer Pulls Supplements with Alleged Steriods”, in which online retailer Bodybuilding.com is having to recall lots of 65 dietary supplements that are believed to contain steriods such as androstenedione, superdrol, madol and tren.

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.

Health Supplements Biggest Problem – Undeclared Substances!

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One of the biggest issues facing the health supplement industry is the frequency in which undeclared substances find there way into the products.

One commissioned study conducted by Informed-Choice indicates that approximately 25% of supplements in the market could be contaminated.

Some of the undeclared substances in supplements found could be deadly.  One example of this is when the undeclared drug, Sildenafil, an active drug ingredient for erectile dysfunction, was found in the product STEAM, made by Nutracoastal Trading, LLC.  When Sildenafil interacts with Nitrates, the result could be a lowering of blood pressure.  People with diabetes, high blood pressure, high cholesterol or heart to disease often take nitrates and if combined with STEAM, could have faced life threatening consequences. 

In other cases, there could be financial impact to those that take supplements that have undeclared substances. It seems that almost every week there are athletes in the news claiming that the supplements they were taking had undeclared substances that caused them to fail a drug test. Sometimes the athletes are right. A good example is in 2004 Triathlete, Rebeka Keat, tested positive for norandrostendione and was suspended for two years for failing the drug test.  With the help and support from her sister, her name was finally cleared when the WADA laboratory  tested the supplements  she was taking and found that they were contaminated with norandrostenedione.

Since my job is product liability insurance, what I find most interesting is the question of whether or not product liability insurance would cover both of the supplement manufacturers/distributors in the above mentioned cases.

In my opinion, the first case Nutracoastal Trading, LLC is a slam dunk and should be covered by product liability insurance; however, the second case, involving Rebeka Keat, is not so clear and the manufacture/distributor may not be fully covered by their product liability policy.

In the first case, since the trigger for product liability coverage is bodily injury or property damage, the manufacture/distributor of STEAM should be covered by their product liability insurance policy, since the lawsuit would likely be a result of an interaction of Sildenfil with Nitrates and likely lead to bodily injury or death.

In the second case, it is not as clear whether or not there was any bodily injury.  The attorney for Rebeka Keat could claim emotional distress and trigger the bodily injury coverage of the product liability policy and possibly receive judgment or settlement compensation. However, much of the damage to Rebeka could have been more economic in nature such as the loss of current and future sponsors.   While the product liability insurance carrier may have a duty to defend the manufacture/distributor of the supplement that caused Rebeka to get banned from competition, any attempt to recover economic losses would likely not be covered by the product liability insurance policy, since there was no bodily injury or property damage to trigger coverage.

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.

Children’s Product Companies Are Getting Buried By High Cost of Compliance

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With the economy going south the Consumer Product Safety Improvement Act of 2008 could not have come at a worse time for small businesses that manufacture or import children’s products.

The real question on the minds of most small businesses involved with children’s products is – will the new chair of the Consumer Product Safety Commission, Inez Tenenbaum, bring relief to small business or will she simply be the enforcer of the new Consumer Product Safety Improvement Act (CPSIA) of 2008 and force most out of business because of the high cost of legal compliance?

The first thing Ms. Tenenbaum will need to do is clarify the agency’s position regarding testing, labeling, tracking and it’s current ban on the sale of existing inventories.  According to the CPSIA of 2008 all children’s products will have to be tested for safety by an independent testing lab certified by the CPSC.  Warning Labels will now need to be on the product, packaging, Internet sites and catalogs and comply with a specific layout, type, language, color and placement.  Tracking must be on each product and show source of product, date manufactured and batch or run number.

If Ms. Tenenbaum simply chooses to be the enforcer of the CPSIA of 2008, most small children’s importers and manufacturers will be forced out of business because they are barely surviving due to current recession and the high cost of legal compliance will, likely, be the final nail in the coffin. 

Those choosing to continue to import and manufacture children’s products will not have the luxury of easing into the market place.  They will need deep pockets to support their efforts and a marketing plan that will have be aggressive so they can sell enough products to offset the increased investment cost.