Recently I had my annual physical, and my doctor recommended a couple of preventive medicine procedures in pursuit of my long-term health, which I thought was great. But she cautioned me as well. “None of the costs of these tests will be covered by your health insurance,” she said. “Health insurance companies are just continuing to raise their premiums and narrow the scope of services they will pay for as part of their coverage.”

This got me to thinking about the current state of product liability insurance for dietary supplement companies on all levels: raw materials suppliers, contract manufacturers, wholesale distributors and retailers. The trend of continuing to narrow coverage is exactly the same as those health insurers my doctor was lamenting about.

Two years ago I wrote about certain exclusions that are often deeply buried in some polices and that most policyholders certainly weren’t aware of. These included the usual ingredient exclusions (which most people in the industry are indeed aware of), and certain “hidden” exclusions mostly aimed at specified “reporting requirements” the insurer imposed as a condition of coverage. This article will identify newer exclusions and limitations that have been imposed by some carriers recently.

Batch Clause Warranty
When purchasing any commercial insurance policy, you need to be wary of any coverage part that puts you in a position of warranting anything, as a condition of coverage. Unfortunately, these warranties are appearing more often, both in applications as well as endorsed onto the policies themselves. One carrier has an endorsement always buried deep in the policy—and, unfortunately, virtually never disclosed by the insurance broker—that requires you to warrant the following as a “condition precedent” to coverage:

• You will maintain a formal and complete quality control program that meets industry standards for safety and efficacy;
• That all of your products will be free from contamination;
• That all of your products’ ingredients are consistent with the labeling;
• That the above processes involve regular testing of all batches and that you will maintain formal controlled records of such testing for a period of not less than three years and supply such records to the insurance company.

The endorsement ends with this statement: “Failure to comply with these conditions shall void any and all coverage available to you, and the insurance company shall have no duty to defend or respond to any claim if you do not maintain the above described quality controls.”

Just how scary is this? What is the definition of “industry safety and efficacy standards?” Will the insurance company decide unilaterally after the claim comes in (or, more likely, the courts after you have to sue your insurer)? And your products must be free of contamination in order for coverage to respond? What a Catch 22! If your product is inadvertently contaminated and injures a claimant, this wording would appear to bar coverage, when you need it the most—after a claim has been filed against you.

The requirement for proper labeling seems odd, as label substantiation claims are not covered by insurance policies. This seems to be just another method for the insurance company to deny a claim. And do you think the policyholders of this company’s product liability policy know they are supposed to be sending their carrier copies of their testing results? I would be shocked if a single one of those policyholders is complying with this warranty.

New Dietary Ingredient Exclusion
Another carrier came up with the following limitation just recently. It’s an exclusion that can be paraphrased as follows: Any of your products containing a New Dietary Ingredient, as defined by the United States Food and Drug Administration unless you have first complied with applicable regulations applying to New Dietary Ingredients.

Let’s just cut to the heart of this one. The NDI notification process is complex. According to one source, more than 80% of NDI notifications are rejected by FDA. NDI notifications are most often rejected due to insufficient evidence for safety, the absence of required elements, as well as lack of knowledge and experience with preparing such notifications. Furthermore, NDI regulations are still in “guidance” mode, which means they are not finalized and they are not law. Industry has complained loudly about the complexities and confusion surrounding the current guidance. So how can an insurance company come up with an exclusion like this, which merely makes the coverage their policy provides even murkier? Well, they did, and you’ll find this one buried deep in the policy as well. 

Proposition 65 Coverage
Insurance companies have been window dressing their polices in recent years touting Proposition 65 coverage. Let’s see what is really there. First of all, the coverage is always subject to a “sub-limit” of insurance, usually $25k or $50k. This isn’t very much, considering that it is also subject to the same deductible as the product liability section of the policy (which may equal or even exceed the sub-limit provided). One source pinned the average cost of a Prop 65 action at around $100k. So what “coverage” is really being provided under these conditions?

One insurance company in particular brags about its Prop 65 coverage, but will only cover civil fines and penalties (that’s in the fine print, not surprisingly). Statistics show that of all Prop 65 claim settlement dollars, civil fines and penalties only add up to about 15% of total payments. So again, what are you really getting here? Not much.

In conclusion, be careful when choosing a product liability insurer for your company. Often we see a company being encouraged to buy a policy from a carrier with exclusions like the Batch Clause Warranty or the NDI exclusion, and the broker delivering that quote has no idea of the existence or gravity of that exclusionary wording, let alone the soon-to-be policyholder. In the case of Prop 65 “coverage,” all that glitters is certainly not gold. Be wary, as my doctor pointed out, about things no longer covered by your insurance company, or things you assume would be covered but are not.

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Greg Doherty
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 gdoherty@boltonco.com; Phone: 626-535-1409; Website: www.gregdoherty.net