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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.

Product Liability Insurance Quote Tips

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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.