Guest post by Greg M. Doherty, CPCU, ARM
August 27, 2014
An increase in adverse event reports raises product liability insurance disclosure requirements for supplement companies.
It was recently reported that the number of government mandated adverse events reports (AERs) connected to dietary supplements has risen for six consecutive years. AERs reflect hospitalizations, life-threatening illnesses, deaths and other serious adverse events that are connected to supplement consumption.
According to FDA statistics, adverse event reports for supplements submitted to the agency in 2008-2013 were:
- 2013: 3,289
- 2012: 2,844
- 2011: 2,037
- 2010: 1,014
- 2009: 714
- 2008: 687
Is this increase good news or bad news for the industry? It depends who you talk to. Critics of the industry say this is long overdue, saying that even the 2013 number is just the tip of the iceberg, and that more aggressive regulation is needed by FDA, including pre-market product approval, to get to the bottom of the quality and safety storm surrounding dietary supplement products.
Industry advocates say the increase is merely the slow-but-sure progress companies are making in the implementation of best practices, part of which is driven by FDA’s public focus on compliance with AER reporting in its cGMP inspections. These advocates are quick to add that data alone do not necessarily suggest that supplement products are getting more dangerous. Indeed, according to a U.S. Government Accountability Office (GAO) report on AERs released in March 2013, of the total number of supplement AERs received by FDA from 2008 through 2011, the agency established a “certain” relationship between the product and the reported health problem in only 3% of cases.
Product Liability Implications
What does all of this have to do with your product liability insurance?
When I first wrote about this topic four years ago, so few companies had ever reported an AER that they were off the radar of virtually every insurance broker and insurance company professing to be “experts” at nutraceutical product liability insurance. Now, with the soaring incidence of AERs going to FDA, the topic needs to be examined in a brighter light. The issue for supplement companies, in a word, is disclosure.
Why? Virtually every application for product liability insurance for nutraceutical companies includes a question that asks: “Is the applicant aware of any fact, circumstance or situation which one might reasonably expect could give rise to a claim that would fall within the scope of the insurance being requested?” Companies must ponder this question carefully before responding either “yes” or “no.” If a company is maintaining the required AER records, can the company in good faith answer “no” to that question? Hardly.
Two important mechanics about product liability insurance need to be understood. First, applications for this insurance must be completed each and every year to secure a renewal policy. So every year a supplement company must answer the aforementioned question, thus “refreshing” either the yes or no answer that was given a year earlier.
Second, the “claims made” nature of the insurance plays a role in understanding this complex issue. Under claims-made liability insurance, coverage is triggered by the date a claim is actually made against you, combined with prompt notification to your insurer of the claim. The insurer’s policy that is in force on the date you became aware and gave notice is the policy that must defend and settle the claim. One must understand—and this is the crux of the matter—that AERs do not constitute a “claim” as defined by most of the insurers; so an AER is in a kind of limbo status as to where coverage will be triggered, if and when the AER matures into a bona fide claim.
So what are the possible consequences of answering the question incorrectly? Quite simply, if a lawsuit arises out of a previously documented AER incident, the insurance company will surely deny the claim once it discovers (and it will) the AER was documented in the company’s files, and not properly disclosed. The insurance company will allege fraud for inducing it to issue a policy based on concealed information. It will not only deny the claim, but most likely will seek to rescind the policy in its entirety. We have seen this happen.
Thus, AER requirements have introduced a new necessity to disclose such events to a product liability insurance company when applying for coverage, or risk claim denial when a claim is made—as unlikely as statistics make that possibility seem (remember the 3%).
The Other Side of the Coin
So you have followed the advice of your expert insurance broker and reported one or a handful of AERs to your insurer, with the full expectation that this disclosure will keep you out of trouble. What‘s next?
The unfortunate truth is that at the present time, the majority of the insurers offering product liability insurance to the industry do not understand the subject of AERs. What we have generally witnessed is that when they see an AER, they view it as a potential claim against them, rather than an incident that might give rise to a claim against them at a later date (again, remember the 3%). This lack of understanding restricts the number of insurers willing to offer a company with AERs the coverage they desire. Other times, we have seen the insurer significantly raise the client’s premium in anticipation of the reported AER to turn into a real claim.
One insurer has introduced an endorsement to its policy that states it acknowledges a reported AER will be a “covered claim” if it is made in the future, subject to underwriting the AER with available information. The problem, however, is that AER reports are often sketchy at best, offering very little detail as to the facts of the report. Recently, a client of this insurance company disclosed an AER, had the company agree to “cover” it via the special endorsement, and raised the premium rate by 35%.
In conclusion, the slippery slope of AERs and your product liability insurer is getting even more slippery with the increased reporting of adverse events. Be very careful or you may find out that your coverage has been voided at the worst possible time—after a lawsuit has been filed against you!
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 12 years. He can be reached at gdoherty@boltonco.com; Website: www.boltonco.com Phone: (626)535-1409.