04 Oct Tips & Tricks For Walking The Insurance Application Minefield
Product liability insurance applications can be challenging to complete, so companies need to be diligent.
Every day we send out applications for product liability insurance to supplement companies that have contacted us for coverage. In addition, the process requires that our existing customers “re-apply” with a new application each time they renew their coverage with us.
Why is this so? It seems like it should be easier, right? After all, most businesses don’t change that much year to year, except for maybe variations in revenue. Why do these insurance companies make you answer the same questions over and over, when so many of the responses are the same year after year? This article will shed some light—and hopefully some understanding—on this process.
The Importance of the Application Process
You might not think much about the process of completing an insurance application, whether it’s for product liability or any of the hundreds of types of insurance coverage available to individual consumers and companies. But it is important if for no other reason than the insurer is expecting you to give complete and truthful answers. If you don’t, either inadvertently or on purpose (commonly called fraud), the insurer will likely attempt to rescind coverage at the worst time, that is, after you have been involved in a claim.
So remember that although the application process may be frustrating on many levels, it is important for you to pay attention to your answers, and make sure they are truthful and complete. If you aren’t sure how to answer a question, call your broker for help. Don’t guess.
One Size Fits All … or Not
If insurance companies set out to have a customized application for each and every vocation or business type, they would need hundreds if not thousands of people working full time to keep up with the changes necessary to keep the applications relevant in this fast-changing world. So they try to design “one size fits all” applications. In the case of the dietary supplement and herbal products industry, they design an application that covers three broad categories all in one application: raw material suppliers, contract manufacturers, and brand owners (retailers/marketers). And thus, frustration is born.
For example, when asked to answer questions about GMP processes, quality control, recordkeeping, etc., as a brand owner, you rely on your contract manufacturer to do those things properly, so you may not know how to answer these questions.
But answer them you must. If you leave the answer blank because you don’t know the answer, that immediately raises a red flag (“what are they hiding?”). If you guess and answer wrong, the potential consequences could mean loss of coverage. Again, if you have questions, rely on a competent broker who is very familiar with these applications to help you.
The Tricky & Dangerous Application Questions
Insurance companies are also putting ambiguous, open-ended questions on their applications. Although I’m sure their intentions were good—after all, they are just trying to ask questions that will differentiate a “good” risk from a potentially “bad risk,” the result is the same. Here are some examples that will be found on the majority of product liability applications for dietary supplements and herbal products.
The first questions is: “Do you know of any event or circumstance that might give rise to a claim under this proposed insurance?” Doesn’t sound too bad, right? But what if in the past year you have dutifully filed two Serious Adverse Event Reports in connection with the use of your product, as required by law? By the definition of an SAER, those reports involved some kind of injury or death from the use of your product, which would be events covered by the insurance. If you answer “no” and fail to disclose the SAER to the insurer, you could be setting yourself up for big trouble, even though the question was not specifically about SAERs.
Next, here are two questions that are now part of one carrier’s application for product liability insurance: “Are you fully compliant with FDA current Good Manufacturing Practices (cGMP)?” “Do you have a formal, written internal Quality Assurance program that is fully compliant with all applicable federal regulations and industry standards?” Remember you have to answer “yes “or “no.” Do you see how dangerous these questions are? What does “fully compliant” mean? GMPs are a function of regulations arising out of the Food, Drug and Cosmetic Act (FDCA) and the Dietary Supplement Health and Education Act (DSHEA), not FDA, so the question is flawed. And what exactly are “all applicable federal regulations and industry standards?”
What if you answer “yes” to the first question, and then three months later have an FDA GMP inspection that results in some “inspectional observations” (as FDA calls them), and three months after that you have a product liability claim? Will this carrier then argue that you have effectively lied on your application and use that as a weapon to rescind your policy? Do not dismiss the possibility.
Here is one last question that many of the insurance applications ask: “Have any of the Applicant’s products or ingredients or components thereof, ever been the subject of any investigation, enforcement action or notice of violation of any kind by any governmental, quasi-governmental, administrative, regulatory or oversight body?” Read this one again; this is a very broad question. Think about DMAA or ephedra or any one of many ingredients that were under scrutiny for a while before being banned or effectively banned by FDA. Does this scrutiny amount to an “investigation?” If you have carelessly answered “no,” without thoughtful pause, you may run the real risk of having your coverage rescinded by the insurance company.
So when completing your next application for product liability insurance remember these tips and tricks and be careful answering those potentially problematic questions.