How to make insuring tough product liability accounts easier

Skis, ladders, pacemakers and nutraceuticals may be different products at first glance, but all share challenges in finding coverage. According to Nan Meyer, product manager for Shand-Morahan, and David Rosenburg, wholesale broker with CRC Insurance Services Inc., who recently discussed “Insuring Tough Product Liability Accounts” as part of Insurance Journal’s “How to Write” Webinars sponsored by Markel Corp., such products as Lasik surgery equipment and implantables are tough risks to insure because they are experimental or invasive. Sporting goods, automotive parts and after-market products are often so revolutionary that, “there’s not a home for those,” Meyer said.

Nevertheless, such “tough” products to insure need coverage because of the potential legal liability that could be incurred because of an injury or property damage resulting from their use. And for those products, the manufacturers, importers, distributors and repackagers all face exposure.

Plaintiff attorneys will look at each entity in the product chain to assist in any type of injury or medical expenses related as a result of the use of the product, Meyer explained.

Even if the product manufacturer already has insurance, Rosenburg said a product distributor needs coverage. “Sometimes the manufacturers’ policies aren’t able to cover the losses that are related to those products,” he said. “Their policy limits could be exhausted.” When that happens, attorneys will often look to the distributor to recover damages.

“They are the ones who are … next down on the firing line,” Meyer added.

Worldwide defense
With today’s global business environment, distributors might need to consider worldwide coverage as well, Meyer indicated. As long as the United States has diplomatic relations with the countries the distributor is sending products to, the product can qualify for worldwide coverage. She recommended global distributors examine their design or other errors and omissions exposures worldwide.

Especially if the distributor is the first party responsible for a product as it enters the United States, it should consider products liability coverage to protect itself, Meyer said.

Foreign manufacturers are difficult to hold responsible for the products they manufacture, she explained. Lawyers will “look to the distributor, or the first entry in the United States, as the [party] that holds responsibility for the product,” Meyer said.

Covering claims
Generally speaking, products liability coverage is necessary to defend against three types of claims: design defect, foreseeable risk of harm or manufacturer’s defect, when a product departs from its intended design, Meyer said. “This could be something as simple as an ingredient being inferior to the original design of the product that was originally made by the inventor. And, there is failure to warn.”

Claims made programs
Meyer and Rosenburg advised difficult-to-insure products be underwritten in a claims made program. Such coverage is underwritten to a specific exposure in a specific time frame by identifying the exposure and what the claim could be.

With a claims made policy, pricing can be increased or decreased, and the ability to write those accounts increases. Insurers often offer higher limits for the first-time buyer at a lower cost, Meyer noted.

Claims made products include classes such as medical devices and instruments, chemicals and startup operations.

Claims made programs also are beneficial for price-sensitive situations, Rosenburg said. “Because we are measuring results in real time, we can react, affording us the opportunity to offer higher limits at costs often more economical for the insureds,” he explained.

Products with poor loss history also may be best-suited for claims made forms.

“Often the standard market will push those accounts off,”Meyer explained. “They are not used to those types of exposures, and severity becomes an issue.”

The speakers said products with poor loss history can be covered as long as agents can evaluate the problem related to the loss and evaluate the plan to correct the situation.

Additionally, claims made policies may be perfect for discontinued products, where some product is left in market that leaves potential liability, the speakers said.

“We’re happy to [cover discontinued products] on a stand-alone basis, or in conjunction with [a company’s] current portfolio of products,” Meyer said. In multi-year situations, she said a company might get product liability for a couple of years to fill a contract.

“Maybe it’s a buy-sell situation,” Meyer said, and the insurer can offer coverage for that. She advised agents to be creative to fit the insured’s needs with a program.

Recall expense
When a product is recalled, the policyholder may look to its insurer to provide reimbursement. A lot of the expense is related to the advertising, mailing, warehouse, secretarial staff and stationery, Meyer explained. Thus, some insurance companies are offering a sub-limit, two-year products recall liability and expense to provide recall coverage.

Additional insureds
The speakers suggested policyholders look at coverage for additional insureds. For example, contract manufacturers may be added as additional insureds on a distributor’s policy. In this case, a contract manufacturer is responsible for the manufacturing.

“They’re often using someone else’s ingredient or design, but they are manufacturing and control all the attributes of quality control. … It’s really not fair to put that type of liability onto a distributor,” Rosenburg said.

Meyer noted, however, that she would not include an inventor on a manufacturer’s or contract manufacturer’s policy because that person is just creating the design, not the product.

Agents can specifically name the additional insureds, or add them on a blanket basis, Meyer said, noting her company prefers the blanket basis, but entertains a named insured.

There are occasions when an agent would want to offer a limited form and exclude injury or property damage that occurs on a vendor’s premises, she added, such as when products are being sold in a nursing home facility or in a high-traffic store.

Agents also should consider vendors coverage for repackagers, Meyer said. Someone that repackages a product is changing the product, and thus, take responsibility for that product, she explained. On the other hand, someone that puts a label on a product is considered a re-labeler and does not need vendors coverage.

Underwriting the account
As when underwriting any other account, Meyers said agents should look at a company’s financials and loss experience, as well as whether the product is in a flat or growing market. Agents should analyze the application to determine what is the named insured and whether it is a viable U.S. entity, Meyer recommended. Agents need to know who the insured is, and whether the policyholder is a new opportunity for the company.

To view the entire Tough Products Liability Accounts Webinar, visit www.insurancejournal.com/webcasts/archives.php.