Another challenge facing cosmetic importers, distributors and retailers is liability insurance—in particular, product liability insurance. With the lines blurring between topical cosmetics and new products such as ingestible “beauty from within” products, it’s important to understand and manage the insurance procurement process for your company so that coverage is optimized at a competitive premium.
This article will examine the current trends and issues in these key areas.
Cosmetics are regulated by the Federal Food, Drug and Cosmetic Act (FFDCA) and the Fair Packaging and Labeling Act (FPLA). A cosmetic is defined by the FFDCA as an article “intended to be rubbed, poured, sprinkled, or sprayed on, introduced into, or otherwise applied to the human body or any part thereof, for cleansing, beautifying, promoting attractiveness, or altering the appearance,” (21 U.S.C. § 321(i)). In this regard, cosmetics are not required to obtain FDA approval of labeling prior to distribution, nor are they required to provide any level of substantiation regarding safety. Thus, the FDA’s regulatory authority is limited to post-distribution findings of misbranding or adulteration in cosmetics.
A cosmetic is misbranded if its labeling is false or misleading (21 U.S.C. § 362(a)). In this regard, FDA has recently issued warning letters to numerous cosmetics companies alleging that their respective products’ labeling, including websites and promotional materials, contained drug claims. Examples of the claims cited by the FDA, included, but were not limited to the following: “Assists in skin regeneration”; “Anti-inflammatory”; “Offers relief for rashes, eczema, psoriasis, and burns”; “Treats acne”; “Reduces visible redness”; “Treats dark spots and discolorations”; “Stimulates collagen production.”
According to FDA, these types of claims are drug claims in that they indicate the product affects a structure or function in the human body or treats, prevents or mitigates a disease (or the symptoms thereof). Under such circumstances, FDA determined the products were new and unapproved new drugs and therefore misbranded.
FDA also appears to be taking an aggressive approach toward finding adulteration with regard to cosmetics. In addition to sending warning letters, FDA has seized custody of products and ingredients intended for import into the U.S. on the basis of adulteration, as well as for misbranding.
The agency’s efforts to take a more active role in enforcement are coupled with recent Congressional efforts to give FDA more regulatory power over the cosmetics industry. Proposed legislation before Congress has sought to amend the FFDCA to require cosmetics companies to register their facilities with FDA prior to product distribution, as well as to require submission of ingredient statements to the FDA for pre-approval, among other things.
Taken together, the foregoing governmental actions tend to indicate a possible change in the climate toward the cosmetics industry. Those in the industry should take precautions now, including having all product labeling and advertising reviewed by counsel for compliance with current law prior to distribution of their products.
Product Liability Issues
Topical cosmetics, which include shampoos, oils, ointments, toiletries, skin and hair care products, perfumes and similar products have historically paid hefty premiums for their product liability insurance. Although premiums have fallen quite dramatically in the past 10 years, concurrent with falling premiums for the entire commercial insurance market in the U.S., premiums are still “high” in the eyes of most insurance buyers. Why is this so?
Like in the dietary supplement industry, liability claims against cosmetics companies can originate from several sources. First, every “body” is different and a topical cream that may cure a rash on your body may serve to exacerbate the same rash on someone else. Depending on the severity of the adverse reaction, a lawsuit may soon follow. Next, adulterated or contaminated products may be introduced in to the commerce stream, resulting from a manufacturing error, which in turn may generate scores of “bodily injury” claims, which will be covered by a product liability insurance policy.
Often I hear, “why do I need insurance? I’m only the retailer, how can I be at fault? I did not make the product that caused these claims.” The fact is that since you are in the stream of commerce, you will be sued with equal vigor as your supplier. Also, if you are a wholesaler or distributor, you may well be dealing with a customer that will not handle your product until they have evidence of your product liability insurance in hand.
Insurance Buying Tips
So how should a cosmetics company shop for product liability coverage and be confident of proper limits of insurance, coverage and a competitive premium?
The viable pool of insurers for cosmetics risks is quite thin. And to access them, you need an insurance broker. Some people have a habit of broker shopping, thinking that multiple brokers will afford maximum competition. However, all of the brokers will attempt to get quotes from the same insurers—a chaotic and unproductive process. You need first to shop around for a single competent broker, with knowledge and experience insuring other cosmetics companies, and then let that broker be your advocate to all viable insurers. Here are some additional criteria for selecting a product liability insurance broker:
• Understanding the Issues: Active insurance brokers with a specialty in cosmetics insurance appreciate the importance of understanding industry issues and take steps to stay educated, including attending trade shows and industry networking events. Companies can gauge a broker’s industry familiarity by the questions the broker poses about the company’s business operations. For example, a good broker could ask questions about your company’s good manufacturing practice (GMP) standards, manufacturing certifications and association memberships.
• Insurance Industry Connections: A competent retail broker should be able to readily name all of the current insurers for product liability and identify specific traits of each one (e.g., minimum premium, years of commitment to insuring the industry, financial rating, etc.)
• Logistical Abilities: It is critical to ensure the broker selected has adequate support staff to service your account—issuing certificates of insurance promptly and answering routine questions in a timely, accurate manner. In addition, the broker should be able to help you with issues not involving insurance, such as referrals to regulatory attorneys, GMP consultants, marketing and advertising consultants, all specializing in the same industry as yours—and his/hers.
Selection of the right insurance broker is an important matter. If the selection is made with these criteria in mind, the result will be maximized protection of company assets from insurable legal liability events.
Bolton & Company
Greg Doherty is a commercial insurance broker with Bolton & Company Insurance Brokers and Employee Benefits Consultants, Pasadena, CA. He is the executive vice president and managing director of the Dietary Supplement Practice Group for the firm, which specializes in the nutritional product and dietary supplement industries, including but not limited to contract manufacturers, raw materials suppliers, distributors/retailers. Mr. Doherty has four decades of experience as a broker, focusing solely on the dietary supplement industry for the last 14 years. He can be reached at email@example.com; Phone: 626-535-1409; Website: www.gregdoherty.net.
Joseph P. Schilleci, Jr.
Schilleci & Tortorici, P.C
Joseph P. Schilleci, Jr. is the managing partner of the Birmingham, AL, office of Schilleci & Tortorici, P.C. His practice focuses on representing dietary supplement manufacturers and distributors, as well as other regulated industries, in contractual issues and in regulatory matters involving advertising and labeling issues with the FDA and the FTC. He can be reached at 205-978-4211 or firstname.lastname@example.org.