Insurance brokers specializing in dietary supplement firms seek new coverage avenues as many manufacturers have cleaned up their act and lowered their product liability risk.

Marketers and distributors now have the opportunity to take out policies covering legal claims made against them for false advertising, lawsuits under California's Proposition 65 and "cyberliability" issues.

Additionally, as more mainstream insurance companies expand into covering supplement firms, some see an accompanying need to educate those carriers on the supplement industry’s regulatory issues and risk-mitigation realities.

The evolving state of insurance coverage reflects the dynamic nature of marketing strategies and regulatory pressures affecting the supplement industry, says Dick Griffin, an insurance program manager specializing in natural products.

"Over the years, everything has changed," said Griffin, who works with supplement companies through Grifcon Enterprises Inc., based in Lincoln, Calif.

Notably, FDA forced the withdrawal of ephedra-containing products from the market and promulgated good manufacturing practices for dietary supplements, significantly reducing risk and losses in the industry, which subsequently became more attractive to underwriters.

Media risks "were not covered by insurance historically. Advertising was a very restricted coverage and very few people had the opportunity to buy that because of costs." – insurance program manager Dick Griffin

Add to those developments a soft insurance market in recent years and product liability premiums have plummeted. Griffin estimated a supplement firm with about $500,000 in sales would have paid $8,000 annually for coverage in 2005, and now would pay $2,000.

Product liability insurance primarily safeguards against costs associated with a consumer suffering bodily injury or death from use of a product.

Supplement companies entering the market may face sizable investments to comply with GMP provisions, but the low cost of insurance is one less barrier to entry, Griffin added.

Though buying insurance is often "the last piece of the puzzle they want to deal with," small start-ups in the supplement industry eventually come around when they discover retailers require suppliers to have insurance, said Jason Simon, a senior VP of financial services at Mesirow Financial.

New Insurance Products Bubble Up

Industry observers say in recent years the number of major insurance carriers covering supplement companies has grown substantially – from three or four to as many as 20 today.

With supplements emerging in the world of mainstream insurance, specialized brokers are exercising their expertise in the industry by providing policies beyond the scope of generalists.

Simon says product recall insurance coverage could prove important for food and supplement companies, now that FDA has mandatory recall authority for food products under the Food Safety Modernization Act.

Intellectual property insurance – covering the legal costs of litigating or defending a patent infringement suit – also may increase in popularity as more supplements are formulated with proprietary ingredients. However, such coverage is often prohibitively expensive, Simon added.

Griffin believes he has the next big insurance product for the supplement industry in his portfolio.

Working with insurance company Ryan Specialty Group, Griffin helped develop and now offers a "converging risk liability" policy, aimed at mitigating areas of media risk that have surfaced for supplement, food and natural product companies.

"These areas were not covered by insurance historically," he said. "Advertising was a very restricted coverage and very few people had the opportunity to buy that because of costs."

The policy offers a la carte coverage options, including content liability insurance for false advertising in traditional and social media. The policy will pay up to $10 million to cover costs relating to resulting legal claims made under false advertising statutes.

Costs relating to "any actual or alleged false advertising or unfair or deceptive trade practice with respect to the advertising or sale of an insured's own products, publications or service, or any unfair competition allegations arising out of the foregoing" would be covered, according to the policy.

Likewise, the costs of defending against suits brought by the state of California under Prop 65 – regarding allegedly insufficient consumer warnings of carcinogen exposure in products – would be covered under a content liability portion of the policy (Also see "Arbitrary Or Not, Prop 65 Standards Look Likely To Continue – Experts" - Pink Sheet, 23 February, 2009.).

Griffin said he has heard a growing chorus of calls for Prop 65 coverage, especially as even a dropped suit under the law can cost a firm as much as $80,000 in initial defense costs.

Another offering under the converging risk liability policy includes coverage for wrongful acts, such as errors or omissions, arising from professional or technology services

Finally, the policy’s privacy/network security coverage addresses cyberliability issues, such as a security breach of an e-commerce website.

False Advertising Coverage Walks A Tightrope

Greg Doherty of Poms & Associates Insurance Brokers is interested to see how the false advertising coverage plays out – he previously tried without success to develop a false advertising policy.

"I could not get any underwriter even vaguely interested in doing that," said Doherty, Poms' dietary supplement practice leader based in Woodland Hills, Calif.

Potential losses from false or misleading advertising can be "catastrophic," he said.

"The vast majority of underwriters that underwrite these policies have almost no insight or clue as to what's happening in the supplement industry." – Poms & Associates broker Greg Doherty

Case in point: Around the time Doherty was shopping the coverage, Airborne Health Inc. was the target of Federal Trade Commission enforcement and a class action lawsuit over unsubstantiated immunity claims for its Airborne supplements. The firm agreed to a combined consumer redress settlement totaling $30 million (Also see "FTC Settlement Looks To Ground Airborne Claims" - Pink Sheet, 18 August, 2008.).

Additionally, underwriters likely will balk at covering advertising that could be illegal and open to regulatory enforcement, Doherty added.

Ensuring Insurance Understanding

Doherty says he is less focused on offering new types of policies than on fostering mutual understanding between the supplement and insurance industries.

Serious adverse event reports from consumers represent a prime area of confusion between insurers and the insured. Carriers, Doherty said, are prone to "knee-jerk reactions" upon learning about a firm's AERs, even though the supplements may not be at fault.

Conversely, although companies for the most part know to submit AERs to FDA as required by the Dietary Supplement and Non-Prescription Drug Consumer Protection Act of 2006, many are not passing them along to their insurance carriers.

Red Flag Ingredients For Insurers

Androsteredione
Aristolochic acid
Bitter orange
Creatine
Collodial silver
Dehydroepiandrosterone (DHEA)
Gamma hydroxy butrate (GHB)
Germander
Hoodia
Kava-Kava
Pennyroyal oil
Steroids or anabolic hormones
Yohimbe

"There was no connection between that process and over here disclosing the AERs to the carrier, which … is required on every application for insurance," Doherty said.

He also attempts to clarify for supplement companies the types of supplement ingredients that raise red flags for insurance underwriters.

While many ingredients that carriers will not cover or for which they require additional insurance likely are no surprise – yohimbe, kava and steroids are among them – some insurers will question seemingly safe ingredients like green tea, Doherty said (see box this page for selected supplement ingredients that typically raise red flags with insurance carriers).

"The thrust of what I do is centered around one thing that I believe is absolutely true: that the vast majority of underwriters that underwrite these policies have almost no insight or clue as to what's happening in the supplement industry," he said.

"They don't really get it. And how scary is that?"

By Dan Schiff

False Advertising Insurance Among Options For Changing Supplement Industry

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