Tough products don’t need to be a challenge to write

Skis, ladders, skateboards, pacemakers and nutra-ceuticals may be different products at first glance, but all share the same challenges in finding coverage in the insurance marketplace. 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, such products as Lasik surgery equipment or implantables are tough risks to insure because they are highly experimental or invasive. Products such as new sporting goods, automotive parts and after-market products are often so revolutionary that, “there’s really 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 the use of the product. And for such products, the manufacturers, importers that bring the products into the country, distributors and repackagers all face exposure.

Plaintiff attorneys will look at each entity in the chain of a product being placed on the market 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 distributor of a product also needs coverage. “Unfortunately, sometimes the manufacturers’ policies aren’t really able to cover the losses that are related to those products,” he said. “They may, for whatever reason, have a product that generates highly severe losses, which means their policy limits could be exhausted. Or the [manufacturer] might just not purchase enough product liability limits to anticipate the type of losses they would have.” When a manufacturer’s policy is exhausted, attorneys will often look to the distributor to recover damages, Rosenburg said.

“They are the ones who are really the next down the line on the firing line for the plaintiff’s bar to attack,” when looking for economic reimbursement for financial loss, Meyer added.

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

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 a little more problematic for the insurance industry because of the difficulty in holding them responsible for the products they manufacture, she explained.

What lawyers will do in that case “is look to the distributor, or the first entry in the United States, as the one that holds responsibility for the product,” Meyer said. “We look to them in terms of underwriting exposure. We want to be sure that they are able to assist in the defense of a claim should there happen to be a situation in which the manufacturer is not liable.”

Covering claims
Another reason why products liability coverage is needed is to defend against claims, according to Meyers. She identified three types of claims: design defect, foreseeable risk of harm or manufacturer’s defect, when a product departs from its intended design. “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,” she said.

Meyer recalled the famous McDonald’s coffee claim, in which a customer of the burger chain burned herself while driving with the restaurant chain’s coffee in her lap. She said there was a lot of back and forth on why that claim occurred.

“While the plaintiff probably had responsibility for driving with hot coffee in her lap, there is the question of why McDonald’s was making the coffee so hot,” she said. “One theory is that the [workers] were making it that hot due to the fact that they had free refills.”

Claims made programs
When writing products liability, the speakers advised difficult-to-insure products could 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 potentially could be, they explained.

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

With a claims made policy, results are measured in real time, looking at real time results, so that they pricing can be increased or decreased, and the ability to write those types of accounts is increased. Insurers often offer higher limits for the first-time buyer at a lower cost, Meyer noted.

Rosenburg added, that for “people who are in price sensitive situations, a claims made program provides them the best program to meet their budgetary concerns. With the claims made product, because we are measuring results in real time, we can react, affording us the opportunity to offer higher limits to them, at costs often more economical for them and for the insureds,” he said. Higher limits of $3 million to $5 million are often available to insureds with those types of needs, he added.

Another type of product that may seek to be written on a claims made form are those with poor loss history, the speakers said.

“Poor loss history is another example of those types of products best-suited for products liability claims made coverage forms,” Meyer said. “Often the standard market will push those accounts off. They are not used to those types of exposures, and severity becomes an issue.”

The speakers said products with poor loss history can be underwritten as long as the agent and insurer can evaluate what the problem was related to the loss, and what the action plan is to correct the situation.

Additionally, claims made policies may be perfect for discontinued products. Some manufacturers may have products or great ideas that don’t quite get off the ground and effectively end up being discontinued, although some product is left in market where there is potential liability, the speakers explained.

“We’re often asked to cover those types of discontinued products,” Meyer said. “We’re happy to do that on a stand-alone basis, or in conjunction with [a company’s] current portfolio of products.”

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 now are offering a sub-limit, two-year products recall liability and expense, so that the policyholder has coverage during a recall.

Additional insureds
Then, the speakers suggested policyholders might want to look at coverage for additional insureds, defined by Meyer as a person or entity who is protected under the terms of the contract.

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 product it is manufacturing.

“They effectively are the manufacturer,” Rosenburg said. “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.”

Meyer said, however, that she would not include an inventor on a manufacturer or contract manufacturer’s policy because that person is just creating the design, not actually making the product. “The actual one who has responsibility for the product is the contract manufacturer, not the inventor. [The inventor’s] exposure is very slight.”

Agents can specifically name the additional insureds, or add them on a blanket basis. “There’s no need to add individual vendors,” Meyer said, noting her company prefer the blanket basis, but on occasion, will entertain 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.

Underwriting the account
As when underwriting any other account, Meyers said it is beneficial to look at a company’s financials and loss experience to be sure that the business is “financially sound.”

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